How to Calculate Gratuity in UAE?

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Full text of Article 16 of the UAE Labour Law
XVI. PAYMENT OF GRATUITY

What is the employee entitled to at the termination of the employment contract?

The employee at the termination of the employment contract will be entitled for to the following:

A notice period, or any amount due in lieu of the notice period, in the case of an unlimited contract.
Compensation for the unreasonable dismissal if the contract was terminated by the employer for unreasonable cause, in the case of an unlimited contract.
In the case of a limited contract, compensation equivalent to the period until the end of the contract, or three month’s salary whichever is greater.
Payments equivalent to the balance of un-utilized leave or any part thereof.
Payments for overtime or any balance of wages due and not yet paid.
End of service gratuity calculated on the duration of the employment.
Repatriation expense as per the law or the contact.

2. What does the term end of service gratuity mean in terms of compensation?

An employee who completes one year or more in continuous service shall be entitled to gratuity at the end of the service. The gratuity shall be calculated as follows:

21 day’s wages for each year of the first five years.
30 day’s wages for each additional year on condition that the total of the gratuity shall not exceed the wages of two years.

3. How is gratuity calculated?

Gratuity is calculated on an annual basis if the employee has actually completed one year of employment with the employer or more. The day of absence from work without pay shall not be included in calculating the length of service. However, if the employee completed a year in service he will be entitled to a gratuity for the fraction of the year proportional for the part of the year he spent in work provided that he has completed one year in continuous service.

4. On what basis is gratuity calculated?

Without prejudice to what is stipulated by some laws in the granting of pensions or retirement benefits to employees, in some establishments gratuity for those who are paid monthly, weekly or daily wages shall be calculated as follows:

Basic wage which is taken as a basis for the calculation of gratuity is that which is last received by the employee before the termination of the employment contract. This wage will be the basis for calculating the gratuity for all the years during which the employee works for the employer calculated at the rate advised here above.

5. What does a basic wage mean?

A basic wage means anything received by the employee as a wage excluding housing, transport, travelling allowances and overtime, family allowances, entertaining allowances and any other allowances or a bonus.

6. Would a commission or payment by percentage be considered a basic wage?
According to recent judgment delivered by the UAE court, any amount payable to employee as wage other than allowances or bonus including wages paid by percent, commission or by performance will be considered a wage and will be taken into consideration in calculating gratuity.

7. Would an employee employed prior to the law coming into use be entitled to gratuity?

According to the UAE law, employees who are working with their employer prior to the date on which the law came into force will not be entitled for gratuity for the period preceding the law. Without prejudice to any entitlement or payment they were entitled to under laws or regulations. However, gratuity for those employees will be calculated on the date the law came into force thereafter.

8. Can the employer deduct any payment from the gratuity payable to the employee?

The employer may deduct any amount due and payable to the employee to the employer from the end of the service gratuity and make payment for the balance to the employee. If there is any dispute over payment of gratuity or amount payable to the employer, the matter should be put to the labour office for mediation.

9. Does it make difference to the amount calculated for the gratuity if the employee resigned from employment?

An employee employed under a contract for unlimited period who resigned after a continuous service of not less than a year and not more than three years is entitled to one third of the end of service gratuity provided above. If the period of continuous service was more than three years and less than five years he is entitled to two thirds of the gratuity.

If his continuous service was more than five years, he shall be entitled to the full gratuity.

If an employee who is employed under a contract of limited period, resigned with his free will before the end of the contract, he shall not be entitled to the end of service gratuity unless his continuous service exceeds five years.

10. Can an employee be deprived of his end of service gratuity and under what circumstances?

An employee may also be deprived of his gratuity in either of the following two cases.

He has been dismissed for one of the reasons stated in Article 120 of this law, or if he left work to avoid dismissal.

If he left his job voluntarily without notice in cases other than the two provided for in Article 121 of this law. This applies to unlimited period contract and in cases where the employee did not complete five years of continuous employment in a contract of limited term.

If the establishment or company has a pension scheme which is beneficial to the employee, would it be a substitution for payment of gratuity?

If the employer has pension scheme applicable to all employees at the company or the establishment, such a scheme must be published and known to all employees, and at the same time, specify that this scheme will be a substitution for the gratuity rules governed by the UAE Federal Labour Law. It must be more beneficial to the employees than the gratuity provision of the law. Otherwise the employee may benefit from both.

11. Can the employee and the employer agree to pay gratuity for determination of the employment contract for the proceeding period?

The employer and the employer may agree to pay at a certain time the gratuity to the employee for the years during which the employee served the employer, and to start with a new contract for the future period. Provided always however, that this agreement is clearly stated, acknowledged, and agreed between the employee and employer whereby gratuity will be paid for the proceeding period, and a new contract will be entered into for the future relationship. This, bearing in mind that the employee’s employment with the employer will still be considered as a continuous period for the purpose of the calculation of the interest, or at the time when he resigns, calculating the years during which he was employed with the employer.

12. Can an employee mortgage or assign payment of his gratuity?

It is possible to mortgage or assign payment of the employee’s gratuity to the employer or to the third party by mutual agreements provided that in the agreement with the third party, the employer and the employee should consent and agree to this in writing with an understanding of all parties that the employee may forfeit his right for a gratuity which is not yet due if he has violated the provision of the law as stipulated above.

13. When does gratuity become due and payable?

Gratuity will only become due and payable at the end of or at the termination of the contract.

14. Would end of service gratuity and other dues payable to the employee be considered priority debts?

The employee’s wages, overtime, and any other benefits, including the end of service gratuity, is considered a preferential debt and the employee shall have a lien over any movable or immovable property owned by the employer ranking second to government charges, judicial fees and family alimony payments.

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