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Gratuity calculation in Abu Dhabi, Dubai, UAE

Friday 21 November 2014 (UAE)   
 
   
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Gratuity calculation in Abu Dhabi, Dubai, UAE

Guide to how to calculate final gratuity salary payment, severance pay, (or annual bonus as some might call it) in Abu Dhabi, Dubai, UAE when you resign, or get fired, or when your job is terminated, based on federal UAE Labour Law information.

This should not be read as any sort of legal document or interpretation, it is only our opinion of what we understand of the UAE Labour Law and should not be assumed to be accurate or correct. Consult the UAE Labour Department or a lawyer in the UAE to get authoritative or professional information. Your HR department or PRO is not necessarily an authoritative source of information and opinion - remember that they are paid by the employer to do their job, not by the employee.

  • In the UAE, the federal labour law says that workers are entitled to severance pay (more commonly known as the "gratuity") upon termination of their employment, whether by completing a fixed period contract, or resigning from a job with an unlimited contract.
  • This is intended to compensate for the lack of a government pension scheme for expatriate workers resident in the UAE.
  • How much you get will depend on whether you had a limited or unlimited contract, and on whether you resigned or not. Check carefully what sort of contract you have.
  • If your contract specifies how much gratuity you are entitled to, check the calculation according to the labour law anyway. Usually, such contracts provide greater benefits, but if they do not, then you should have a case for claiming your entitlement according to the labour law, even if you signed such a contract.
  • Unlimited contract holders receive substantially less than limited contract holders. Usually. To calculate your gratuity entitlement, follow the following steps.

Some job categories are not covered by the UAE Labour Law - maids and other domestic servants for example, which means they are not automatically entitled to a gratuity payment irrespective of years of service.

Maids and domestic workers in the UAE - gratuity update
  • 15 May 2012 (Emirates 24-7) - a new draft law was approved by the UAE Cabinet in January 2012 to grant domestic helpers an end-of-service gratuity. Unknown when the law will actually come into force.
Termination, resignation, being fired - what's the difference?
  • A contract, whether unlimited or limited, is terminated when it ends, whether by the employee, employer, or mutual agreement. How it ends can affect your gratuity payment. In particular, if you resign from an unlimited contract, you won't be entitled to as much gratuity payment as workers who complete a limited contract (see article 137 of the labour law).
  • If you resign, then you chose to terminate the contract. If an employer asks or forces you to resign, then you still resigned, and it was your choice to terminate the contract according to the labour law (being forced to resign is another issue, and it is better to deal with that before signing a resignation letter, not after).
  • If you get fired, then your employer chose to terminate the contract.
  • If given a choice between being fired and resigning, your gratuity payment is not the only factor to consider - it is possible that an employer fires you for a reason that results in no gratuity payment, even though your contract was terminated by your employer (see articles 120 and 139 of the labour law).

Note that a resignation is not something your employer can choose to accept or not. He might be able to negotiate or try to manipulate you into changing your mind, but his refusal to accept a resignation is meaningless (legally) if you want to terminate your contract. Of course there are consequences to your decision but you do have the choice to terminate a contract whenever you like. Just as your employer does.

