Gratuity calculation in the UAE is an essential function for each HR professional to carry out. Here is a quick guide based on the type of contract the employee is on.
As per the UAE End of Service Gratuity Law, any employee who has spent one or more year's in continuous service of your organization is entitled to an end of service gratuity. The gratuity calculation depends on two major factors, the length of the employment and the type of contract.
It is important to note that gratuity in the UAE is calculated based on the basic salary of the employee which therefore excludes housing allowance, conveyance, furniture, utilities and other allowances. If the employee owes any money to the employer, the amount shall be deducted from the employee’s gratuity.
Depending on the type of contract, here is how to accurately calculate the gratuity pay for your employee:
Limited or Fixed Term contract:
There are three situations under limited contract based on the length of the employment term.
Less than 1 year: If the employee leaves work before completing one year, you do not need to pay them gratuity.
1 year – 5 years: If the employee has worked for more than a year, but less than 5 years, you have to pay him or her gratuity based on 21 days of salary.
More than 5 years: If the employee has worked more than 5 years, you are required to pay him or her gratuity based on 30 days salary for every year of work.
For example, let's assume the basic salary of the employee is AED 10,000. The below will be how you calculate the employees' gratuity, scenario dependent:
Step 1: Calculate the daily wage:
10,000 / 30 = AED 333.33
Step 2: Multiply the daily wage with 21 (assuming the employee worked within the organization between 1 to 5 years):
333.33 x 21 = AED AED 6,999.3
Step 3: Now, multiply this amount with the number of years of service:
For example, the employee has worked for 3 years, AED 6,999.3 x 3 = AED 20,997
Therefore, AED 20,997 will be the gratuity paid to the employee.
For employees that have worked more than 5 years within the company the same formula applies but you would use 30 days versus 21 days.
Unlimited contract:
For employees under unlimited contract, there are four different situations based on the length of the employment term:
Less than 1 year: Under an unlimited contract, employees who leave work before one year service are not entitled to gratuity pay.
1 year – 3 years: The employee is entitled to 1/3rd of the 21 days of gratuity pay:
Using the above example, let’s assume the basic salary of the employee is AED 10,000. Therefore, the 21 days salary is AED 6,999.3.
The gratuity pay for the employee would be AED 6,999.3 x 1/3 = AED 2,333.1.
3 years – 5 years of service: The employee is entitled to 2/3rd of the 21 days of gratuity pay:
The gratuity pay for the employee would be AED 6,999.3 x 2/3 = AED 4,666.2.
5 years or more: The employee is entitled to full 21 days of gratuity pay:
The gratuity pay for this employee would be the full 21-day pay which is AED 6,999.3.
Calculating gratuity manually is a tedious and error prone task. Opting for a robust HR solution such as Bayzat Benefits not only helps to automate gratuity calculations but will streamline your organizations administration, payroll and benefits.