Gratuity is a term used to describe the end-of-service benefits provided to an employee who has completed a certain period of service in the UAE. This benefit is calculated based on the employee’s basic salary and the number of years of service, and it is a significant component of an employee’s overall compensation. However, many employers and employees are not clear about the exact calculation of gratuity. In this article, we will discuss How To Calculate Gratuity In UAE?
Definition of Gratuity
Gratuity is a benefit provided to employees in the UAE, calculated based on their basic salary and length of service. According to the UAE Labor Law, employees who complete one year or more of continuous service with an employer are entitled to a gratuity payment at the end of their service.
Calculating Gratuity for Limited Contract Employees
For employees who have signed a limited contract, gratuity is calculated based on the following formula:
Gratuity = (Basic Salary ÷ 30) x 21 days of service
In this formula, “basic salary” refers to the employee’s basic monthly salary, and “30” refers to the number of days in a month. The “21 days of service” refers to the number of days of service for each year of the contract.
For example, if an employee’s basic salary is AED 5,000 per month, and they have completed three years of service, the gratuity calculation would be as follows:
Gratuity = (5,000 ÷ 30) x (21 x 3) Gratuity = 3,500 AED
This means that the employee would be entitled to a gratuity payment of AED 3,500 at the end of their service.
Calculating Gratuity for Unlimited Contract Employees
For employees who have signed an unlimited contract, gratuity is calculated based on the following formula:
Gratuity = (Basic Salary ÷ 30) x 30 days of service
In this formula, “basic salary” refers to the employee’s basic monthly salary, and “30” refers to the number of days in a month. The “30 days of service” refers to the number of days of service for each year of employment.
For example, if an employee’s basic salary is AED 7,000 per month, and they have completed five years of service, the gratuity calculation would be as follows:
Gratuity = (7,000 ÷ 30) x (30 x 5) Gratuity = 35,000 AED
This means that the employee would be entitled to a gratuity payment of AED 35,000 at the end of their service.
Partial Gratuity Calculation
For employees who leave their job before completing one year of service, they are not entitled to any gratuity payment. For those who complete one year of service but less than five years, the gratuity calculation will be pro-rated based on the number of years of service. For those who have completed more than five years of service, gratuity is calculated based on the formula mentioned above.
Payment of Gratuity
Gratuity is usually paid by the employer to the employee within 30 days of the end of their service. However, if the employee is terminated for cause or resigns, they may not be entitled to receive the gratuity payment.
Employers’ Obligation to Pay Gratuity
It is the employer’s responsibility to pay gratuity to their employees. Failure to pay gratuity can result in legal action and penalties. Employers should ensure that they have proper systems in place to calculate and pay gratuity accurately and on
First, it’s important to note that the UAE government has established the End of Service Gratuity (ESG) as a mandatory benefit for all employees, including domestic workers. The ESG is calculated based on an employee’s last basic salary, and it is due upon termination of employment.
According to the UAE Labor Law, the ESG payment is calculated as follows:
If an employee has worked continuously for one year or more, they are entitled to a gratuity payment of 21 days’ basic salary for each year of service.
If an employee has worked for less than one year, the gratuity payment is calculated on a pro-rata basis.
If an employee has worked for more than five years, their gratuity payment is calculated at a rate of 30 days’ basic salary for each year of service beyond the first five years.
For example, if an employee has worked for a company for six years, their gratuity payment would be calculated as follows:
21 days’ basic salary for each of the first five years of service = 105 days’ basic salary
30 days’ basic salary for each year of service beyond the first five years = 30 days x 1 = 30 days’ basic salary
Total gratuity payment = 105 days’ basic salary + 30 days’ basic salary = 135 days’ basic salary
It’s important to note that the basic salary used in the gratuity calculation does not include allowances or other forms of compensation. The UAE Labor Law also specifies that the maximum amount of gratuity payable is two years’ basic salary.
It’s recommended that companies in the UAE keep accurate records of their employees’ basic salaries, as well as their length of service, in order to ensure that gratuity payments are calculated correctly. It’s also important to note that companies are required to provide their employees with a gratuity payment within 30 days of the end of their employment contract.
In 2020, the UAE government announced a new law regarding the calculation of gratuity for private sector employees, which aims to provide greater protection for employees and increase the transparency of the gratuity calculation process. The law establishes a new formula for calculating gratuity payments, which takes into account an employee’s length of service, their basic salary, and any allowances they may receive.
Under the new law, the gratuity payment is calculated as follows:
21 days’ basic salary for each year of service for the first five years
30 days’ basic salary for each year of service beyond the first five years
The basic salary used in the calculation includes all forms of compensation, including allowances. The law also establishes a cap on the total amount of gratuity payable, which is set at the equivalent of two years’ basic salary.
In addition, the new law requires that companies in the UAE establish a savings plan to cover the cost of gratuity payments. This savings plan can be set up through a bank, insurance company, or other financial institution, and companies are required to contribute a percentage of their employees’ basic salaries to the plan each month.
Overall, the calculation of gratuity payments in the UAE can be a complex process, but it’s important for both employees and employers to understand the requirements set out in the UAE Labor Law. By following these guidelines and keeping accurate records, companies can ensure that they are providing their employees with the gratuity payments they are entitled to, while also complying with UAE labor regulations.