As an employer in the United Arab Emirates, it is crucial to understand every aspect of WPS salary processing, WPS payroll, and how to run payroll efficiently, to ensure that your workforce remains happy and motivated.
As part of this, let’s dive into understanding how to calculate gratuity that is given to employees in the UAE after their employment has been terminated, as a token of appreciation for the employee’s hard work and dedication to the company. Accuracy in calculating gratuities is important for compliance with the local labour laws and to ensure fair treatment of all employees.
What is Gratuity?
Also known as End-of-Service Benefits (EOSB), ESBs or termination indemnities, gratuity is an end-of-service payment made to employees after completion of their employment contract. Expats as well as domestic workers are entitled to receive end-of-service benefits after working for an employer in the UAE.
It is a legal obligation for employers here, and also serves as a financial cushion for employees during their transition between jobs, or in case of a resignation or retirement.
Eligibility criteria
Technically, all employees qualify for gratuity. However, employees must also meet specific criteria depending on the job role, which includes completing a minimum of one year of continuous service with their employer.
If an employee resigns before completing one year, they cannot be entitled to gratuity. The UAE Labour Law mentions that if an employee is dismissed from work for any employment violation stated in Article 120 of UAE Federal Labour Law no. 8 of 1980 (as amended) (reasons include forging of documents, false identity, etc) or if they leave work without giving notice to their employer, they will not be entitled to any gratuity pay at the end of their employment.
It is important to note that the length of service, nature of contract (limited or unlimited), and labour regulations determine the exact eligibility requirements.
How is gratuity calculated?
As mentioned in Article 134 of the UAE Labour Law, the calculation of the end-of-service gratuity pay is on the basis of the last recorded basic salary or wage of the employee, in their most recent place of work. This does not include housing allowance, utilities, transport or and any other allowances that have not been explicitly mentioned in the employment contract, such as overtime pay, commissions, bonuses, or any variable components.
Here’s a breakdown of the two methods of gratuity calculations, depending on the type of contract:
- A limited contract is like a fixed-term contract, where you and your employer agreed to work for a specified period of time. If your employee has worked for 1-5 years, then they are entitled to 21 days’ basic salary for each year of service. If your employee has worked for 5+ years, then then they are entitled to 30 days’ basic salary for each year of service.
Example: If someone’s basic salary is AED 15,000 and they have been in service for 5 years, their gratuity pay will be calculated like this:
AED 15,000 for 30 days
AED 15,000 x 5 years = AED 75,000 gratuity pay
- Under an unlimited contract, there are no fixed terms and it is like an indefinite-term contract with no specified time as to when that employment will end.
If your employee has worked for 1-3 years, then they are entitled to one-third of the 21-day gratuity pay. If your employee has worked for 3-5 years, then they are entitled to two-thirds of the 21-day gratuity pay. If your employee has worked for 5+ years, then they are entitled to full 21-day gratuity pay.
Example: Let’s say an employee has worked for 4 years with AED 15,000. Their gratuity pay will be calculated like this:
AED 15,000 / 30 days = AED 500 per day
AED 500 x 21 days = AED 10,500
AED 10,500 x 0.66 = AED 6930 gratuity pay
According to the latest amendment by MOHRE, from now on permanent or indefinite contracts will be limited and renewable after a fixed term of 1 year for all private sector employees.
If the employee resigns?
In case of a resignation, the following rules will apply when calculating gratuity:
- Resignation before 1 year of service- The employee is not entitled to any gratuity.
- Resignation between 1 and 3 years of service- The employee is entitled to 7 days’ basic salary (one-third of 21 days) for each year as gratuity for the period of employment.
- Resignation between 3 and 5 years of service- The employee is entitled to two-thirds of 21 days’ basic salary for each year as gratuity for the period of employment.
- Resignation after 5 years of service- The employee is entitled to 21 days’ basic salary for the first 5 years of employment and 30 days’ basic salary for each additional year.
It is crucial for businesses to stay updated with the latest labour laws and any amendments related to gratuity calculations. Additionally, employers must ensure compliance with these regulations, as failure to do so can result in legal consequences.
Working with a Ministry-approved payroll card provider can help ensure that your salary processing operations, i.e. WPS payroll and WPS-compliant salary processing in the UAE remains efficient, accurate, and compliant.