End-of-service benefits, often known as gratuity, are one of the most important rights for employees working in Dubai. These benefits offer financial security at the end of employment and help workers transition into their next opportunity. While many employees and employers understand that gratuity exists, its calculation process can sometimes seem confusing, especially when contract types, salary components, and termination reasons vary.
The UAE Labour Law provides clear rules for gratuity, but real-life situations often involve unique factors that require careful interpretation. This detailed FAQ explains how end-of-service benefits are calculated, common mistakes to avoid, and what both employers and employees should keep in mind throughout the process.
Understanding the Purpose of End-of-Service Benefits
The gratuity system ensures that employees receive a financial sum when their employment ends, provided they have completed at least one full year of continuous service. These benefits reward loyalty and service, forming a critical part of the employment relationship in Dubai’s private sector.
Gratuity is not a bonus or a goodwill payment; it is a legal entitlement. Therefore, employers must calculate and settle it accurately, while employees should be aware of how it is determined.
Eligibility Requirements for End-of-Service Benefits
To qualify for gratuity, an employee must:
- Complete a minimum of one year of continuous service
- Work under a valid employment contract
- Not be terminated for severe disciplinary misconduct
Employees who have completed less than one year are not entitled to gratuity. Those who exceed one year begin to accumulate benefits based on years of service and basic salary.
The Role of Basic Salary in Gratuity Calculations
Gratuity is always calculated using basic salary, not total earnings. Many employees mistakenly believe allowances (housing, transport, commissions, etc.) are included, but this is incorrect.
Basic salary is the amount written in the employment contract under the “basic pay” section. All other payments, benefits, or incentives are excluded from the gratuity formula.
This distinction is crucial because even a small difference in basic salary can significantly impact the final payout.
Calculation Formula for Gratuity
The UAE Labour Law uses a simple structure for calculating gratuity:
For the first five years of service:
Employees receive 21 days of basic salary for each year.
For service beyond five years:
Employees receive 30 days of basic salary for each additional year.
Gratuity is proportional. If an employee has worked:
- 2.5 years → calculation is based on 2.5 years
- 7 years → first 5 years at 21 days + last 2 years at 30 days
This ensures fair compensation based on actual service duration.
How to Convert Days Into Salary
Some employees find the conversion of “days” into salary confusing. The calculation is:
Daily basic salary = Basic monthly salary ÷ 30
Once the daily salary is identified, the formula becomes:
Gratuity amount = Daily basic salary × number of entitled days
For example, an employee earning AED 6,000 as basic pay receives:
- Daily basic salary: 6,000 ÷ 30 = AED 200
- Annual gratuity entitlement for first 5 years: 21 × 200 = AED 4,200
If the employee worked for 3 years, gratuity = 4,200 × 3 = AED 12,600.
Impact of Termination Type on Gratuity
Gratuity entitlement varies based on how the employment ends. The law distinguishes between:
- Resignation
Employees who resign are still entitled to gratuity under the new labour law, and the full calculation applies as long as they have completed one year. Older rules limiting gratuity for resignation no longer apply.
- Termination by Employer
If termination occurs for valid reasons, the employee still receives gratuity.
- Termination for Gross Misconduct
If an employee is dismissed due to severe disciplinary violations proven under Article 44 of the law, gratuity may be forfeited.
Because termination type directly affects entitlement, individuals sometimes consult professionals, including Lawyers in Dubai, to interpret their situation correctly.
What Happens When Employment Ends Mid-Year?
Gratuity is calculated proportionally. For example, if an employee works 5 years and 7 months, the additional 7 months count toward gratuity.
The formula adjusts automatically:
- Completed years are counted fully
- Partial years are calculated as a fraction
This system ensures fairness throughout the employment period.
Gratuity for Fixed-Term vs. Unlimited Contracts
The previous UAE Labour Law distinguished between fixed-term and unlimited contracts, but under the updated law, all contracts are treated as fixed-term, renewable agreements.
Gratuity calculation is now standardized regardless of contract type. What matters most is:
- Length of service
- Basic salary
- Reason for termination
The updated rules create consistency for employees across industries.
How Unpaid Leave Affects Gratuity
If an employee takes unpaid leave, those days are generally excluded from total service duration. For example:
- Working period: 3 years
- Unpaid leave: 30 days
- Service counted: 3 years minus 30 days
This results in a slightly lower gratuity amount. Employers must adjust calculations accordingly to remain compliant.
Situations That Complicate Calculations
Real-life gratuity calculations may become difficult due to:
- Salary changes during employment
- Contract amendments
- Disputes about basic salary components
- Long unpaid leaves
- Conflicting interpretations of service duration
- End-of-service disputes after arbitrary dismissal claims
In such cases, both employees and employers must rely on accurate documentation such as payslips, contracts, visa records, and MOHRE filings.
The Employer’s Obligation to Pay Promptly
When employment ends, payment of gratuity must be made without delay. Employers cannot withhold gratuity unless:
- An employee owes money to the company
- There is a documented legal dispute
- A court order requires withholding
Delaying gratuity can lead to penalties.
Differences for Domestic Workers
Domestic workers are governed by a separate legal framework with their own gratuity rules. They receive 14 days of salary for every year of service, unless the contract states otherwise.
Employers must refer to the Domestic Workers Law to avoid mistakes.
Gratuity vs. Pension for Emiratis
Emirati employees typically receive pensions instead of gratuity because they are enrolled in the General Pension and Social Security Authority (GPSSA). Expatriates, however, do not receive pensions and rely on gratuity as their primary end-of-service entitlement.
What Employees Should Do Before Leaving a Job
Employees should take the following steps to ensure accurate payout:
- Verify their basic salary in the contract
- Request updated payslips
- Confirm their total service duration
- Check any deductions or debts owed to the employer
- Keep written communication regarding resignations or notice periods
Miscommunication often leads to disputes, especially when service duration is unclear.
What Employers Must Keep in Mind
Employers should:
- Maintain accurate employee records
- Ensure salary components are clearly defined
- Update contracts when salary changes
- Calculate gratuity based only on basic salary
- Follow proper termination procedures
Failure to comply can result in financial or legal consequences.
When Disputes Arise Over Gratuity
Disagreements about gratuity are common. Common issues include:
- Miscalculated basic salary
- Incorrect service duration
- Salary reductions without employee consent
- Termination disputes affecting entitlement
When these issues occur, employees often raise complaints with MOHRE. Employers must present documentation to support their calculations. In more complex cases, individuals or companies may seek guidance from professionals, including Lawyers in Dubai, to ensure correct interpretation of the law and proper dispute resolution.
Final Thoughts
End-of-service benefits play a vital role in Dubai’s employment system. Understanding how gratuity is calculated helps employees plan their careers confidently and ensures employers meet their legal obligations. While the formula appears straightforward, real-life situations—such as salary adjustments, unpaid leave, or termination disputes—require careful attention.
Accurate documentation, transparent communication, and proper knowledge of UAE Labour Law help avoid unnecessary misunderstandings. With clarity and proper compliance, both employees and employers can complete the end-of-service process smoothly and fairly.
