A gesture of an organization’s gratitude for an employee’s loyal service is the basic notion behind the remuneration of gratuity. This simple gesture has become strictly governed by the law to ensure the employee’s well-being. A gratuity helps a lot of these employees as elementary sustenance, at the least temporarily before they start fresh. Hence, gratuity calculation is integral in maintaining good employee relations.

The payment of gratuity is governed by various guidelines mention in the UAE Labor Laws.

An employee is eligible to receive gratuity after a minimum service period of one year.

Though in many cases the remuneration of gratuity is considered as a platform for retirement clearance, it virtually cannot be deliberated so.

Eligibility and Laws Governing the Scenario:

If an employee resigns or is terminated from his position in the establishment, he is entitled to gratuity provided he has completed a required minimum of the period and was not terminated based on misconduct.

  • The minimum required period of service is one year.
  • The provided guidelines may have a slight variation based on the type contract signed by the employee i.e., Limited Contract or Unlimited Contract.
  • Variable gratuity payment schemes are prescribed based on four scenarios that may be considered which shall be discussed in detail later in the article.
    1.Terminated in a period less than a year.
    2.Between a period of more than one year but less than three years
    3.Between a period of more than three years but less than five years
    4.After more than five years
  • UAE Labor Law Article 132 describes the gratuity allowance depending on the period of service scenario.
  • UAE Labor Law Article 134 describes the specificity of the type of remuneration considered as gratuity.
  • The article states that payments made to the employee as compensations, housing, travel stipend, overtime wage, teller’s allowances, child education allowance, allowances for social services, and any other bonuses will not be included or considered as payment in the confidence of gratuity.
  • Article 139, Article 120, Article 121, etc., specifies the conditions under which the organization may or may not be liable to the payment of the gratuity:
    1.The first scenario shall be considered in the case of termination of the employee due to misconduct, negligence, property destruction, etc.
    2.The second scenarios come into consideration, if there is a breach of contract by the employer or an assault which may have forced the employee to resign without notice, and is strictly inspected under the legal guidelines

Limited Contract and Unlimited Contract (Gratuity Calculation in UAE):

1.Limited-term contract

  • This type of contract is time-bound with a specific period of service demanded and is signed by the employer and employee. The breach of this contact is virtually illicit.
  • As per the labor employment laws of UAE, the maximum time duration of a limited contract is 2 years. Earlier, the time period for the same was 4 years.
  • For further extension of the period of service, the establishment and employee can agree on renewing the old contract or signing a new one.

2.Unlimited term contracts

  • There is no specific minimum or maximum period for this form of employment.
  • Before termination, the establishment must send a notice between 30 and 90 days before the termination.
  • This kind of agreement is on mutual consent. Therefore, the enforcement from legal bodies is minimal. Hence, the establishments themselves set the terms and conditions, unlike the government procedures as in case of limited contract.
  • Legal proceedings can occur in case of fraud, employee maltreatment or wrongful termination.

Now, we will take a look at the previously mentioned gratuity payment schemes depending on period of service.

Limited Contract gratuity fund

i. If the service was terminated in less than a year then the organization is not accountable to pay the gratuity fund.

ii. If the service of the employee terminates between the first year and the fifth year, they must receive the full gratuity fund accounting as wages for 21 days of service for each year.

iii. If the employee contract lasts five years, the employee must receive the full gratuity fund which accounted for 30 days of wages for each year completed.

Unlimited Contract gratuity fund

i. As previously mentioned even in the case of the unlimited contract, if the employment contract does not last the completion of one year, no gratuity payment is necessary.

ii. If the employment termination occurs anywhere between the 1st and 3rd year of employment, then the employee must receive gratuity amounting to one-third of the wages for 21 days of service.

iii. If the employment termination occurs anywhere between the 3rd and 5th year of employment, then the employee must receive gratuity amounting to two-third of the wages for 21 days of service.

iv. On conclusion of five years of service, the employee must receive comprehensive payment of gratuity as 21 days of wages for each year of service.

How to Calculate your Gratuity in UAE?

The Formula used for the Calculation of Gratuity:

Limited Contract:

  • Elementary pay ÷ 30 = Daily wage
  • Daily wage x 21 = 1-year gratuity owed
  • 1-year gratuity owed x years of service = Total gratuity owed

Unlimited Contract:

  • Elementary pay ÷ 30 = Daily wage
  • Daily wage x 21 = gratuity owed for 1 year
  • Gratuity owed for one year x years of service = Total gratuity owed
  • Total gratuity owed ÷ 3 = One-third of total gratuity owed
  • One- third of gratuity owed for 1-3 years of service
  • Two- third of gratuity owed for 3-5 years of service
  • After the end of 5 years, remuneration of the total gratuity owed may occur

In case an employee under contract for 2 years, signs an unlimited contract for the next tenure, the two earlier years becomes a part of the whole term of service. Hence, the gratuity for the same becomes a part of the unlimited contract. Therefore, irrespective of the contract, all the employee who toil for the organization should receive gratuity.

For more info please contact :

Contact Person: Gopu Rama Naidu CPA FCA

Email: support@kgrnaudit.com Mobile : +971 50 452 0648 Phone: +971 455 70 204

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