End-of-service gratuity calculation is one of the most critical—and often confusing—aspects of UAE labor law compliance. Whether you're an HR manager, business owner, or employee in the UAE, understanding how gratuity is calculated can save you from costly mistakes and legal disputes.
In this comprehensive guide, we'll break down everything you need to know about UAE gratuity calculations, including the latest 2025 updates, step-by-step calculation methods, and common pitfalls to avoid.
What is End-of-Service Gratuity in the UAE?
End-of-service gratuity is a mandatory payment that UAE employers must make to employees when their employment contract ends, regardless of whether the employee resigns or is terminated. It's essentially a financial reward for the employee's years of service.
For comprehensive information about UAE employment regulations, check out our latest employment guidelines for UAE private companies.
Key Facts:
- Required by UAE Labor Law (Federal Law No. 8 of 1980)
- Applies to all private sector employees
- Calculation based on basic salary and length of service
- Different rules for limited vs. unlimited contracts
UAE Gratuity Calculation Formula 2025
The calculation method depends on your contract type and length of service:
For Unlimited Contracts (Permanent Employment)
Years 1-5:
21 days' basic salary for each year of service
Years 6+:
30 days' basic salary for each year of service
Maximum Gratuity: Limited to 2 years' basic salary
For Limited Contracts (Fixed-Term)
If contract completed naturally:
21 days' basic salary for each year of service
If terminated by employer without cause:
21 days' basic salary for each year of service
If employee resigns before contract completion:
- • Years 1-3: No gratuity
- • Years 3-5: 1/3 of entitled gratuity
- • Years 5+: 2/3 of entitled gratuity
Step-by-Step Calculation Examples
1Example 1: Unlimited Contract Employee
Employee Details:
- • Basic Salary: AED 8,000/month
- • Service Period: 7 years
- • Contract Type: Unlimited
Calculation:
- • First 5 years: 5 × 21 days = 105 days
- • Remaining 2 years: 2 × 30 days = 60 days
- • Total: 165 days
- • Daily salary: AED 8,000 ÷ 30 = AED 266.67
- • Total Gratuity: 165 × AED 266.67 = AED 44,000
2Example 2: Limited Contract Employee (Resigned)
Employee Details:
- • Basic Salary: AED 6,000/month
- • Service Period: 4 years
- • Contract Type: Limited (resigned before completion)
Calculation:
- • Total entitled gratuity: 4 × 21 = 84 days
- • Employee gets 1/3 (served 3-5 years): 84 ÷ 3 = 28 days
- • Daily salary: AED 6,000 ÷ 30 = AED 200
- • Total Gratuity: 28 × AED 200 = AED 5,600
3Example 3: Long-Service Employee
Employee Details:
- • Basic Salary: AED 12,000/month
- • Service Period: 15 years
- • Contract Type: Unlimited
Calculation:
- • First 5 years: 5 × 21 = 105 days
- • Remaining 10 years: 10 × 30 = 300 days
- • Total: 405 days
- • Daily salary: AED 12,000 ÷ 30 = AED 400
- • Theoretical gratuity: 405 × AED 400 = AED 162,000
- • Maximum allowed: AED 12,000 × 24 = AED 288,000
- • Actual Gratuity: AED 162,000 (below cap)
Common Gratuity Calculation Mistakes
1. Including Allowances in Calculation
Mistake: Using total salary instead of basic salary
Correct: Only basic salary counts for gratuity calculation
2. Wrong Formula for Contract Type
Mistake: Using unlimited contract formula for limited contracts
Impact: Over or underpayment of gratuity
3. Ignoring Partial Years
Mistake: Not calculating pro-rata for incomplete years
Correct: Calculate proportionally (e.g., 6 months = 0.5 years)
4. Misunderstanding Maximum Limits
Mistake: Assuming maximum applies to all calculations
Correct: Maximum only applies to unlimited contracts
5. Incorrect Resignation Rules
Mistake: Paying full gratuity to limited contract employees who resign early
Correct: Apply 1/3 or 2/3 rules based on service years
Special Circumstances and Exceptions
Termination for Cause
- • No gratuity is payable
- • Must be proven serious breach of contract
- • Examples: theft, fraud, violation of confidentiality
Death or Disability
- • Full gratuity is payable regardless of contract type
- • Paid to legal heirs or employee
- • No reduction for early resignation
Mutual Agreement
- • Parties can agree on different gratuity terms
- • Must be documented in contract
- • Cannot be less than legal minimum
Part-Time Employees
- • Same calculation rules apply
- • Based on actual working hours
- • Pro-rata calculation for partial employment
Gratuity Payment Timeline
Legal Requirements:
- →Must be paid within 30 days of employment end
- →Delay can result in penalties
- →Employee can file complaint with Ministry of Human Resources
Best Practices:
- Calculate and approve during notice period
- Process with final salary payment
- Provide detailed calculation breakdown
- Get written acknowledgment from employee
2025 Updates and Changes
Recent Legal Clarifications
- • Clarification on remote work gratuity calculations
- • New guidelines for flexible employment contracts
- • Updated maximum limits for certain sectors
Digital Compliance Requirements
- • Electronic gratuity calculation records
- • Integration with MOHRE systems
- • Automated reporting requirements
Gratuity vs. Other End-of-Service Benefits
| Benefit Type | Legal Requirement | Calculation Base |
|---|---|---|
| Gratuity | Mandatory | Basic salary only |
| Unused Leave | Mandatory | Basic salary + allowances |
| Notice Period | Contractual | Full salary package |
| Bonus | Discretionary | Company policy |
Understanding leave entitlements is crucial for accurate end-of-service calculations. Learn more about different types of leave in the UAE and how they affect final settlements.