Limited contract holders shorter than 1 year
  • No gratuity entitlement. But if unfairly or arbitrarily dismissed you might be entitled to up to 3 months salary as compensation.
Unlimited contract holders working less than 1 year
  • No gratuity entitlement. But if unfairly or arbitrarily dismissed you might be entitled to up to 3 months salary as compensation.
Limited contract holders (or fixed term contracts) longer than 1 year
  1. Did you complete your contract? If yes, you are entitled to 21 days salary for every year of employment less than 5 years, and 30 days salary for each year of employment over 5 years, up to a maximum of 2 years salary.
  2. If you did not complete your contract, then you get nothing if you were employed less than 5 years, otherwise the full amount according to the calculation in step 1.
Unlimited or indefinite contract holders longer than 1 year
  1. Were you terminated by your employer, fired, or did you resign? If terminated or fired by your employer, you should be entitled to the full amount of gratuity with the same calculation as for limited contract holders. If you resigned, then probably not. If you think you can negotiate a better deal than the calculation below, do it before you resign (and get something in writing), it is unlikely your employer will do you any favors after you resign.
    • If you were asked to resign, and you agreed because you felt like you had no choice, then you still resigned, even if it did not feel like a voluntary resignation. An involuntary resignation is not the same as being fired or terminated by your employer, and that will probably make a difference when it comes to gratuity payments. Which appears to be a financial incentive for employers to encourage you to resign when they don't want you any more.
  2. Did you resign (Article 117 of the Labour Law - "... left his work at his own option ..."), and give the correct notice period (usually 30 days)? If yes, then the amount is according to the following:
    • Employed for less than 1 year - no gratuity
    • Employed between 1-3 years - 7 days for each year of employment (1/3 of the limited contract amount)
    • Employed between 3-5 years - 14 days for each year of employment (2/3 of the limited contract amount)
    • Employed longer than 5 years - 21 days for each year up to 5 years, and 30 days for each year after 5 years (same as for limited contract holders). Maximum limit of 2 years worth of salary.
  3. If you did not give the correct notice period, then no gratuity entitlement unless the employer has not fulfilled their obligations according to the UAE Labour Law, or the employer has assaulted the employee (Article 121 conditions for permission to leave employment without notice). You might have to file a case with the Ministry of Labour in the UAE to claim your gratuity in this case, and they might not agree with your claim.
Additional notes on calculating severance pay
  • Gratuity is calculated on final base salary only (not initial salary), any additional allowances are ignored.
  • Employees who are entitled to a gratuity will have it calculated pro-rata for part-years of employment.
Confusion and differences between limited and unlimited contracts
  • It is common for employees in the UAE to be on a limited contract which is renewed repeatedly after completion of the fixed term. The gratuity applicable in this case should be that for a limited contract. But check carefully what your contract says.
  • If a contract specifies a possible notice period for terminating before completion, then it is still a limited contract and you might not be entitled to any gratuity if you do not complete the contract, even if you give the correct notice as specified in the contract. However, such contracts do usually include a clause to detail what gratuity will be paid in those circumstances, and those clauses should have legal validity.
  • Being required to give a period of notice of renewal or non-renewal of a fixed term contract does not make it an unlimited contract. It is still a limited contract, and the gratuity calculations for a limited contract should still apply. If an employer claims otherwise, contact the Ministry of Labour to at least ask for clarification, and possibly file a complaint.
Article 138 clarification (minimum 5 years employment on limited contracts?)

This information related to limited contracts only, not unlimited (or indefinite) contracts.

  • Article 138 does not say you must work a minimum of 5 years to be entitled to a gratuity payment. It says you must work a minimum of 5 years to be entitled to a gratuity payment if you resign before completing a limited contract (whether it's a 1, 2, 3, 4, 5, or more, year contract). The article specifies "continuous" years of service. Some examples:
  • If you complete a 2 year contract and leave at the end of it, you are entitled to a gratuity.
  • If you complete a 2 year contract, and renew it, but then resign after 1 year employment into your second contract, you are not entitled to a gratuity payment (it's not clear whether or not you forfeit your gratuity for the first 2 year contract which you completed - assume you don't receive it).
  • If you complete a 3 year contract, renew it, and resign 1 year after renewal, you are not entitled to a gratuity.
  • If you complete a 3 year contract, renew it, and resign 2 years after renewal, you are entitled to a gratuity for the full period because you have completed 5 continuous years of service.
Other End of Service benefits due to employees
  • Payment equivalent to notice period if no notice given (by the employer) for an unlimited contract.
  • Payment to the end of contract or 3 months salary (the lesser of the two options) if contract terminated prematurely by the employer.
  • Overtime and salary or wages due but not paid yet.
  • Payment equivalent to leave or holiday time not used.
  • Repatriation expenses to the home country of the employee, according to the labour law or contract.
UAE Labour Law on gratuity and severance pay

Below is the original text of the UAE Federal Labour Law with the section on gratuity payments. Articles 132, 137, and 138 refer specifically to the calculation of gratuity. Different sources of what appears to be the original text might have slightly different wording, which might or might not be important.

