How Does Gratuity (End of Service Benefit) Work?

The end of service gratuity—sometimes called “severance pay”—is a lump-sum payment provided to employees when their employment contract in the UAE comes to an end, provided certain conditions are met. Understanding how gratuity works helps you plan for the future and ensures you get the benefits you are legally entitled to.

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1. What Is Gratuity?

Gratuity is a monetary benefit paid to employees who have completed at least one year of continuous service with their employer. It is mandated by UAE Labor Law and is separate from your regular wages or any other end-of-contract entitlements (like unpaid leave or repatriation tickets).

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2. Who Is Eligible for Gratuity?

You are eligible if:

• You work in the private sector and are not covered by the UAE government pension scheme.
• You have completed at least one year of continuous service.
• You resign, are terminated, or your contract ends, provided the termination was not for gross misconduct.

Note: Domestic workers, government employees, and certain free zone employees may be covered by different regulations.

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3. Calculation Basis

Gratuity is calculated based on your last basic wage (excluding allowances such as housing, transport, or overtime). The formula differs depending on your type of contract (limited or unlimited), the length of service, and the reason for leaving.

Basic Principles

• Less than 1 year’s service: Not entitled to gratuity.
• 1 to 5 years of service: 21 days’ basic pay for each completed year.
• More than 5 years of service: 21 days’ pay for the first 5 years, then 30 days’ pay for each additional year after 5 years.

There are also reductions if you resign under certain contract types (see below).

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4. Gratuity Formula

Gratuity for Each Year =

21 days of basic pay (for first 5 years)
or
30 days of basic pay (for service beyond 5 years)

Daily Basic Pay = Monthly Basic Wage ÷ 30

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5. Examples of Gratuity Calculation

Let’s use a couple of scenarios to make it crystal clear:

Example 1: 3 Years’ Service (Basic Salary AED 8,000/Month)

• Years of service: 3
• Basic monthly wage: AED 8,000

Step 1: Find daily wage
AED 8,000 ÷ 30 = AED 266.67/day

Step 2: Gratuity for 3 years
21 days’ wage x 3 years = 63 days

63 days x AED 266.67 = AED 16,800

Total Gratuity: AED 16,800

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Example 2: 7 Years’ Service (Basic Salary AED 10,000/Month)

• Years of service: 7
• Basic monthly salary: AED 10,000

Step 1: Daily wage
AED 10,000 ÷ 30 = AED 333.33/day

Step 2:

• For first 5 years: 21 days x 5 = 105 days
• For next 2 years: 30 days x 2 = 60 days
• Total: 105 + 60 = 165 days

165 days x AED 333.33 = AED 54,999.45

Total Gratuity: AED 54,999.45

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Example 3: Resignation Before 5 Years (Under Unlimited Contract)

Employees who resign after 1+ years but before 5 years may get a reduced gratuity (often 1/3 or 2/3 of the full amount), subject to Labor Law and your contract.

• Example: 2 years, AED 6,000/month
• Daily wage: AED 6,000 ÷ 30 = AED 200
• Full entitlement: 21 x 2 x 200 = AED 8,400
• If entitled to only 2/3 (based on how resignation occurs):
• AED 8,400 x 2/3 = AED 5,600

Always check with HR or the official labor authorities for specifics as rules may change.

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6. Important Points & Exclusions

• Unpaid Leave: Unpaid leave periods do not count toward years of service for gratuity calculations.
• Deductions: Employers may deduct amounts owed (such as loans) from gratuity.
• Maximum Cap: Gratuity should not exceed two years’ wage.
• Termination for Gross Misconduct: No gratuity is paid.
• Short Service: Less than 1 year’s service = No gratuity.

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7. Process of Receiving Gratuity

1. Exit Clearance: When you resign or are terminated, HR reviews your service record and unpaid balances.
2. Calculation: HR will compute your gratuity and final settlement.
3. Payment: Gratuity is typically paid within 14 days of your last working day via bank transfer.