How is Gratuity Calculated in the UAE? Formula & Eligibility Explained

If you work in the UAE, you’ve probably come across the term gratuity—a financial reward given to employees when they leave a company after a certain period of service. It’s a key benefit under UAE Labour Law, designed to provide financial security at the end of your employment. But how does it work, and who qualifies for it? Let’s break it down in simple terms.

Who is Eligible for Gratuity?

To qualify for gratuity, you must meet these conditions:

1. You’ve worked for at least one full year – If you leave before completing a year, you’re not entitled to gratuity.
2. You’re under a valid employment contract – Full-time employees on limited or unlimited contracts qualify. Part-time employees have different rules.
3. You weren’t dismissed for misconduct – If you’re terminated for serious misconduct under Article 120 of the UAE Labour Law, you won’t receive gratuity.

How is Gratuity Calculated?

Your gratuity depends on your contract type and how long you’ve been with the company. Let’s break down the calculations for both limited and unlimited contracts. To make things easier, you can also use our Gratuity Calculator.

1. Gratuity for a Limited Contract

If you’re on a limited contract (one with a fixed end date), here’s how gratuity is calculated:

• Less than 1 year → No gratuity.
• 1 to 5 years → 21 days of basic salary per year worked.
• More than 5 years → 21 days of salary per year for the first five years, then 30 days per year for any additional years.

Formula:

For up to 5 years: (21 days of basic salary) × (number of years worked)

For more than 5 years: (21 days of basic salary) × 5 + (30 days of basic salary) × (number of years worked beyond 5)

2. Gratuity for an Unlimited Contract

If you’re on an unlimited contract, gratuity depends on whether you resign or get terminated.

If the employer terminates you:

• Less than 1 year → No gratuity.
• 1 to 5 years → 21 days’ salary per year.
• More than 5 years → 21 days’ salary per year for the first five years, then 30 days per year after that.

If you resign:

• Less than 1 year → No gratuity.
• 1 to 3 years → 1/3 of full gratuity.
• 3 to 5 years → 2/3 of full gratuity.
• More than 5 years → Full gratuity entitlement.

Formula:

• If terminated by the employer:
• For less than 1 year: No gratuity
• For 1 to 5 years: 21 days of salary per year worked
• For more than 5 years: 21 days of salary per year for the first 5 years + 30 days of salary per year for any additional years

• If you resign:
• For less than 1 year: No gratuity
• For 1 to 3 years: 1/3 of full gratuity
• For 3 to 5 years: 2/3 of full gratuity
• For more than 5 years: Full gratuity entitlement

Key Points to Remember

1. Gratuity is based on your basic salary – Housing, transport, and other allowances don’t count.
2. Unpaid leave affects gratuity – Any unpaid leave taken during your service might reduce the gratuity amount.
3. Outstanding debts may be deducted – If you owe money to your employer, they may deduct it from your gratuity.
4. Payment must be made within 14 days – By law, employers must pay gratuity within two weeks of your last working day.
5. Misconduct results in no gratuity – If you’re fired for serious misconduct, you won’t receive any gratuity.

Final Thoughts

Gratuity is a great financial benefit for employees in the UAE, offering support when you leave a job. Understanding how it works helps you plan better for the future. Whether you’re an employee or an employer, staying informed ensures fair and smooth transitions for everyone involved.