How to Calculate UAE Gratuity Calculation
Introduction
Every employee in the UAE will eventually leave their job, whether due to relocation, retirement, or seeking new opportunities and challenges. When this happens, employers are obliged to provide an end-of-service gratuity payment as per the labor law. However, calculating the amounts can be tricky and sometimes complex, especially when considering different employment contract types. To help simplify this process, it is essential to understand key definitions, eligibility requirements, and the key factors influencing the payout.
A well-structured guide can help both business owners and employees accurately calculate their gratuity using a Gratuity Calculator. The length of service, salary, and whether the employment lasted for more than a year play a crucial role in the final payment. Businesses that pay gratuity find it improves retention and encourages employees to stay longer. Whether you owe gratuity to your staff or want to claim what you are entitled to, having detailed information ensures a smooth completion of the process for all parties involved.
What Is Gratuity?
In the UAE, gratuity is an end-of-service benefit that an employee receives when leaving an organization. This payment is legally awarded by the employer as a token of appreciation for the services they have rendered during their term with a company. The UAE Labor Law clearly dictates that employees who have worked for a certain amount of time are entitled to this benefit, provided they meet the necessary prerequisites outlined in the law. The amount that is payable depends on various factors, such as the monthly basic salary and the length of service. While many employees receive it upon retirement, it is also possible to claim it earlier under specific terms and conditions.
The gratuity system applies to both limited and unlimited contracts, ensuring that eligible employees receive the sum of money they are owed. A well-defined formula helps in the calculation of the final amount, taking into account key factors such as employment type and service duration. Employers must follow a structured method to determine the payable gratuity, ensuring fairness in the process. Understanding the criteria for eligibility is essential before estimating the final payout.
Who Is Eligible for Gratuity in UAE?
Not every employee is entitled to gratuity payments under UAE law. Certain conditions must be met for it to be applicable. The employment labor contract, whether limited or unlimited, plays a key role. To qualify, an employee must have worked continuously for at least one year or more with an employer. If an employee resigns without completing the notice period, they might not receive the end-of-service benefit. Additionally, if they fail to prove the non-fulfilment of legal obligations by their employer or cannot provide evidence of assault by their representatives, they may not be eligible. Both UAE nationals and expatriates can qualify, but those dismissed under Article 120 of the UAE Labour Law, specifically for non-compliance with the matters stated, may be ineligible. The payment depends on the period of service, and termination without cause does not necessarily restrict one’s ability to claim it. If you meet all the pre-requisites and are wondering how to calculate your gratuity, fortunately, the process is really simple. Many resources are available online to help determine the exact amount owed, and you can even use tools to simplify the calculation without hassle.
Factors to Consider for Gratuity Pay Calculation
Key Factors in Gratuity Calculation
When calculating gratuity in the UAE, several key factors determine the final amount an employee is owed. The type of employment contracts, the last basic salary, and the duration of service play a crucial role. Each contract type—whether limited or unlimited—follows different rules for end-of-service benefits, making it important to understand how they differ.
Your basic salary is the foundation of your gratuity computation. The gratuity amount is derived from the last salary received by the employee before termination. However, only the salary package without any additional benefits such as allowances for housing, fuel, or overtime is considered. For instance, if your salary is AED 4,000, including transport and other perks, only the AED 4,000 will count towards your gratuity. Any salary sacrifice schemes or deductions are also excluded.
The UAE Labour Law outlines the eligibility for gratuity payment based on tenure. An employee must have worked for at least one year in the organization to qualify. The actual number of days worked is crucial since extended periods of leave like sabbaticals do not count. The gratuity calculator used by the UAE Ministry of Human Resources and Emiratisation (MoHRE) ensures that the employment period does not include unpaid breaks or holidays.
The nature of an employee’s termination also affects their gratuity. If an employee is terminated under Article 120, they are not eligible for gratuity. Those under an unlimited contract may see their gratuity vary based on whether they resigned or were terminated. A limited contract has a key difference, as it specifies both a start date and an end date, whereas an unlimited contract only has a start date.
Another critical aspect is the gratuity amount itself. The entire sum cannot exceed the employee’s complete salary for two years. If an employee owes money to the employer, the owed amount can be adjusted in their gratuity payment. Understanding these rules ensures that employees can correctly calculate their gratuity without any confusion.
How Gratuity is Calculated in an Unlimited Contract
When it comes to unlimited contracts in the UAE, the gratuity calculation depends on your service length and whether you resign or are terminated. For example, if your service is less than one year, you are not entitled to any gratuity pay. If you’ve worked for 1-3 years, you receive 1/3rd of your 21-day basic salary for each year. For employees with 3-5 years, the calculation increases to 2/3rd of the 21-day basic salary, and after 5 years, you are entitled to the full 21-day salary per year.
To calculate your gratuity, first determine your daily wage by dividing your basic salary by 30. For instance, if your basic salary is AED 15,000 and you’ve worked for 4 years, your daily wage would be AED 500. Multiply this by 21, which equals AED 10,500. Then, apply the ⅔ rd rule for 3-5 years, bringing your gratuity to AED 7,000 per year. Finally, multiply that by the total years worked to find your total gratuity. In this example, for 4 years, the total gratuity would be AED 28,000.
