Written by
Changeboard Team

Published
06 Apr 2016

End of service gratuity in the UAE

06 Apr 2016 • by Changeboard Team

Employers new to the Middle East can sometimes be surprised at the inherent nature of this entitlement and that it is payable regardless of whether the employee resigns or is dismissed (other than for gross misconduct).

This article explores some of the common pitfalls and tricky issues which arise in relation to statutory gratuity in the United Arab Emirates (UAE) under Federal Law No.8 of 1980 Regarding the Organisation of Labour Relations, as amended (UAE Labour Law).

It also contrasts the position onshore in the UAE with the position in the UAE's Federal Financial Free Zones (the Dubai International Financial Centre and Abu Dhabi Global Markets), both of which have their own separate employment legislation.


Entitlement and calculation

Under the UAE Labour Law, gratuity is (potentially, subject to our comments below) payable where an employee has accrued at least 12 months' continuous service with their UAE employer.

The UAE Labour Law sets out a statutory formula for calculating gratuity, namely:

  • 21 days' pay per year of service for the first five years' service; and
  • 30 days' pay per year of service thereafter. 

Total gratuity must not exceed two years' remuneration (meaning an employee would have to accrue approximately 25 years service to reach this maximum). 

Length of service

  • Length of service is pro-rated for part years worked.
  • Generally speaking, only an employee's continuous service with the UAE employer will be taken into account for the purposes of calculating length of service for gratuity accrual.
  • However, it is possible to (sometimes inadvertently) enhance this by contractually agreeing to recognise previous service with another entity in the group, for example, where wording recognising prior service is included in the contract of employment, the Labour Court may (in the event of a dispute) calculate gratuity using the earlier date of continuous service.
  • When contractually agreeing to recognise prior service, employers should carefully choose their wording and, unless they intend to enhance gratuity, should expressly state that gratuity will be calculated from the employee's start date in the UAE. 

Pay

Under the UAE Labour Law, an employee's gratuity is calculated on the basis of their basic salary only.

Allowances are expressly excluded from the definition of basic salary for these purposes. As a result, to reduce gratuity liability, employers will commonly split total remuneration into basic salary and allowances (although basic salary should still represent the majority of the total remuneration package).

Commission and bonuses can be a tricky issue in relation to gratuity calculations onshore in the UAE. Under the UAE Labour Law, commission is included in the definition of basic salary and should therefore be included when calculating end of service gratuity.

Bonuses may be included when calculating gratuity, depending on how they are structured. For example, a bonus which is paid on a weekly basis based on individual performance only is likely to be included when calculating gratuity (on the basis that it is essentially a commission payment). On the other hand, a bonus scheme based solely on company performance and paid on an annual basis is unlikely to be included for gratuity purposes. There is of course somewhat of a grey area in-between.

For employers registered in either of the UAE's Federal Financial Free Zones, the relevant employment regulations are clear that commission and bonuses are not included when calculating gratuity. 

Circumstances in which Gratuity is not payable and/or reduced

Under the UAE Labour Law, Gratuity is subject to reductions where an employee resigns from his/her employment as follows:

  • In relation to unlimited term contracts, where an employee resigns with between one to three years' service, Gratuity is reduced by two thirds and where an employee resigns with between three to five years' service, Gratuity is reduced by one third.
  • In relation to limited term contracts, where an employee resigns with under five years' service, no Gratuity is payable.

Additionally, no Gratuity is payable where an employee's employment is terminated for one of the exhaustive list of reasons set out under Article 120 of the UAE Labour Law. This includes where an employee's employment is terminated during the probationary period but is generally reserved for the most serious acts of gross misconduct, often involving a criminal element.

Gratuity is however payable in full where an employee's unlimited term employment is terminated for a "valid" reason (for example, poor performance or misconduct) where such reason falls short of Article 120.

It is, of course, possible to contractually enhance the circumstances in which Gratuity is payable and employers will sometimes do this inadvertently by way of their contracts of employment. The wording of some of the prescribed form Free Zone employment contracts also, arguably, contractually enhance the statutory minimum Gratuity entitlement by setting out the formula for calculating Gratuity on termination of employment, without caveating this where, for example, the employee resigns from their employment with under five years' service.

The position differs in the UAE's Federal Financial Free Zones. No reductions are applicable where an employee resigns from their employment. 

Other issues to consider

It is not possible to contract out of the statutory minimum entitlements under the UAE Labour Law. A contractual term which seeks to waive an employee's right to Gratuity in circumstances where it would have otherwise been payable would not therefore be legally enforceable. Clauses which seek to roll an employee's Gratuity entitlement into his/her remuneration are also not legally enforceable.

Gratuity is payable on termination of employment. There is no mechanism under the UAE Labour Law for paying out accrued Gratuity during the course of an employee's employment, for example, and where an employer does so, there would be a risk that the employee could still successfully claim for his/her full end of service gratuity entitlement on termination of employment.

UAE/GCC nationals

The UAE has in place reciprocal pension arrangements with the GCC meaning that, generally speaking, the pension and social security laws of a GCC national's home state shall apply to him/her when working in the UAE. The aim of this legislation is to ensure that a GCC national receives the same treatment or benefit with regard to state pension as he would have had if he worked in his home country, in accordance with the laws of his home country.

Generally speaking, GCC nationals working in the UAE will not therefore receive Gratuity in addition to state pension contributions. However, the position is slightly complicated and varies between the various GCC countries.

For example, in many of the GCC countries, the employee only receives pension contributions in relation to his/her salary up to a specific cap. The employee is therefore entitled to receive Gratuity in the usual way in relation to any salary which exceeds the cap.

The position in relation to KSA nationals is slightly more complicated as there is no interaction between the Saudi Social Security and Labour Laws which means that KSA nationals employed in the UAE are potentially entitled to employer pension contributions and statutory Gratuity, based on different aspects of the employee's salary.

Employers must ensure that all GCC employees are registered with the GPSSA and must make the relevant contributions into the GPSSA. Employers should also ensure that their contracts of employment do not inadvertently grant such GCC employees Gratuity in addition to contributions into the state pension scheme.