HZLegalCalculation of End of Service Gratuity in UAE

18/09/2024by Hossam Zakaria0

Table of Contents

“Secure your future with accurate End of Service Gratuity calculations in the UAE.”

Introduction

In the United Arab Emirates, the calculation of End of Service Gratuity is an important aspect of employment law. This gratuity is a lump sum payment made to employees who have completed a certain period of service with their employer. The calculation of this gratuity is based on the employee’s basic salary and length of service. It is important for both employers and employees to understand how this gratuity is calculated to ensure fair and accurate payments are made.

Understanding End of Service Gratuity in UAE

End of Service Gratuity, also known as gratuity pay, is a lump sum amount that is paid to an employee upon the termination of their employment contract in the United Arab Emirates (UAE). This payment is a form of retirement benefit and is calculated based on the employee’s length of service with the company. Understanding how End of Service Gratuity is calculated is essential for both employers and employees in the UAE.

The calculation of End of Service Gratuity in the UAE is governed by the UAE Labour Law, specifically Article 132. According to this law, an employee is entitled to receive a gratuity payment if they have completed at least one year of continuous service with the company. The amount of gratuity pay is based on the employee’s final basic salary.

To calculate the End of Service Gratuity, the first step is to determine the employee’s daily wage. This can be done by dividing the employee’s monthly salary by 30 (the average number of days in a month). Once the daily wage is determined, the next step is to calculate the employee’s gratuity entitlement based on their length of service.

For employees who have completed less than five years of service, they are entitled to receive gratuity pay equivalent to 21 days of their basic salary for each year of service. For employees who have completed more than five years of service, the gratuity pay increases to 30 days of their basic salary for each year of service.

It is important to note that the maximum amount of gratuity pay that can be received is capped at two years’ worth of the employee’s basic salary. This means that even if an employee has worked for more than 20 years, they will only receive gratuity pay equivalent to two years’ worth of their basic salary.

In cases where an employee resigns from their job, they are still entitled to receive gratuity pay, provided they have completed at least one year of continuous service. However, if an employee is terminated for gross misconduct, they may forfeit their right to receive gratuity pay.

Employers in the UAE are required by law to set aside a specific amount of money each year to cover the gratuity payments for their employees. This amount is calculated based on a percentage of the employee’s basic salary and is deposited into a gratuity fund. When an employee’s contract is terminated, the gratuity payment is then made from this fund.

In conclusion, understanding how End of Service Gratuity is calculated in the UAE is crucial for both employers and employees. By knowing the formula for calculating gratuity pay and the factors that influence the amount of payment, both parties can ensure that the process is fair and transparent. It is important for employers to comply with the UAE Labour Law and set aside the necessary funds to cover gratuity payments, while employees should be aware of their rights and entitlements when it comes to receiving gratuity pay.

Calculation Methods for End of Service Gratuity

End of Service Gratuity, also known as gratuity pay, is a lump sum amount that an employer is required to pay to an employee upon termination of their employment contract in the United Arab Emirates (UAE). This payment is a form of retirement benefit and is calculated based on the employee’s length of service with the company. The calculation of End of Service Gratuity in the UAE is governed by Federal Law No. 8 of 1980, also known as the UAE Labour Law.

The UAE Labour Law stipulates that an employee is entitled to End of Service Gratuity if they have completed at least one year of continuous service with the same employer. The amount of gratuity pay is calculated based on the employee’s last basic salary. For employees who are paid on a monthly basis, the gratuity pay is calculated as follows:

– For the first five years of service, the employee is entitled to receive 21 days of basic salary for each year of service.
– For each subsequent year of service beyond the first five years, the employee is entitled to receive 30 days of basic salary for each year of service.

For example, if an employee has worked for a company for seven years and their last basic salary was AED 5,000, the calculation of their End of Service Gratuity would be as follows:

– For the first five years: 5 years x 21 days x AED 5,000 = AED 52,500
– For the sixth year: 1 year x 30 days x AED 5,000 = AED 5,000
– For the seventh year: 1 year x 30 days x AED 5,000 = AED 5,000

Total End of Service Gratuity = AED 52,500 + AED 5,000 + AED 5,000 = AED 62,500

It is important to note that the calculation of End of Service Gratuity is based on the employee’s last basic salary. This does not include any allowances, bonuses, or other benefits that the employee may have received during their employment. Additionally, the calculation is based on the number of completed years of service, with any partial year being rounded up to the nearest full year.

