Computation of Gratuity Pay for Limited, Unlimited Contract in UAE

In the United Arab Emirates, workers are entitled to severance pay should their employment status, and the contract is terminated. The payment is commonly known as gratuity computation. The idea is to compensate for the lack of pension for workers from other countries.

Depending on the contract, whether it was limited or unlimited, workers are calculated different gratuity. In some cases, the contract specifies the amount of gratuity pay a worker is entitled to. However, commonly, unlimited contract holders receive less money than those with a limited contract.

The Difference Between Being Fired and Termination of Contract

There is a difference between being fired, voluntary resignation and termination of the contract are that an employment contract can be terminated by both the employee and the employer, or they can come to a mutual agreement. How the contract ends affects the gratuity computation.

1. Workers can resign and terminate their contract. However, there are cases when the employer asks the employee to leave. According to the law, this is still a voluntary decision made by the employee. However, it is worth noting that the employer has no legal right to force the employee to stay at work. If the employee wishes to terminate the contract, he/she can do so.
2. When being fired, the employer is the one that terminates the contract.
3. Sometimes, being fired results in no gratuity payment. That is the reason why workers should always seek a mutual termination or ask for a resign.

Formula for UAE Gratuity for Limited and Unlimited Contract

1. Basic salary ÷ 30 = Daily wage
2. Daily wage x 21 = One year gratuity figure (Or x30 if applicable)
3. One year gratuity figure x years of service = Total gratuity owed

(Only continue for Unlimited Contract calculation)

4. Total gratuity owed ÷ 3 = One third (1/3) of total gratuity
5. Either take this figure (between 1 and 3 years) or multiply it by two (between 3 and 5 years)
6. For over 5 years, total gratuity owed will be payable.
Source: UAE Ministry of Human Resources and Emiratisation Laws

Gratuity for Limited Contracts

If the contract is limited and shorter than one year, workers are not entitled to a gratuity. However, in the situation where the worker is unfairly fired, he/she can ask for a three months salary as compensation.

• In limited contracts that are longer than one year, and the worker has completed the contract duration, he/she has the right to 21 days of salary for every year of the contract. This is if the contract was shorter than five years. For more extended contracts or more than five years of employment, the worker is entitled to 30 days’ salary for every year he has worked.

Less than 1 year of service
Leaving your job before completing one year of service means that you are not entitled to any gratuity pay.

Between 1 year and 5 years of service
An employee is entitled to full gratuity pay based on 21 days’ worth salary for each year of employment.

5 or more years of service
An employee is entitled to full gratuity pay based on 30 days salary for each year of work.

Calculations for Unlimited Contract gratuity pay

Calculation example
Basic salary example: AED10,000
a. 10,000 ÷ 30 = 333.30. Your daily wage is AED333.30.

b. 330.30 x 21 = 6,936.30. So 21-days salary is AED7,000 (rounded up from AED6,999.30) in gratuity entitlement for each year of service. Multiply this figure for every year of service for up to 5 years.

For 30 days calculation for those exceeding 5 years of service

c. 333.30 x 30 = Dh9,999. So 30-days salary is AED9,999 in gratuity entitlement for each year of service – so long as the total figure does not exceed the total salary of two years.

Therefore, regardless of the years spent at a firm, total gratuity in the above example cannot exceed AED240,000.

Gratuity for Unlimited Contracts

• Same as with limited contracts, if working is less than one year, workers are not entitled to a gratuity. The exception for three months’ salary applies here as well. That is if the termination is a result of an unfairly firing.
• Still, if the employee works more than one year, and f the contract was terminated by the employer, and it was unfairly firing, the worker is entitled to the same gratuity as with limited agreements.
• An involuntary resignation, or being forced to resign, results in no gratuity.
• Workers who resign voluntarily are entitled to gratuity, provided they did it correctly. Workers must give 30 days notice period to their employer. The gratuity pay depends on the time the employee has worked. For less than one year, there is no gratuity; 1-3 years results in 7 days for each year of employment; 3-5 years results in 14 days salary for each year of work; 5+ years results in 21 days for the first five years and 30 days salary for every year after the fifth. A maximum amount of two years worth of pay is set.

Less than 1 year of service
Leaving your job before completing one year of service means that you are not entitled to any gratuity pay.

Between 1 year and 3 years of service
An employee is entitled to one third (1/3) of the 21-days gratuity pay.

Between 3 years and 5 years of service
An employee is entitled to two thirds (2/3) of the 21-days gratuity pay.

5 or more years of service
An employee is entitled to full 21-days gratuity pay for each year of service.

Calculation example
Basic salary example: AED10,000

a. 10,000 ÷ 30 = 333.30. Your daily wage is AED333.30

b. 333.30 x 21 = 6,999.30. So 21-days salary is AED6,999.30

Of this figure of AED6,999.30, only 1/3 is payable if you have worked between 1 and 3 years, so the total gratuity pay would be AED2,333.10.

Only 2/3 is payable if you have worked between 3 and 5 years, so the total gratuity pay would be AED4,666.20.

The full AED6,999.30 is payable if you have completed 5 years.

These sample calculations should only be treated for reference only. For any disputes or further clarification, contact the UAE Ministry of Human Resources and Emiratisation.

Additional Notes

When calculating gratuity, one must consider the final base salary, not the initial salary. The other allowances are not calculated in the gift.

The gratuity is calculated as pro-rata, which means the computation of this severance benefit will cover the entire duration of a worker’s service to the company.