Industry-Specific Considerations
Free Zones
- • May have different gratuity rules
- • Check specific free zone regulations
- • DIFC, ADGM have separate laws
Government Sector
- • Federal employees: Different pension system
- • Local government: May follow UAE Labor Law
- • Semi-government: Varies by entity
Domestic Workers
- • Separate law (Law No. 10 of 2017)
- • Different calculation method
- • Specific end-of-service provisions
Automating Gratuity Calculations
Benefits of HR Software
Accuracy
Eliminates calculation errors
Compliance
Always uses current legal rates
Efficiency
Instant calculations
Documentation
Maintains audit trail
Reporting
Generate compliance reports
Looking for a complete solution? Our UAE payroll software handles gratuity calculations automatically along with WPS compliance, leave management, and full payroll processing.
Key Features to Look For
- Multiple contract type support
- Automatic formula selection
- Partial year calculations
- Maximum limit enforcement
- Integration with payroll systems
Frequently Asked Questions
Can an employer refuse to pay gratuity?
No, end-of-service gratuity is a legal right under UAE Labor Law. Employers can only withhold gratuity if the employee is terminated for serious misconduct (Article 120) or if a limited contract employee resigns within the first 3 years. Refusing to pay legally due gratuity can result in legal action and penalties.
What if an employee has multiple contracts?
If an employee has multiple consecutive contracts with the same employer, the service period is calculated cumulatively for gratuity purposes. However, if there was a break in service or the employee worked for different employers, each contract is calculated separately based on its own terms and duration.
How are partial months calculated?
Partial months are calculated on a pro-rata basis. For example, if an employee works 3 years and 6 months, the calculation would be 3.5 years. Some companies round up partial months (15+ days = 1 month), but the standard practice is to calculate exactly based on actual days worked.
Can gratuity be paid in installments?
No, UAE Labor Law requires gratuity to be paid in full as a lump sum within 30 days of employment termination. Paying in installments is not permitted unless there's a written agreement between both parties and approval from the Ministry of Human Resources and Emiratisation.
What about employees on unpaid leave?
Periods of unpaid leave are generally not counted toward gratuity calculations unless specified in the employment contract. The service period for gratuity purposes only includes time actively worked and paid leave periods. Long unpaid leave may affect the total gratuity amount.
Red Flags: When to Seek Legal Advice
- ⚠Employee disputes calculation method
- ⚠Multiple contract types for same employee
- ⚠Termination circumstances are unclear
- ⚠Cross-border employment issues
- ⚠Free zone vs. mainland jurisdiction questions
Compliance Checklist
Before Employment Ends:
- Determine exact service start and end dates
- Identify contract type (limited/unlimited)
- Confirm basic salary amount
- Check for any disciplinary issues
- Calculate unused leave separately
During Calculation:
- Use correct formula for contract type
- Apply resignation rules if applicable
- Consider maximum limits
- Account for partial years
- Document calculation method
After Calculation:
- Review calculation for accuracy
- Prepare payment within 30 days
- Provide breakdown to employee
- Maintain records for audit
- Update HR systems
Conclusion
UAE end-of-service gratuity calculation doesn't have to be complicated. By understanding the basic rules, using the correct formulas, and avoiding common mistakes, you can ensure compliance and maintain positive employee relationships.
The key is having reliable systems in place to handle these calculations accurately and consistently. Whether you're managing one employee or hundreds, proper gratuity calculation is essential for legal compliance and business reputation.
Need Help with Gratuity Calculations?
If you're tired of manual calculations and want to ensure 100% accuracy, consider automating your HR processes. Modern HR software can handle complex gratuity calculations, maintain compliance records, and integrate with your existing payroll systems.
Ready to streamline your HR operations?
Disclaimer: This guide is for informational purposes only and should not be considered legal advice. Always consult with qualified legal professionals for specific situations. UAE labor laws may change, so verify current regulations with official sources.
About HRX360: We specialize in UAE-compliant HR and payroll software, helping businesses automate complex calculations like gratuity, leave entitlements, and WPS compliance. Our platform is designed specifically for the UAE market and stays updated with the latest legal requirements.
