How to Calculate Gratuity in UAE?

Gratuities are a type of end-of-service incentive that employers are legally obligated to give their workers in the United Arab Emirates when their employment contract expires.

Both employers and employees must be aware of how to compute gratuities in the UAE in order to maintain compliance with the UAE Labour Law.

In the UAE, what is a gratuity?

A gratuity is a one-time payment made to an employee in recognition of their service when they are fired, quit, or retire. It is determined by the employee’s pay and length of service with the company.

The guidelines for gratuity payments are outlined in the UAE’s Labour Law.

Nevertheless, the sum differs according on whether the worker quit, was fired, or had their contract expire.

Organisations Taking Part in the Calculation of Gratuities:

It’s critical to comprehend the main players in the computation before beginning:

• Employer: The business or person who employs the worker and is in charge of covering the gratuity.

• Employee: The worker for the company, whose tenure establishes the amount of the gratuity.

• The governing law that establishes the proper method for calculating gratuities is the UAE Labour Law.

• The government agency responsible for monitoring UAE labour rules is the Ministry of Human Resources and Emiratization (MOHRE).

Employee Types Eligible for Gratuities:

Employees with limited or unlimited contracts are eligible for gratuities. Gratuities are given to both groups, although under different circumstances:

• Limited Contract Workers: Gratuity is due at the conclusion of a contract with a set length.
• Unlimited Contract Workers: Depending on the conditions, workers whose contracts have no set expiration date may also be eligible for a gratuity upon resignation or termination.

Important Elements Affecting the Calculation of Gratuities:

The following important elements determine how much gratuity an employee is entitled to:

• Length of Service: The years of service with the employer are used to determine the gratuity.

• Monthly wage: The computation is based on the final wage, which does not include bonuses or allowances.

• Contract Type: As previously stated, employees with limited or unlimited contracts may be entitled to different gratuities.

• Termination Type: The amount of the gratuity may vary depending on whether the employee resigns or is fired.

How the UAE Determines Gratuity?

Depending on the period of work, the UAE has different formulas for determining gratuities. The following guidelines are used to determine the gratuity payment:

1. For Workers with Under a Year of Experience:

An employee is not eligible for a gratuity if they have worked for less than a year.

2. For Workers with One to Five Years of Experience:

The gratuity for workers with one to five years of service is determined as follows:

21 days of base pay for every year of employment.

This is how to figure it out:

1. Find the base pay: This is the base pay for the employee each month; bonuses and allowances are not included.
2. Determine the daily wage: To calculate the daily wage, divide the base pay by thirty.
3. Increase by 21: To calculate the gratuity for a year of service, multiply the daily wage by 21.
4. By the amount of years, multiply: Multiply the total number of years worked by the yearly gratuity.

For instance: Three-year veteran employee

Assume a worker has been employed for three years and receives a base wage of AED 5,000 per month.

• AED 5,000 / 30 = AED 166.67 is the daily wage.
• AED 3,500 (AED 166.67 x 21) is the one-year gratuity.
• Three years’ worth of gratuities = AED 3,500 x 3 = AED 10,500

3. For Workers with Over Five Years of Experience:

The gratuity for workers who have worked for more than five years is determined as follows:

For the first five years, you will receive 21 days of your basic pay; after that, you will receive 30 days.

This is how to figure it out:

1. Determine the gratuity for the initial five years: Multiply the basic salary by five years, or 21 days.

2. Determine the gratuity for the years that remain: Multiply the number of years beyond five by 30 days of basic pay.

For instance: Seven-year veteran employee
The gratuity will be computed as follows if the same worker has worked for seven years and had a base wage of AED 5,000:

• AED 166.67 x 21 = AED 3,500 x 5 = AED 17,500 during the first five years
• AED 166.67 x 30 = AED 5,000 x 2 = AED 10,000 over the next two years
• AED 17,500 + AED 10,000 = AED 27,500 is the total gratuity.

4. Elements That Impact Gratuity:

• Resignation of Payment: An employee is not eligible for a gratuity if they leave their position before serving for a full year.

However, they are eligible for a reduced gratuity if they leave after one year but before five years. The employee is entitled to a full gratuity if they leave their position after five years.

• Termination: Employees are entitled to the full gratuity in the event of their termination, with the exception of circumstances involving egregious misbehaviour.

• Leave Balance: The gratuity payment usually includes any unused leave balance.

• End of Service Bonus: Depending on the employer’s policies, employees may occasionally also be eligible for an end-of-service bonus.

Benefits’ Effect on the Calculation of Gratuities

Certain benefits are seen as being included in the base pay of the employee, while others are not. Only the base pay is taken into account when calculating gratuities. 

Unless otherwise included in the contract, benefits like housing, transportation, and commissions are normally not covered.

Calculating Gratuities for Nationals and Foreigners

Emirati citizens and foreigners are both subject to the UAE Labour Law. Gratuity payments for UAE citizens, however, can be subject to further rules under the Emiratization initiative. 

In some cases, nationals may be eligible for more favourable terms for gratuities.

How to Make Sure UAE Labour Laws Are Followed?

Employers are required to make sure that their gratuity policies adhere to UAE labour laws. To stay out of trouble with the law, employers should:

• Maintain precise records of each employee’s basic pay and length of service.

• Clearly define the terms of gratuities in contracts.

• As soon as an employee quits the company, figure out their gratuity.

Workers should also check their contracts to make sure they comprehend the conditions of gratuity and their rights.

Conclusion

Employers and employees alike must be aware of how to compute gratuities in the United Arab Emirates. 

Employers can steer clear of legal issues and employees can make sure they receive the appropriate gratuity at the end of their employment by following the aforementioned measures.

 Understanding your rights under the UAE Labour Law will make navigating the process easier for you, whether you’re a national or an expat.

If you have any questions concerning any aspect of the gratuity calculation, don’t hesitate to seek the advice of a professional or legal counsel.

FAQs