UAE Gratuity policy and settlement

David Kambo

19 August, 2020

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Article 132 of the UAE labor law states as follows regarding gratuity
The employee who has completed one year or more in the continuous service is entitled to the end of service remuneration at the end of his service. Days of absence from work without pay are not included in computing the period of service, and the remuneration is to be calculated as follows: –

1. Twenty-one day’s pay for each year of the first five years of service.
2. Thirty days pay for each additional year.

Provided that the entire total remuneration shall not exceed two year’s pay.

  1. What is Gratuity?
    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, at termination or at resignation. According to article 133 the worker shall be entitled to a fraction of the year worked provided he has completed more than one year of continuous service.
  3. What is the basis amount that is used to calculate gratuity?
    The basis amount used to calculate is the employee’s last drawnbasic salary.Any amounts due to the employer may be deducted from the gratuity pay by the employer.
  4. Who is eligible for 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 pension.
  5. Does gratuity payable have a limit?
    The amount of gratuity payable to an employee during final settlement cannot exceed the employee’s current total two-year salary.
  6. What is the number of days used to accrue gratuity?
    The criteria of calculating the gratuity accrued to an employee is based on a set number of days for each year of service.

    Accrual: gratuity accrues at the following rate.

    • Below five years at 21 days per year.
    • Five years and above at 30 days per year.

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

    Accrual
        Service periodLess than 5 years 5 Years and Above
        Hire date12/05/201810/02/2014
        Basic salary7,250.007,250.00
        One day Basic salary (= Basic salary/30)241.67241.67
        Payroll MonthJan-20Jan-20
        Number of days in service as of 31stJanuary 2020630.002,182.00
        Gratuity Days
        For the first five years (21 days per year)36.25105.00
        Five years and above (30 days per Year)N/A29.34
        Total Gratuity Days36.25134.34
        Gratuity Amount (Gratuity days*One day Salary)8,759.5932,466.10

     
    The 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.

  7. Do the types of contracts provisioned in the UAE labor law affect gratuity payout?
    Yes, the amount of gratuity payout is determined by various factors among them.

    • Type of contract – Limited and unlimited contracts
    • Type of separation – Resignation or Termination
  8. The two types of contracts and the separation method affect the gratuity payout as we explain further below.

    Limited contract

    Calculation of gratuity is as follows under limited contracts when the separation type is resignation.

    • If the service period is less than one year, no gratuity is paid.
    • If the service period is more than one year, but is less than five years, no gratuity is paid.
    • If employee resigns at the end of contract period, fully accrued amount is paid.
    • If the service period is more than five years, the gratuity pay is based on 21 days per year for the first five years and 30 days per year for each additional year. See below table breakdown of the number of days qualifying for each slab of service period.
    Type of contract; Limited Contract
    Separation type; Resignation
    Period of serviceNumber of days used to calculate gratuity.
        Less than one year    No gratuity
        Resignation at end of contract period    Full Accrued amount
        One to Less than 5 years    No gratuity
        Year 5 and above    Full Accrued amount

     
    Please see below sample showing gratuity calculation for resignation under limited contract.

    Resignation under Limited contract
        Service periodLess than 1 yearResignation at end of contractOne to Less than 5 years5 Years and Above
        Hire date14/08/201901/02/201812/05/201810/02/2014
        Basic Salary7,250.007,250.007,250.007,250.00
        Last working day31/01/202031/01/202031/01/202031/01/2020
        Number of days in service171730.00630.002,182.00
        Number of years in service0.4721.735.98
        Gratuity Days
        For the first five years (21 days per year)10,150.00105.00
        Five years and above (30 days per Year)N/AN/A29.34
        Total Gratuity Days134.34
        Gratuity AmountNo gratuity is paid10,150.00No gratuity is paid32,466.10

     
    If the separation type is termination under the limited contract, then the calculation of payout accrued is as follows.

    • If the service period is less than one year, no gratuity is paid.
    • If the service period is more than one year but less than five years, accrual is at 21 days per year.
    • If the service period is more than five years, accrual is at 21 days per year for the first five years and at 30 days per year for each additional year.

    As shown below

    Type of contract; Limited Contract.
    Separation type; Termination.
    Period of serviceNumber of days used to calculate gratuity.
        Less than one year    No gratuity
        One to Less than 5 years    21 days per year.
        Year 5 and above    30 days per year.

