New UAE Labor Law about End of Service Gratuity

Gratuity is a monetary payment eligible to an expat employee as a lumpsum at the end of his tenure provided that the period of service exceeds one year. The basis amount used to calculate is the employee’s last drawn basic salary.

The Ministry of Human Resources and Emiratisation (MOHRE) has recently introduced the Federal Decree Law No. 33 of 2021 that will regulate labor relations and employment practice in UAE. The New UAE Labor Law came into effect on February 2nd, 2022 and it will replace the current UAE Labor Law entirely.

Here, our payroll experts in UAE take you through a comparison between the previous labour law and the new one and the significant changes in gratuity calculation as per new labour law;

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    Comparison between the Previous Law and New Law

    Additional clauses and significant changes in Gratuity calculation as per New UAE Labor Law.

    As per the previous Law, types of contracts i.e. Limited contract or unlimited contract and the separation method i.e. Resignation or termination affect the gratuity payout.

    In new law there is only one type of contract, fixed contract. Employees are eligible for gratuity after completing one year of service. Even if the employee resigns from the company or employer terminates the employee from the company, employee is eligible for full Gratuity after completing one year of service. Eligibility of Gratuity after completing one year of service is;

    • 21 days per year for the first 5years
    • 30 days per year from sixth year onwards

    There is no change in Gratuity calculation base amount in both previous and new law which is the last drawn Basic Salary of the employee.

    Time frame for Settlement of End of Service Gratuity:
    As per new UAE labor law, time frame to pay End of service payment including Gratuity is 14 days from the last working day of the employee. The previous law did not stipulate any time frame for gratuity settlement.

    Please see the below-mentioned scenarios for a better understanding of gratuity calculation;

    Scenario 1

    Service period: less than one year

    Gratuity Amount = Basic Salary per day*Gratuity Days

    * Remarks No Gratuity to be paid as employee did not complete 1 year of service
     

    Scenario 2

    Service period: Between One to Five years


     

    Gratuity Amount = Basic Salary per day*Gratuity Days

    * Remarks Employee is eligible for 21 days for each completed years of service
     

    Scenario 3

    Service period: Above five years

    Gratuity Amount = Basic Salary per day*Gratuity Days

    * Remarks Employee is eligible for 21 days for the first 5 years and 30 days Above 5 years of service

    How is UAE Gratuity Accrued:

    Accrual: gratuity accrues at the following rate.

    1. 21 days per year for the first five years
    2. 30 days per year from sixth year onwards

    The following simple example shows the gratuity accrual at a given time.

    Method applied to calculate the one-day salary is the 30-day method i.e. salary/30. The common methods used are either the current month method or the annualized method i.e. salary*12/365. Employers are not legally restricted to the two methods in determining the daily salary.

    Accounting for UAE End of Service Gratuity:

    Accounting entry for UAE End of service Gratuity is

    Frequently Asked Questions:

    1. What is UAE End of Service Gratuity?

      UAE End of Service Gratuity is a monetary payment eligible to an employee as a lumpsum at the end of his tenure provided that the period of service exceeds one year. Gratuity payment is a liability to the employer which accrues as the employee service period progresses.

    2. When does an employee working in UAE become eligible for gratuity?

      Employees are eligible for gratuity pay at the end of their service period.

    3. What is the basis amount that is used to calculate UAE End of service Gratuity?

      The basis amount used to calculate is the employee’s last drawn basic salary.

    4. Who is eligible for UAE End of Service Gratuity?

      The provision of gratuity pay in UAE is only applicable to expatriate workers. Workers who are UAE nationals are precluded from these provisions. This is because UAE Nationals are eligible to mandatory National pension plans. Expatriate workers do not qualify for UAE pensions.

    5. Does UAE End of Service Gratuity payable have a maximum limit?

      Yes, the amount of gratuity payable to an employee during final settlement shall not exceed two years total salary(Wage).

    6. How is UAE Gratuity accrued?

      The criteria for calculating the gratuity accrued to an employee is based on a set number of days for each year of service.