For employees who are paid on a daily or hourly basis, the calculation of End of Service Gratuity is slightly different. In this case, the daily wage is calculated by dividing the monthly salary by 30 (for daily paid employees) or by 240 (for hourly paid employees). The gratuity pay is then calculated based on the employee’s daily wage, following the same formula as mentioned above.

In conclusion, the calculation of End of Service Gratuity in the UAE is a straightforward process that is governed by the UAE Labour Law. Employees who have completed at least one year of continuous service with the same employer are entitled to receive gratuity pay upon termination of their employment contract. The amount of gratuity pay is calculated based on the employee’s last basic salary and the number of completed years of service. It is important for both employers and employees to be aware of the calculation methods for End of Service Gratuity to ensure that employees receive their rightful entitlements upon termination of their employment.

Factors Affecting End of Service Gratuity Calculation

End of service gratuity is a significant benefit that employees in the United Arab Emirates (UAE) are entitled to upon completion of their employment contract. It is a lump sum payment made by the employer to the employee as a form of appreciation for their service. The calculation of end of service gratuity is based on several factors, which we will discuss in this article.

One of the key factors that affect the calculation of end of service gratuity in the UAE is the length of service. The longer an employee has been with a company, the higher their gratuity amount will be. According to UAE labor law, employees are entitled to gratuity payments for each year of service completed. The formula for calculating gratuity is as follows: (Basic salary ÷ 30) x number of years of service.

Another important factor that influences the calculation of end of service gratuity is the type of contract the employee is on. Employees on limited contracts are entitled to gratuity payments for each year of service completed, whereas employees on unlimited contracts are entitled to gratuity payments for the entire duration of their employment.

Additionally, the employee’s basic salary plays a crucial role in determining the amount of end of service gratuity they will receive. The basic salary is the fixed amount of money that an employee receives before any additional allowances or bonuses. It is important to note that the basic salary does not include any housing allowances, transportation allowances, or other benefits.

Furthermore, the reason for termination of employment can also impact the calculation of end of service gratuity. If an employee resigns from their position, they may be entitled to a reduced gratuity amount compared to if they were terminated by the employer. In cases of termination due to gross misconduct or violation of company policies, the employee may not be entitled to any gratuity payments at all.

It is essential for both employers and employees in the UAE to understand the factors that affect the calculation of end of service gratuity. By knowing how gratuity payments are calculated, employees can ensure that they receive the correct amount upon completion of their employment contract. Employers, on the other hand, can avoid any disputes or misunderstandings by following the guidelines set forth by UAE labor law.

In conclusion, the calculation of end of service gratuity in the UAE is influenced by several factors, including the length of service, type of contract, basic salary, and reason for termination of employment. By understanding these factors, both employers and employees can ensure a smooth and fair process when it comes to gratuity payments. It is important for all parties involved to be aware of their rights and obligations regarding end of service gratuity to avoid any potential conflicts in the future.

Legal Requirements for End of Service Gratuity in UAE

End of service gratuity is a mandatory payment that employers in the United Arab Emirates (UAE) are required to provide to their employees upon termination of their employment contract. This gratuity serves as a form of financial security for employees who have dedicated their time and efforts to a company, ensuring that they are compensated fairly for their service.

The calculation of end of service gratuity in the UAE is governed by Federal Law No. 8 of 1980, also known as the UAE Labour Law. According to this law, employees are entitled to receive a gratuity payment based on their length of service with the company. The formula for calculating end of service gratuity is as follows:

– For employees on an unlimited contract:
The gratuity amount is calculated as follows:
– 21 days of basic salary for each year of service for the first five years of employment.
– 30 days of basic salary for each year of service for every year after the first five years.

For example, if an employee has worked for a company for seven years and their basic salary is AED 5,000 per month, the calculation would be as follows:
– 5 years x 21 days x AED 5,000 = AED 52,500
– 2 years x 30 days x AED 5,000 = AED 30,000
– Total gratuity amount = AED 82,500

It is important to note that the basic salary used in the calculation of end of service gratuity does not include any allowances, bonuses, or other benefits. Only the employee’s basic salary is considered when determining the gratuity amount.