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Gratuity Pay Calculation for Limited Contracts
For limited contracts, gratuity is calculated based on the service length and the type of termination. If you complete a contract with less than 5 years of service, you are entitled to 21 days of basic salary for each year worked. If your contract exceeds 5 years, you are entitled to 21 days for the first 5 years, and 30 days for each year beyond that. This applies regardless of whether you resign or are terminated, though the rules for termination might differ slightly.
In the case of termination, the calculation remains fairly straightforward: employees with 1-5 years of service receive 21 days for each year, and those with more than 5 years get 30 days for each additional year beyond the 5th. When an employee resigns, the calculation of gratuity pay may change depending on the years worked and other factors like misconduct or performance issues.
To begin calculating your gratuity, start by determining your daily wage. Divide your monthly salary by 30. For example, if your basic salary is AED 15,000 and you worked for 4 years, your daily wage would be AED 500. Then, multiply that by 21 (for less than 5 years of service) to get AED 10,500. If you worked for more than 5 years, you would use 30 days instead of 21 days.
Let’s take an example for 4 years of service: After calculating the daily wage, the total gratuity for an employee with 4 years of service would be AED 42,000. This is calculated by multiplying the daily wage by 21 days, and then by the total years of service (4 years). The result will give you the final gratuity amount to be paid when the contract ends.
In conclusion, the gratuity calculation for limited contracts is relatively simple once you understand the tiers and the impact of service period. The calculation depends on termination type, whether you resign or are fired, and the total years you’ve worked. Make sure you understand the different service tiers to ensure you receive the correct gratuity pay at the end of your contract.
How Gratuity is Computed in UAE
Many people think gratuity computation is complex, but once you grasp the basics, it becomes easy to understand. The gratuity amount an employee is owed depends on a few key factors such as basic salary, contract type, and whether they resigned or were terminated. In the UAE, the amount is derived from the last basic salary received from the employer, excluding additional benefits like fuel allowance, accommodation, or transport. For example, if the total salary package includes AED 3,000 plus perks, only AED 3,000 is counted. Even extras like salary sacrifice schemes are not included. The nature of termination also affects the gratuity amount. If an employee is terminated under Article 120, they are not eligible for gratuity. Those on an unlimited contract may have different payouts depending on whether they resigned or were terminated. The contract type is an important factor—a limited contract has a fixed start date and end date, while an unlimited contract only mentions a start date. This key difference plays a major role in determining how much gratuity is given
What are the Types of Contracts?
In the UAE, there are two main types of contracts: limited and unlimited.
A limited or fixed-term contract has a set term or time period, which is often used for a specific project or certain duration. It clearly states the start and end dates of the employment period. When this contract expires, it is automatically canceled, unless the employer decides to renew it. If an employee resigns before completing the specified duration, they may face consequences such as a labor ban, loss of labor rights, or may need to compensate their employer.
On the other hand, an unlimited contract is more flexible and does not have a fixed end date. It can be terminated by either the employee or employer with a notice period of one to three months. This type of contract is more common in the UAE and is usually based on mutual consent. The gratuity calculation for an unlimited-term contract is often based on the duration of service, making it crucial to understand which type of contract you are under when calculating your end-of-service benefits.
How to Calculate Gratuity When Employee Contract Resigns
When an employee with an unlimited contract resigns, the gratuity calculation is based on their service period and basic salary. If the employee has worked for 1-3 years, they are entitled to 1/3rd of their gratuity pay, which is calculated by multiplying 21 days of basic salary by the years worked, then dividing by 30. For example, if the basic salary is AED 20,000 and the employee has worked for 3 years, the gratuity will be AED 14,000 (i.e., (7 days × AED 20,000 × 3 years) ÷ 30).
For employees who have worked between 3-5 years, they are entitled to 2/3rd of their gratuity pay, which is calculated in a similar way. If the same employee with a basic salary of AED 20,000 worked for 3 years, the total gratuity payable will be AED 28,000 (i.e., (14 days × AED 20,000 × 3 years) ÷ 30). This gratuity amount is based on the service period and the employee’s years worked during their time with the company.
FAQs
How is gratuity calculated in UAE?
In the UAE, if employees have served between 1-3 years, they are entitled to full gratuity pay of 21 days of salary per year. For those who have served 3 years but less than 5 years, they are entitled to two-thirds of their basic salary as gratuity pay. To calculate your gratuity, you multiply your daily wage by 21 if your tenure is under 5 years, or by 30 if it’s over 5 years.
Is gratuity in UAE calculated on the basic salary?
In the UAE, gratuity or end-of-service benefits are calculated based on the employee’s last drawn salary. Only the most recent basic salary is used, and allowances and perks are excluded from the calculation. This ensures that only the core basic salary determines the amount of gratuity an employee will receive.
What is the new gratuity law in UAE 2023?
The new gratuity law in the UAE introduced a change where contracts are now limited to a duration of five years. Gratuity calculation is based on the employee’s basic salary, with a 21-day salary considered for each year of service. If an employee’s service period exceeds five years, the gratuity is calculated using 30 days of the basic salary for each year beyond the five-year mark. Under this new law, there is no difference in how gratuity is calculated whether the employee resigns or is terminated.
Is gratuity added to the monthly salary?
In the UAE, gratuity is a benefit provided to the employee based on their length of service, but it is not included in their regular monthly salary. Instead, it is a separate form of employee’s compensation, calculated after the employee completes a certain period of service. The salary itself does not include gratuity, and this benefit is granted when the employee leaves the company.