Federal Law No 8, for 1980, on Regulation of Labour Relations

Chapter VII: Termination and Severance Pay

Section I: Termination of Employment Contract

Article 113

The employment contract is deemed to be terminated in any of the following cases:

  • In the event of mutual consent by both parties to terminate the contract provided that the employee's consent is made in writing.
  • On expiry of the period specified in the contract unless the contract is expressly or implicitly extended in accordance with the provisions of this Law.
  • At the option of either party in unlimited contracts provided that the provisions of this Law regarding warnings and acceptable causes for termination of the contract without abuse are fully complied with.

ARTICLE 117

  1. The employer and employee may terminate the employment contract with unlimited period, for a valid reason at any time after conclusion of the contract by written notice duly given to other party, thirty days at least prior to termination.

Section II: Severance Pay

Article 132

A worker who has completed one or more years of continuous service shall be entitled to severance pay at the end of his employment. The days of absence from work without pay shall not be included in calculating the period of service. The severance pay shall be calculated as follows:

  1. 21 days' wage for each of the first five years of service.
  2. 30 days' wage for each additional year of service provided always that the aggregate amount of severance pay should not exceed two year's wage.

Article 133

A worker shall be entitled to severance pay for any fraction of a year he actually served, provided that he has completed one year of continuous service.

Article 134

Without prejudice to the provisions of laws that grant pensions or retirement benefits to employees in certain firms, severance pay shall be calculated on the basis of the wage last due for monthly, weekly and daily paid workers, and on the basis of the average daily wage referred to in Article 57 hereof for those paid on piecemeal. The wage used as a basis for calculating severance pay shall not include whatever is given to the worker in kind, housing allowance, transport allowance, travel allowance, overtime pay, representation allowance, cashier's allowances, children education allowance, allowances for recreational and social facilities, and any other bonuses or allowances.

Article 135

An employer may deduct any amounts owed to him by a worker from the latter's severance pay.

Article 136

For the purposes of Article 132, no severance pay shall accrue for the employment cases that preceded the enforcement of this Law except where the worker is a National. This, however, shall be without prejudice to any rights acquired by the worker under the repealed labour laws, the employment contract, or under any agreement, regulations or work rules of the firm. In the event of the worker's death, his severance pay shall be paid to his legal heirs.

Article 137

Where a worker under an indefinite term contract abandons his work at his own initiative after a continuous service of not less than one year and not more than three years, he shall be entitled to one-third of the severance pay provided for in the preceding article. Such a worker shall be entitled to two thirds of the said severance pay if his continuous service exceeds three years up to five years, and to the full severance pay if it exceeds five years.

Article 138

Where a worker under a definite term contract abandons his employment at his own initiative before the expiry of his contract period, he shall not be entitled to severance pay unless his continuous period of service exceeds five years.

Article 139

A worker shall forfeit entitlement to his entire severance pay in any of the following two cases:

  1. If he is dismissed from service for any of the reasons specified in Article 120 hereof or if he abandons his employment in order to avoid being dismissed in accordance with that Article.
  2. If he abandons his employment of his own accord, otherwise than in either of the two cases specified in Article 121 hereof, without notice (in the case of indefinite term contracts) or before completing five years of continuous service (in case of definite term contracts).

Article 140

Where a firm has a provident fund for the workers and the rules of the fund stipulate that whatever the employer pays into the fund for the worker's account is in discharge of his legal obligation in respect of severance pay, the worker shall be paid the savings balance in his account or the severance pay due under the Law, whichever is the greater. Where the rules of the fund do not stipulate that the amounts paid by the employer are in discharge of his legal obligation toward the severance pay, the worker shall receive whatever is due to him in the provident fund in addition to the statutory severance pay.

Article 141

Where a firm has a retirement, insurance or a similar scheme, a worker who is entitled to a retirement pension may opt for treatment under the said pension or severance pay or under the pension or insurance scheme, whichever is more advantageous to him.

Last update Wednesday 14-Aug-2013. Page development 4L 5C.
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