Furthermore, employees who resign from their position before completing one year of service are not entitled to receive end of service gratuity. However, if an employee is terminated by the employer without cause, they are still entitled to receive the gratuity payment based on their length of service.

In the case of employees on a fixed-term contract, the calculation of end of service gratuity is slightly different. For fixed-term contracts that are less than five years, the gratuity amount is calculated as follows:
– 21 days of basic salary for each year of service.

If the fixed-term contract is for more than five years, the gratuity amount is calculated as follows:
– 30 days of basic salary for each year of service.

It is important for both employers and employees to understand their rights and obligations when it comes to end of service gratuity in the UAE. Employers must ensure that they calculate and provide the gratuity payment accurately and in a timely manner, while employees should be aware of their entitlements under the UAE Labour Law.

In conclusion, end of service gratuity is a crucial aspect of employment in the UAE, providing financial security for employees who have dedicated their time and efforts to a company. By understanding the calculation of end of service gratuity and the legal requirements surrounding it, both employers and employees can ensure a fair and transparent process when it comes to the payment of gratuity upon termination of employment.

Differences in Gratuity Calculation for Limited and Unlimited Contracts

End of service gratuity is a significant aspect of employment in the United Arab Emirates (UAE). It is a lump sum payment made to employees who have completed a certain period of service with their employer. The calculation of end of service gratuity varies depending on the type of employment contract – limited or unlimited.

In the UAE, limited contracts are those that have a specific end date or are linked to the completion of a specific project. On the other hand, unlimited contracts have no fixed end date and can be terminated by either party with notice. The calculation of end of service gratuity for employees on limited contracts is different from those on unlimited contracts.

For employees on limited contracts, the gratuity is calculated based on the number of years of service completed. According to UAE Labour Law, employees are entitled to gratuity payment equivalent to 21 days of basic salary for each year of service for the first five years. For any additional years of service beyond five years, the gratuity payment increases to 30 days of basic salary for each year.

For example, if an employee on a limited contract has worked for seven years and their basic salary is AED 5,000 per month, the calculation of their gratuity payment would be as follows:

(5 years x 21 days) + (2 years x 30 days) = 105 days + 60 days = 165 days

To convert this into months, we divide by 30:

165 days / 30 = 5.5 months

Therefore, the gratuity payment for this employee would be 5.5 months of their basic salary.

On the other hand, for employees on unlimited contracts, the calculation of end of service gratuity is slightly different. According to UAE Labour Law, employees on unlimited contracts are entitled to gratuity payment equivalent to 21 days of basic salary for each year of service for the first five years. However, for any additional years of service beyond five years, the gratuity payment remains at 21 days of basic salary.

Using the same example as before, if an employee on an unlimited contract has worked for seven years and their basic salary is AED 5,000 per month, the calculation of their gratuity payment would be as follows:

(5 years x 21 days) + (2 years x 21 days) = 105 days + 42 days = 147 days

To convert this into months, we divide by 30:

147 days / 30 = 4.9 months

Therefore, the gratuity payment for this employee would be 4.9 months of their basic salary.

In conclusion, the calculation of end of service gratuity in the UAE differs for employees on limited and unlimited contracts. Employees on limited contracts are entitled to a higher gratuity payment for each additional year of service beyond five years, while employees on unlimited contracts receive a fixed gratuity payment of 21 days of basic salary for each year of service. It is important for both employers and employees to be aware of these differences to ensure compliance with UAE Labour Law.

Impact of Resignation on End of Service Gratuity Calculation

End of service gratuity is a significant aspect of employment in the United Arab Emirates (UAE). It is a lump sum payment made to employees who have completed a certain period of service with their employer. The calculation of end of service gratuity is based on various factors, including the length of service, the employee’s basic salary, and the reason for termination of employment.

When an employee resigns from their job, it can have an impact on the calculation of their end of service gratuity. The UAE Labour Law specifies that employees are entitled to end of service gratuity if they have completed one year of continuous service with their employer. However, the amount of gratuity payable may vary depending on the circumstances of the resignation.