      1. 21 days per year for the first five years
      2. 30 days per year from sixth year onwards
    7. How many types of employment contracts are available in UAE? Does the type of contract have any impact in calculating gratuity payout?

      As per the new UAE Labor Law there is only one type of employment contract i.e. Limited Contract or Fixed Term contract. Since there is only one type of contract, gratuity payout does not have any impact on the type of employment contract.

    8. Should days of absence be reduced from the service days while calculating UAE End of service gratuity?

      Any days of absence from work by the employee as leave of absence is excluded when determining the service period. The period of service is reduced by the number of days served as leave of absence.

    9. How is maternity unpaid leave and sick unpaid leave treated when determining the service period?

      The period taken as maternity unpaid leave or sick unpaid leave do count as part of the service period. The period of service is not affected by the these unpaid leaves.

    10. Is there any timeline in new UAE labor law for processing EOS payment to the staff?

      Yes, as per the new UAE Labor Law, time frame to pay End of service payment including Gratuity is 14 days from the last working day.

    11. Is the UAE End of Service Gratuity policy at Dubai International Financial Center (DIFC) different from the provisions outlined in the labor law?

      The end of service policy at Dubai International Financial Centre has been replaced by a plan called DIFC Employee Workplace Savings (DEWS). This plan requires employers operating in this economic zone to make compulsory monthly contributions to this defined contribution scheme. Please refer DIFC Employee Workplace Savings Plan for more information on the DIFC DEWS plan.

    Relevant Article regarding End of service Gratuity from New UAE Labor Law (Federal Decree-Law No. 33 of 2021):

    Article (51)

    1. The national worker shall be entitled to end of service benefits at the end of his service, in accordance with the legislation regulating the pensions and social securities in the State.
    2. The full-time foreign worker, who completed a year or more in continuous service, shall be entitled to end of service benefits at the end of his service, calculated according to the basic wage as per the following:
    3. A wage of (21) twenty-one days for each year of the first five years of service;
    4. A wage of (30) thirty days for each year exceeding such period.
    5. The foreign worker shall be entitled to a benefit for parts of the year in proportion to the period spent at work, provided that he completed one year of continuous service.
    6. The unpaid days of absence from work shall not be included in the calculation of the service term.
    7. Without prejudice to the legislation regarding the granting of pensions or retirement benefits to workers in some establishments, the end of service benefits shall be calculated according to the last basic wage the worker was entitled to, with respect to those who receive their wages on a monthly, weekly or daily basis and according to the average daily wage stipulated in the provisions hereof for those who receive their wages on a piecework basis.
    8. It is required based on the foregoing that the end of service benefits for the foreign worker in its entirety does not exceed two years’ wage.
    9. The employer may deduct from the end of service benefits any amounts payable under the law or a judgment, in accordance with the conditions and procedures specified in the Implementing Regulation hereof.
    10. The Cabinet may, based on the Minister’s proposal and after coordination with the concerned authorities, approve other alternative schemes for the end of service benefits scheme and the issued resolution specifies the conditions, rules and mechanism of contribution in these schemes.

    UAE PAYROLL PROCESS

    The process of payroll is a little complicated and time-consuming; hence it is always recommended outsourcing your company’s payroll function. Outsourcing payroll will ensure the assistance of a team of trained payroll professionals and it frees up the time of the organization, helping them focus on other projects that add value to their business. One should be extra vigilant while selecting their payroll provider, as payroll data is highly sensitive, and one should opt for a provider that can ensure high levels of data security.

    As a leading payroll outsourcing company, HLB HAMT can help solve your payroll complexities through customized strategies. We take care of our clients’ entire payroll cycle that includes preparation of payroll reports, processing salary payment with WPS compliance, accrual management including Gratuity, pension funds, an online portal for accessing pay slips, and many more. Our leadership team spends the necessary hours in every project, ensuring our clients get refined consulting services to take your business forward.

    To know more about our payroll process, click here.

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