Understanding Gratuity Calculation in the UAE: 2024 Update

In the UAE, the Gratuity calculation is important for both - Employers and Employees.

It ensures fair compensation for employees' services and encourages long-term employment. 

With the new updates for 2024, it is important to stay informed about the latest rules and regulations. Here's a comprehensive guide to help you understand how gratuity works, who is eligible, and how it is calculated, ensuring both employers and employees can navigate this essential aspect of UAE labor law effectively.

What is Gratuity?

Gratuities are a form of end-of-service benefit for an employee rendered services. According to the UAE labor law, employees who have been in work for more than one year are entitled to receive a gratuity from their employer. It is a reward for loyalty and years of service within the same corporation.

Who is Eligible for Gratuity?

The gratuity will be calculated under the following terms.

1. Length of Employment: An employee should have been consecutively employed for at least one year.

2. Nature of contract: Limited and unlimited contract - qualified employment type.

3. Notice Period Compliance: The notice period for an unlimited contract employee must end, except if the employer has committed misconduct that the employee can prove.

4. Termination Conditions: The employees who are terminated under Article 120 UAE Labor Law are not entitled to receive gratuity.

How to Calculate Gratuity in the UAE - 100% Working Method

Three primary factors determine the calculation of gratuity:

1. Basic Salary: Calculations are based on the basic salary without the take-home pay and allowances.

2. Employment Duration: Gratuity is based on the number of years an employee has worked.

3. Contract Type: Gratuity calculations differ for limited and unlimited contracts.

Gratuity Calculation Formula in the UAE

• For Unlimited Contracts

Upon Resignation:

1. 1-3 years of service: Gratuity = (7 days x Basic Salary x Service Years) / 30

2. 3-5 years of service: Gratuity = (14 days x Basic Salary x Service Years) / 30

3. More than 5 years of service: Gratuity = (21 days x Basic Salary x Service Years) / 30

Upon Termination:

1. 1-5 years of service: Gratuity = (21 days x Basic Salary x Service Years) / 30

2. More than 5 years of service: Gratuity = (30 days x Basic Salary x Service Years) / 30

The employees with unlimited contracts receive their gratuity differently according to whether they quit or are terminated. The amount of gratuity an employee receives for resigning from their job is less every five years than that for a terminated employee. This means that more money is paid in gratuity to employees who stay longer.

For Limited Contracts

Upon Resignation:

• Less than 5 years of service: Gratuity = (21 days x Basic Salary x Service Years) / 30

• More than 5 years of service: Gratuity = (30 days x Basic Salary x Service Years) / 30

Upon Termination:

• 1-5 years of service: Gratuity = (21 days x Basic Salary x Service Years) / 30

• More than 5 years of service: Gratuity = (30 days x Basic Salary x Service Years) / 30

The calculations remain the same for both cases where the employee resigns or gets terminated. There is no difficulty in treatment regarding terminations, making it easier to calculate. The liability for employees is clear under limited contracts.

Some More Determinants of Gratuity

• Maximum Limit: The maximum amount payable as gratuity shall not exceed two years of salary.

• Debt Adjustment: Deduction can be made from the gratuity payment in respect of any money due from an employee to an employer.

Understanding the Impact of Basic Salary on Gratuity

In the UAE, the gratuity will be based on the last positive salary, where there are no allowances and other amenities enjoyed by the employee such as housing or transport or bonuses. For instance, if under salary packaging the basic salary is 3,000 AED, there are more benefits that would have no consideration for gratuity.

Resignation vs. Termination: How it Affects End-of-Service Benefits

Termination by the employer, or resignation, under either a fixed or unlimited contract mode, will give different gratuity values. The mode of separation—whether by voluntary resignation or through termination by the employer—through which an employee leaves the company will affect the calculation of their entitlement to gratuity.

Making Gratuity Calculation Simple Enough

If the amount of gratuity calculation seems complicated, then don't try to make an attempt; use some of the online gratuity calculators, which will provide you accurate and very fast results. It removes all that complexity from the process and ensures you get the right amount based on the latest regulations.

Why Gratuity Learning is Important

In this way, the realization of these key points would let both the employers and employees follow the UAE labor laws accordingly and process the gratuity payment in the right way. Apart from supporting employees, gratuity also motivates the employees to stay with the organization for longer, which is another indirect purpose to benefit businesses with experienced staff. 

Knowing this, you will be in a position to move through the gratuity system with ease, being that you ensure that you are treated fairly within the set legal standards.