If an employee resigns voluntarily, they are entitled to receive end of service gratuity for the period of service completed. The calculation is based on the employee’s basic salary at the time of resignation and the length of service. The formula for calculating end of service gratuity for resigning employees is as follows:

Gratuity = (Basic Salary ÷ 30) x 21 x Number of years of service

For example, if an employee has a basic salary of AED 5,000 and has worked for 5 years before resigning, the calculation would be as follows:

Gratuity = (5,000 ÷ 30) x 21 x 5 = AED 17,500

It is important to note that the maximum amount of gratuity payable is capped at two years’ worth of basic salary. This means that even if an employee has worked for more than 10 years, they will only receive gratuity equivalent to two years’ worth of basic salary.

In some cases, employees may be required to serve a notice period before resigning. The notice period is typically specified in the employment contract and can range from 30 days to 3 months. If an employee resigns without serving the notice period, the employer has the right to deduct the salary for the notice period from the end of service gratuity.

On the other hand, if an employer terminates an employee’s contract without cause, the employee is entitled to receive end of service gratuity for the full period of service completed. The calculation is the same as for resigning employees, based on the employee’s basic salary at the time of termination and the length of service.

In cases where an employee is terminated for cause, such as misconduct or poor performance, the employer may not be required to pay end of service gratuity. However, it is important for employers to follow due process and provide evidence of the reasons for termination to avoid legal disputes.

In conclusion, the calculation of end of service gratuity in the UAE is an important consideration for both employers and employees. When an employee resigns, the amount of gratuity payable is based on the length of service and the employee’s basic salary at the time of resignation. It is essential for both parties to understand their rights and obligations regarding end of service gratuity to ensure a smooth transition when an employee decides to leave their job.

End of Service Gratuity Calculation for Fixed-term Contracts

End of Service Gratuity (ESG) is a significant benefit provided to employees in the United Arab Emirates (UAE) upon completion of their employment contract. It serves as a form of financial security for employees who have dedicated their time and effort to a company. The calculation of ESG can vary depending on the type of contract an employee is on, whether it is an unlimited or fixed-term contract.

For employees on fixed-term contracts, the calculation of ESG is slightly different compared to those on unlimited contracts. The UAE Labour Law stipulates that employees on fixed-term contracts are entitled to receive ESG upon completion of their contract period. The amount of ESG is calculated based on the total duration of the contract and the employee’s last drawn basic salary.

To calculate ESG for employees on fixed-term contracts, the following formula is used:

ESG = (Total years of service ÷ Total years of contract) x Last drawn basic salary

For example, if an employee has worked for 3 years on a 5-year fixed-term contract and their last drawn basic salary is AED 5,000, the calculation would be as follows:

ESG = (3 ÷ 5) x 5,000 = AED 3,000

In this case, the employee would be entitled to receive AED 3,000 as ESG upon completion of their contract.

It is important to note that ESG is only calculated based on the employee’s last drawn basic salary. Any additional allowances or benefits are not included in the calculation. This ensures that the calculation is fair and consistent for all employees, regardless of their salary package.

Employees on fixed-term contracts should also be aware of the implications of resigning before the completion of their contract period. In such cases, employees may not be entitled to receive ESG unless there is a provision in their contract that allows for early termination with gratuity payment.

Additionally, employees should be mindful of any clauses in their contract that may impact the calculation of ESG. Some contracts may include specific terms regarding gratuity payment, such as a minimum service period required to be eligible for ESG. It is important for employees to review their contract carefully and seek clarification from their employer if needed.

In conclusion, the calculation of ESG for employees on fixed-term contracts in the UAE is based on the total duration of the contract and the employee’s last drawn basic salary. By understanding the calculation formula and any relevant terms in their contract, employees can ensure they receive their entitled gratuity payment upon completion of their contract. It is essential for employees to be informed about their rights and entitlements to ESG to avoid any misunderstandings or disputes with their employer.

End of Service Gratuity Calculation for Termination Cases

End of service gratuity is a significant benefit that employees in the UAE are entitled to upon the termination of their employment contract. It serves as a form of financial security for employees who have dedicated their time and effort to a company. The calculation of end of service gratuity can vary depending on the circumstances of the termination, such as resignation, termination by the employer, or mutual agreement.

