UAE Gratuity Policy – Understanding the basics of Gratuity

Every employee who has spent a considerable amount of time working in a company is provided a benefit from the company in the form of lumpsum amount when he/she moves out of the company. Gratuity is a common policy adopted in many countries. Here, we shall discuss about gratuity policies/rules in UAE and things to keep in mind when looking forward to gratuity at the end of service/association with a company.

We shall discuss questions like, what is gratuity, who is eligible for gratuity in UAE, how is gratuity amount calculated, what is the gratuity payable amount limit, what are the types of contracts provisioned in the UAE labor law that affect gratuity payout, what are limited and unlimited contracts in UAE, what does resignation and termination mean, maternity leave, sick leave, what is the effect of unpaid leave taken during the period of service etc.

UAE Gratuity as per UAE Labor Law:

According to Article 132 of the UAE labor law,gratuity is defined as follows:“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).”

So, in the UAE Gratuity topic, we shall discuss the UAE Gratuity policies in 3 parts as mentioned below with each part appearing in a separate blog link:

Part 1 – Understanding the basics of Gratuity

Part 2 – Type of Contract – Limited Contract(Resignation or Termination)

Part 3 – Type of Contract – Unlimited Contract(Resignation or Termination)

Part 1 – Understanding the basics of Gratuity

  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 period Less than 5 years 5 Years and Above
      Hire date 12/05/2018 10/02/2014
      Basic salary 10,000.00 10,000.00
      One day Basic salary (= Basic salary/30) 333.33 333.33
      Payroll Month Jan-20 Jan-20
      Number of days in service as of 31stJanuary 2020 630 2,182
      Gratuity Days
      For the first five years (21 days per year) 36.25 105.00
      Five years and above (30 days per Year) N/A 29.34
      Total Gratuity Days 36.25 134.34
      Gratuity Amount (Gratuity days*One day Salary) 12,083.21 44,779.55

      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?
    1. Yes, the amount of gratuity payout is determined by various factors among them
      1. Type of contract – Limited and unlimited contracts (click on the topic to open the link)
      2. Type of separation – Resignation or Termination(click on the topic to open the link)
  8. 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.
  9. 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.

Check out part 2 and part 3 of UAE gratuity law of the following topics:

Part 2 – Type of Contract – Limited Contract (Resignation or Termination)

Part 3 – Type of Contract – Unlimited Contract (Resignation or Termination)

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