Calculating what is in your end of service gratuity

Your end of service gratuity calculation depends on a whole host of factors, such as your length of service, type of contract and how your salary is structured

Is your end of service gratuity based on the basic component of whatever your final salary is? Or is it based on a combination of what your basic salary was before your contract was changed plus what your basic salary was after it was changed? GM, Dubai

Expert 1:

Michael Brough,

Director and international benefits specialist at Willis Towers Watson

End of service gratuities are payments legally due to employees upon leaving their employers, subject to satisfying certain conditions prescribed in the UAE Lab­our Law.

When it was first introduced, the gratuity was to act as a payment to assist an employee during the per­iod following termination, especially in the absence of unemployment and pension benefits. The formulae for the benefit are legislated by the UAE, where the gratuity will depend on the employee’s length of service and their last wage (typically basic salary).

Employers are obliged to pay these amounts to their eligible employees upon (or soon after) their departure. The law indicates that the gratuity would be based on the normal wage, last due to the employee.

The law states that, for the purpose of calculating the benefit, that whatever is given to the employee in kind would not be included, such as transport, housing, overtime, children’s education and other allowances.

One would conclude that it is only basic salary that is used to calculate the gratuity. However, in the past few years there have been a number of cases where the UAE courts have awarded their gratuity based on basic salary and certain commissions. Additionally, a bonus could potentially be included if it operates in the same way as those certain commissions and the employee has a track record of achieving targets.

When there is a change in contract, the salary before any change has no bearing. However, what counts is the time spent with the employer before the change in contract, where this time is cumulative provided the employee has no lapsed time with said employer, in other words, it is continuous employment with no breaks.

Naturally this favours the employee if the change in contract involves an increase in salary. How­ever, if the change in contract involves a reduction in pay, then the employee would stand to be worse off. The UAE Labour Law caps the total amount of end of service gratuity at two years’ worth of salary. We have noticed a trend where employers enhance their end of service gratuity to retain key talent.

Expert 2:

Martin McGuigan, partner at Aon Hewitt Middle East

Employees are entitled to the end of service benefit after completing at least one year of service with an organisation. Tenure is calculated on number of days worked and does not account for extended periods of leave, i.e. a sabbatical. If you have worked for an organisation between one to five years, you will be paid 21 days of pay based on your final basic salary. However, upon your fifth employment anniversary, you will be entitled to 30 days of pay. The total lump sum you receive is then based on the duration of your employment.

For example, for a basic salary of Dh10,000:

a. Dh10,000 ÷ 30 = Dh333.33. Your daily wage is Dh333.33

b. Dh333.33 x 21 = Dh7,000. So 21 days salary is Dh7,000 in gratuity entitlement for each year of service. Multiply this figure for every year of service up to five years.

Calculation based on 30 days for those exceeding five years of service:

c. 333.33 x 30 = Dh10,000. So 30 days’ salary is Dh10,000 in gratuity entitlement for each year of service – so long as the total figure does not exceed two years' total salary figure.

The calculation will vary depending upon contract type and who has chosen to end the contract, i.e. employer or employee.

For example, for an employee who is on an unlimited contract choosing to end their employment, the calculations would be different. For any disputes or further clarification, contact the UAE Ministry of Labour.

Next question:

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