In cases of termination by the employer, the calculation of end of service gratuity is based on the length of service of the employee. According to the UAE Labour Law, an employee is entitled to gratuity for each year of service completed. The gratuity amount is calculated as follows: for the first five years of service, the employee is entitled to receive 21 days’ salary for each year of service. For any additional years of service beyond five years, the employee is entitled to receive 30 days’ salary for each year of service.

For example, if an employee has worked for a company for seven years and is terminated by the employer, the calculation of end of service gratuity would be as follows: 5 years x 21 days’ salary + 2 years x 30 days’ salary. This calculation would give the employee the total amount of gratuity they are entitled to receive upon termination.

In cases of resignation by the employee, the calculation of end of service gratuity is slightly different. According to the UAE Labour Law, an employee who resigns from their position is entitled to receive gratuity for each year of service completed. However, the calculation is based on the length of service and the reason for resignation.

If an employee resigns after completing one year of service but less than five years, they are entitled to receive one-third of the gratuity amount. If an employee resigns after completing five years of service but less than ten years, they are entitled to receive two-thirds of the gratuity amount. If an employee resigns after completing ten years of service or more, they are entitled to receive the full gratuity amount.

For example, if an employee resigns after working for a company for six years, the calculation of end of service gratuity would be as follows: 6 years x 21 days’ salary. This calculation would give the employee the total amount of gratuity they are entitled to receive upon resignation.

In cases of mutual agreement between the employer and the employee to terminate the employment contract, the calculation of end of service gratuity is based on the terms of the agreement. Both parties must agree on the amount of gratuity to be paid, taking into consideration the length of service and any other relevant factors.

In conclusion, the calculation of end of service gratuity in the UAE is an important aspect of employment law that ensures employees are fairly compensated for their service to a company. Whether the termination is initiated by the employer, the employee, or through mutual agreement, it is essential for both parties to understand their rights and obligations regarding gratuity payments. By following the guidelines set out in the UAE Labour Law, employers and employees can ensure a smooth and transparent process for calculating end of service gratuity in termination cases.

Importance of End of Service Gratuity Calculation for Expatriates in UAE

End of Service Gratuity (ESG) is a significant aspect of employment in the United Arab Emirates (UAE), especially for expatriates who make up a large portion of the workforce in the country. ESG is a lump sum payment that employers are required to provide to employees upon the termination of their employment contract. This payment is meant to compensate employees for their years of service and is calculated based on a specific formula outlined in the UAE Labour Law.

The calculation of ESG is crucial for expatriates in the UAE as it can have a significant impact on their financial well-being upon leaving their job. Understanding how ESG is calculated can help expatriates plan for their future and ensure they receive the full amount they are entitled to under the law.

The formula for calculating ESG in the UAE is as follows:
– For employees on an unlimited contract:
– 21 days of basic salary for each year of service for the first five years
– 30 days of basic salary for each year of service after five years
– For employees on a limited contract:
– 21 days of basic salary for each year of service for the first three years
– 30 days of basic salary for each year of service after three years

It is important to note that the basic salary used in the calculation does not include any allowances or bonuses. Only the fixed monthly salary is considered when calculating ESG. Additionally, the total number of years of service is rounded up to the nearest full year, with any partial year being considered as a full year.

Transitional phrases such as “in addition,” “furthermore,” and “moreover” can help guide the reader through the calculation process and ensure a smooth flow of information. For example, in addition to the basic salary, any other benefits or allowances received by the employee are not included in the calculation of ESG. This ensures that the payment is based solely on the employee’s fixed monthly salary, as outlined in the UAE Labour Law.

Furthermore, expatriates should be aware of any additional factors that may impact the calculation of ESG, such as unpaid leave or periods of absence from work. These factors can affect the total amount of ESG that an employee is entitled to receive, so it is important to take them into consideration when calculating the payment.

Moreover, expatriates should also be aware of the importance of keeping accurate records of their employment history and salary details. This information is crucial when calculating ESG, as it will be used to determine the total amount of the payment. Employers are required to maintain accurate records of their employees’ salaries and years of service, but it is also advisable for employees to keep their own records to ensure that they receive the correct amount of ESG upon leaving their job.

