End-of-Service Gratuity Calculation
Overview
End-of-service gratuity is a lump sum payment owed to employees who have completed at least one year of service. It is calculated based on the last basic salary and years of service.
Legal Basis
Under Federal Decree-Law No. 33 of 2022, end-of-service gratuity is mandatory for all employees who have completed at least one year of continuous service. It applies to all employees (limited and unlimited contracts). It is calculated on the last basic salary.
Gratuity Calculation
For Service Less Than 1 Year: No gratuity payable.
For Service of 1-5 Years: 21 days of basic salary for each year of service.
For Service of 5+ Years: 21 days of basic salary for each of the first 5 years + 30 days of basic salary for each additional year.
Maximum Gratuity: Capped at 2 years' total salary (730 days).
Daily Basic Salary Calculation
Daily basic salary = Monthly basic salary / 30 days.
Example: Monthly basic salary = AED 6,000. Daily basic salary = AED 6,000 / 30 = AED 200.
Gratuity Calculation Examples
Example 1: 3 Years of Service
- Monthly basic salary: AED 6,000
- Daily basic salary: AED 200
- Gratuity: 21 days x 3 years = 63 days
- Total gratuity: 63 x AED 200 = AED 12,600
Example 2: 7 Years of Service
- Monthly basic salary: AED 10,000
- Daily basic salary: AED 333.33
- First 5 years: 21 days x 5 = 105 days
- Next 2 years: 30 days x 2 = 60 days
- Total days: 165 days
- Total gratuity: 165 x AED 333.33 = AED 55,000
When is Gratuity Payable?
Full Gratuity: Employee completes the contract term. Employee resigns with proper notice. Employee is terminated without cause. Employee is terminated due to employer's closure.
Reduced Gratuity (under old law): Under the old law, gratuity was reduced for resignation before completing the contract. Under the 2022 law, this reduction has been eliminated. Full gratuity is payable regardless of resignation.
No Gratuity: Employee terminated for cause (misconduct, violation of law). Employee has not completed 1 year of service.
Factors Affecting Gratuity
1. Last Basic Salary: Gratuity is based on the last basic salary, not the total salary (which includes allowances).
2. Years of Service: Continuous service from the start date to the end date.
3. Reason for Termination: Termination for cause may result in no gratuity. Resignation or termination without cause results in full gratuity.
4. Unpaid Leave: Unpaid leave is not counted as service. Only actual working days are counted.
Gratuity and Notice Period
Notice period is served before the end of service. During notice period, employee continues to work. Salary is paid during notice period. Gratuity is calculated up to the end of the notice period.
Gratuity and Annual Leave
Unused annual leave can be encashed. Leave encashment is separate from gratuity. Leave encashment is based on the daily basic salary.
Gratuity Payment Timeline
Gratuity must be paid within 14 days of the end of service. If not paid, employee can file a complaint with MoHRE. Late payment may result in penalties.
PRO's Role in Gratuity Calculation
Calculate gratuity accurately. Ensure correct daily basic salary. Verify years of service. Check for any unpaid leave. Prepare gratuity calculation sheet. Process payment through payroll. Ensure timely payment (within 14 days). Maintain records of payment.
Common Gratuity Issues
Basic vs. Total Salary: Gratuity is based on basic salary only, not total salary (which includes allowances). Some employers incorrectly calculate gratuity on total salary.
Years of Service: Must be continuous. Gaps in service may affect the calculation. Unpaid leave is not counted.
Termination for Cause: Employer must prove cause. Employee has the right to challenge. MoHRE/court will decide.
Contract Type: Under the 2022 law, contract type (limited/unlimited) does not affect gratuity. Full gratuity is payable in both cases.
Gratuity and End-of-Service Benefits
Gratuity is the primary end-of-service benefit. Other benefits may include: Unused leave encashment. Repatriation ticket (to home country). Any unpaid salary or overtime. Any other contractual benefits.
Record Keeping
Maintain gratuity calculation records. Keep payment proof. Store employee acknowledgment. Update MoHRE records. Keep records for 7 years (Corporate Tax requirement).