     
    The following sample calculates the accrual for a termination case under the limited contract.

    Termination under Limited contract
        Service periodLess than 1 yearOne to Less than 5 years5 Years and Above
        Hire date14/08/201912/05/201810/02/2014
        Basic Salary7,250.007,250.007,250.00
        Last working day31/01/202031/01/202031/01/2020
        Number of days in service171630.002,182.00
        Number of years in service0.471.735.98
        Gratuity Days
        For the first five years (21 days per year)36.25105.00
        Five years and above (30 days per Year)N/AN/A29.34
        Total Gratuity Days36.25134.34
        Gratuity AmountNo gratuity is paid8,759.5932,466.10

     
    Unlimited contract

    If the employer terminates the unlimited contract, calculation of gratuity is as follows:

    • If the service period is less than one year no gratuity is paid.
    • If the service period is more than one year, but less than five years, the gratuity paid is based on 21 days salary for each year of service.
    • If the service period is more than five years, the gratuity paid is based on 21 days for the first five years and 30 days per year for each additional year.

    Refer to following tabular breakdown on the number of days used to accrue the gratuity under this type of separation.

    Type of contract; Unlimited contract.
    Type of separation; Termination
    Period of serviceNumber of days
        Less than one yearNo gratuity
        One to Less than 5 years21 days per year
        Year 5 and above30 days per year

     
    Please see sample calculation of gratuity payment for termination.

    Termination under unlimited contract
    Service periodLess than 1 yearOne to Less than 5 years5 Years and Above
        Hire date14/08/201912/05/201810/02/2014
        Basic Salary7,250.007,250.007,250.00
        Last working day31/01/202031/01/202031/01/2020
        Number of days in service171630.002,182.00
        Number of years in service0.471.735.98
        Gratuity Days
        For the first five years (21 days per year)36.25105.00
         Five years and above (30 days per Year)N/AN/A29.34
        Total Gratuity Days36.25134.34
        Gratuity AmountNo gratuity is paid8,759.5932,466.10

     
    If the employee terminates the unlimited contract, the calculation of gratuity is as follows.

    • If the service period is less than one year, no gratuity is paid.
    • If the service period is more than one year, but less than three years, the gratuity paid is based on 7 days salary (1/3 of 21 days)for each year served.
    • If the service period is between 3-5 years, the gratuity paid is based on 14 days salary (2/3 of 21 days) for each year of service.
    • If the service period is more than five years, the gratuity paid is based on 21 days salary for each additional year of service.
    Type of contract; Unlimited Contract
    Separation type; Resignation
    Period of serviceNumber of days used to calculate gratuity
        Less than one yearNo gratuity
        One to less than 3 years7 days per year
        Three to less than 5 years14 days per year
        5 years and aboveFull accrual

     
    The following example describes the accrual under this scenario.

    Resignation under unlimited contract
    Service periodLess than 1 yearOne to less than 3 yearsThree to less than five yearsFive years and above
        Hire date14/08/201907/11/201710/02/201510/02/2014
        Basic Salary7,250.007,250.007,250.007,250.00
        Last working date31/01/202031/01/202031/01/202031/01/2020
        Number of days in service171816.001,817.002,182.00
        Number of years in service0.472.244.985.98
        Gratuity Days
        For the first three years (7 days per year)N/a15.6521.00
        For year 3 to year 5 (14 days per year)N/aN/a27.69
        For the first five years (21 days per year)N/aN/a105.00
        Five years and above (30 days per Year)N/aN/aN/a29.34
        Total Gratuity Days15.6548.69134.34
         Gratuity AmountNo gratuity is paid3,781.9211,767.5132,466.10

     

  9. Is the gratuity policy at DIFC different from the provisions outlined in the labor law?
    The end of service policy at Dubai International Financial Centre has recently been changed and replaced by a new 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 new plan.
  10. What is the effect of unpaid leave taken during the period of service?
    Any period taken by the employee as unpaid leave is excluded when determining the service period. That means unpaid leave days are excluded when accruing gratuity. The period of service is reduced by the number of days served as unpaid leave.
  11. How is Maternity unpaid leave and sick leave unpaid leave treated when determining the service period?
    The period taken as either maternity unpaid leave or sick leave unpaid do count as part of the service period. The period of service is not affected by any period taken during tenure by employees for these two types of leaves. Please refer to A Guide on statutory leaves in UAE to see how specific statutory leaves affect the service period.

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