In conclusion, the calculation of End of Service Gratuity in the UAE is a crucial aspect of employment for expatriates in the country. Understanding how ESG is calculated and being aware of the factors that can impact the payment are essential for expatriates to ensure they receive the full amount they are entitled to under the law. By keeping accurate records of their employment history and salary details, expatriates can plan for their future and ensure a smooth transition when leaving their job in the UAE.

Strategies for Maximizing End of Service Gratuity Payout

In the UAE, the calculation of end of service gratuity is governed by Federal Law No. 8 of 1980, also known as the UAE Labour Law. According to the law, an employee is entitled to end of service gratuity if they have completed at least one year of continuous service with the same employer. The gratuity amount is calculated based on the employee’s final basic salary and the length of service.

The formula for calculating end of service gratuity in the UAE is as follows:
– For employees on an unlimited contract: Gratuity = (Final basic salary ÷ 30) x 21 days x number of years of service
– For employees on a limited contract: Gratuity = (Final basic salary ÷ 30) x 21 days x number of years of service for the first five years, and (Final basic salary ÷ 30) x 30 days x number of years of service for the subsequent years

It is important to note that the basic salary used in the calculation of end of service gratuity does not include any allowances or bonuses. Only the basic salary is considered when determining the gratuity amount. Additionally, the maximum gratuity amount that can be paid to an employee is capped at two years’ worth of basic salary.

To maximize your end of service gratuity payout, there are several strategies that you can consider. One strategy is to negotiate a higher basic salary with your employer. Since the gratuity amount is based on the final basic salary, a higher salary will result in a larger gratuity payout at the end of your service.

Another strategy is to stay with the same employer for a longer period of time. The longer you work for the same employer, the higher your gratuity amount will be. This is because the gratuity calculation is based on the number of years of service, so the more years you work, the larger your gratuity payout will be.

You can also consider contributing to a savings or retirement plan to supplement your end of service gratuity. By saving a portion of your salary each month, you can build up a nest egg that can be used to supplement your gratuity payout when you retire or leave your job.

In conclusion, end of service gratuity is an important benefit that employees in the UAE are entitled to upon completion of their employment contract. The calculation of gratuity is based on the employee’s final basic salary and length of service, as outlined in the UAE Labour Law. By negotiating a higher salary, staying with the same employer for a longer period of time, and saving for retirement, you can maximize your end of service gratuity payout and ensure a comfortable financial future.

Q&A

1. How is end of service gratuity calculated in the UAE?
End of service gratuity is calculated based on the employee’s last drawn basic salary.

2. How many days of salary are included in the calculation of end of service gratuity?
End of service gratuity is calculated based on 21 days of salary for each year of service for the first five years, and 30 days of salary for each year of service thereafter.

3. Are allowances included in the calculation of end of service gratuity?
No, only the basic salary is considered in the calculation of end of service gratuity.

4. Is end of service gratuity mandatory in the UAE?
Yes, end of service gratuity is mandatory for all employees in the UAE.

5. When is an employee eligible to receive end of service gratuity?
An employee is eligible to receive end of service gratuity after completing one year of continuous service with the same employer.

6. Is there a maximum limit on the amount of end of service gratuity that can be received?
Yes, the maximum amount of end of service gratuity that can be received is two years’ worth of salary.

7. Can an employee receive end of service gratuity if they resign from their job?
Yes, an employee is entitled to receive end of service gratuity even if they resign from their job, as long as they have completed one year of continuous service.

8. Are there any exceptions to the calculation of end of service gratuity?
Yes, there are certain categories of employees, such as those working in the public sector or in free zones, who may have different rules for the calculation of end of service gratuity.

9. Can an employee negotiate for a higher end of service gratuity amount?
Yes, an employee can negotiate for a higher end of service gratuity amount with their employer, but this is not mandatory.

10. How is end of service gratuity paid out to employees in the UAE?
End of service gratuity is typically paid out in a lump sum to the employee upon termination of their employment contract.

Conclusion

The calculation of End of Service Gratuity in the UAE is based on the employee’s length of service and final salary. The formula for calculating gratuity is as follows: for the first five years of service, the employee is entitled to 21 days of salary for each year of service. For any additional years of service beyond five years, the employee is entitled to 30 days of salary for each year of service. It is important for employers and employees to understand the calculation method to ensure fair and accurate payment of gratuity at the end of employment.