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Gratuity Calculation in UAE – Updated for 2021

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Gratuity Calculation in UAE – Updated Version for 2021

Gratuity is a great way to improve employee retention and at the same time it encourages employees to stay longer for their employers. UAE’s labor law requires businesses to pay gratuity to employees who have provided more than a year of continuous service. Whether you’re a business owner or an employee, at some point you want to know how much gratuity you owe to your employees or how much gratuity your employees can claim from you. This guide will provide detailed information to both the parties.

What is Gratuity?

Gratuity is a form of end-of-services benefits that employees are entitled to. Simply put, it is a sum of money awarded to an employee from the employer, as a token of appreciation for their services. The UAE labor law dictates that any employee who has worked for a company for a certain amount of time is entitled to gratuity.

Employees on, both, limited and unlimited contracts are eligible for gratuity (provided that they meet other pre-requisites as well).

The exact amount of gratuity owed to an employee is determined by a handful of factors. There’s a complete formula through which one’s gratuity amount is calculated. Before we get into the gratuity calculation method, let’s go through the eligibility criteria first.

Who is Eligible for Gratuity?

Gratuity isn’t something that every employee can get. There are a several conditions that must be met. Some of these conditions are:

  1. There should be a limited or unlimited labour contract in place.
  2. An employee needs to have worked continuously for a period of 1 year with an employer in order to receive gratuity.
  3. An employee under unlimited contract may not be able to get the end of service benefit despite of continuous employment of more than one year in case he/she resigns without completing the notice period, unable to prove that the employer has not fulfilled his/her legal obligations towards the contract, fails to provide evidence that he/she was assaulted by the employer or any of the employer’s representatives.
  4. Any employee terminated under Article 120 of the UAE’s Labour Law. Termination without notice due to non-compliance of any of the matters under Article 120 can restrict your ability to receive end of service benefits.

If you meet all the pre-requisites of gratuity payment, then you might be wondering how can you calculate gratuity in UAE. Fortunately, UAE gratuity calculation is really simple. There are plenty of resources online that can help you determine the exact amount of gratuity owed to you. You can even use online tools to calculate your exact gratuity without any hassle.

How Gratuity is Computed in UAE

Gratuity computation sounds rather complex, but once you wrap your head around the basics, it becomes quite easy to understand. Your gratuity amount depends on 3 main factors:

  • Your basic salary
  • Resignation or termination?
  • Your contract type

In the UAE, the amount of gratuity owed to an employee is derived from the last basic salary that they received from their employer. Basic salary does not include any additional benefits that an employee was receiving.

For example, if an employee’s salary package includes AED 3,000 along with fuel allowance, accommodation, and transport, their basic salary will only count the AED 3,000. It should be noted that any extras taken out of one’s salary (in the form of salary sacrifice schemes or something similar) aren’t counted in basic salary either.

The nature of your termination affects your gratuity as well. As we mentioned earlier, if you’re terminated under Article 120, you aren’t eligible for gratuity. Also, if you have an unlimited contract, your gratuity will vary depending on whether you resigned or got terminated.

The type of contract you have with your employee is an important factor. Unlimited and limited contracts are both similar. However, they have one key difference: limited contracts specify a start date and end date for the contract. An unlimited contract only specifies a start date.

Other Factors that Affect Your Gratuity

  • The entire gratuity amount cannot exceed the sum of an employee’s 2 years’ complete salary.
  • If an employee owes money to their employer, the owed amount can be adjusted in the gratuity.

How Gratuity is Calculated in an Unlimited Contract

In both types of contracts, your gratuity calculation varies depending on whether you resign or get fired. Gratuity payment calculation is further broken down into 3 tiers:

  • 1-3 years of service
  • 3-5 years of service
  • 5 years and more of service

If an employee is terminated, then only 2 tiers remain:

  • 1-5 years of service
  • 5 years or more of service

As an employee progresses through these tiers, the calculation for their payment changes.

Upon Resignation

  • For employees who have worked for 1-3 years, their gratuity consists of 1/3rd of their basic salary of 21 days for each year of service.
  • For employees who have worked for 3-5 years, their gratuity consists of 2/3rd of their basic salary of 21 days for each year of service.
  • After 5 years or more of service, an employee’s gratuity consists of their complete basic salary of 21 days for each year of service.

Upon Termination

  • For employees who have worked for 1-5 years, their gratuity consists of their basic salary of 21 days for each year of service.
  • For employees who have worked for more than 5 years, their gratuity consists of their basic salary of 21 days for up to their 5th year of service. For every year after their 5th year, 30 days’ basic salary is counted.

How Gratuity is Calculated in a Limited Contract

For limited contracts, the rules of calculation are more or less the same. Your gratuity calculation will vary based on the number of years you’ve worked and the nature of your termination. However, the payment tiers will be different:

  • Completion of a contract with less than 5 years of service
  • More than 5 years of service

If you have been fired then the following tiers will apply to you:

  • 1-5 years of service
  • 5 years or more of service

Upon Resignation

  • If you have completed your contract with less than 5 years of service, your gratuity will consist of your basic salary for 21 days for every year of service.
  • If you have more than 5 years of service, then your gratuity will consist of your basic salary for 21 days of your first 5 years. For every year after their 5th year, 30 days’ basic salary is counted.

Upon Termination

  • For employees who have worked for 1-5 years, their gratuity consists of their basic salary of 21 days for each year of service.
  • For employees who have worked for more than 5 years, their gratuity consists of their basic salary of 21 days for up to their 5th year of service. For every year after their 5th year, 30 days’ basic salary is counted.

UAE Gratuity Calculation Formula

Reading all the different conditions for calculating your gratuity can leave your head spinning. To make things simpler, you can simply use these formulas to calculate your exact gratuity.

Gratuity formulas for Unlimited Contracts

Upon Resignation

  • For 1-3 years of service:

Gratuity = (7 days X Basic Salary X Service Years)/30

  • For 1-5 years of service:

Gratuity = (14 days X Basic Salary X Service Years)/30

  • For more than 5 years of service:

Gratuity = (21 days X Basic Salary X Service Years)/30

Upon Termination

  • For 1-5 years of service:

Gratuity = (21 days X Basic Salary X Service Years)/30

  • For more than 5 years of service:

Gratuity = (30 days X Basic Salary X Service Years)/30

Gratuity formulas for Limited Contracts

Upon Resignation

  • For completion of contract with less than 5 years of service:

Gratuity = (21 days X Basic Salary X Service Years)/30

  • For more than 5 years of service:

Gratuity = (30 days X Basic Salary X Service Years)/30

Upon Termination

  • For 1-5 years of service:

Gratuity = (21 days X Basic Salary X Service Years)/30

  • For more than 5 years of service:

Gratuity = (30 days X Basic Salary X Service Years)/30

If you don’t have the time to apply these formulas on your own, you can use an online Gratuity calculator tool instead.

UAE Gratuity Calculation Formula

While it’s good for an employee to have a basic understanding of gratuity calculation, it can also be confusing. The UAE Gratuity Calculator is a really useful tool that takes care of all the technical elements of gratuity calculation in UAE. You can find this tool on the Dubai Development Authority’s (DDA) website. Just follow these steps and calculate the exact amount owed to you:

  1. Go to the DDA’s website and open the gratuity calculator.
  2. The tool will ask you for basic information regarding your contract type, service years, method of separation, and your basic salary. Enter all of this information and click the “calculate” button.
  3. The tool will calculate your exact gratuity for you.

A great thing about this tool is that since it’s provided by the authorities, its calculation methods are up-to-date with current laws.

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