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Gratuity Benefits and its Calculation under UAE Labour Law

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The term “gratuity” refers to a monetary benefit given by the employer to his employee in the event of retirement, resignation or termination of services.

The practice of giving gratuity has originated in order to ensure that patrons receive the best service possible. This practice has later evolved as a custom which allows rewards to the service providers for providing good services.

Under Article 133 of the UAE Labour Law, the worker shall be entitled to a gratuity for the served fraction of a year provided that he completes one year of continuous service. In simple words, an employee who has spent one year or more continuous service is entitled to gratuity as an end of service benefit. Therefore, an employee, who served for less than one year is not legally entitled to get gratuity.

Further, as per Article 135, the employer may deduct from the end of service gratuity any amounts due to him by the worker.

 

Computation of Gratuity

Under the UAE Labor Law, the method of calculation of gratuity is different according to the nature of the employment contract, whether limited or unlimited.

Further, as per Article 134 of the UAE Labour Law, the calculation is based on the last wage due to monthly, weekly and daily – paid workers. In case of the workers getting paid by the piece, the calculation would be on the basis of average daily wage.

For this purpose, the term ‘wages’ shall not include allowances for housing, transport and travel, overtime pay, representation allowances, cashier’s allowances, children education allowance, allowances for recreation and social services, and any other bonuses or allowances.

With regard to the calculation of gratuity,

1. Under Limited Contract (contract with limited term)

On termination of a limited contract, the amount of gratuity shall be calculated as follows:

  • If the period of service is less than one year, no gratuity is payable
  • For an employee whose period of service is 1 to 5 years, he is entitled to 21 calendar days’ basic salary for each year of the first five years of work.
  • If an employee has served more than 5 years, he is entitled to 30 calendar days basic salary for each additional year, provided the entire compensation does not exceed two years pay.

2. Under Unlimited Contract (contract with unlimited term)

The computation of gratuity, under an unlimited contract is different on termination by the employer and the employee.

On termination of the employment contract by the employer,

  • If the period of service is less than one year, no gratuity is payable
  • If the period of service is 1 to 5 years, the employee is entitled to 21 calendar days’ basic salary for each year of the first five years of work.
  • If an employee has served more than 5 years, he is entitled to 30 calendar days basic salary for each additional year, provided the entire compensation does not exceed two years pay.

On resignation of an employee under an unlimited contract,

  • If the period of service is less than one year, no gratuity is payable
  • If the period of service is between 1 and 3 years, the employee is entitled to one third (1/3) of 21 days basic salary as gratuity pay.
  • If the employee has served between 3 and 5 years, he is entitled to two-thirds (2/3) of 21 days basic salary as gratuity pay.
  • If an employee has served more than 5 years, he is entitled to full 21 days basic salary as gratuity pay.

 

Persons Ineligible for Gratuity

As per Article 139 of the UAE Labour Law, the employees are not eligible for gratuity from their employers under the following circumstances:

1. On dismissal by the employer by invoking any reasons mentioned under Article 120 of the UAE Labour Law which allows summary dismissal of an employee on eleven exhaustive grounds mainly considered as instances of gross misconduct on part of the employee. An employee who resigned from his employment in order to avoid such dismissal also is not eligible for gratuity.

2. On resignation from the employment without notice except for the reasons mentioned under Article 121 of the UAE Labour Law as per which the employee can abandon his work without notice if the employer fails to honour his obligations towards him or if he is assaulted by the employer or the employer’s legal representatives, and such with regards to unlimited contracts, or prior to the completion of five years of continuous service with regard to limited contracts.

The UAE Labour Law provisions are more advantageous to the employee and its prime objective is to ensure the welfare of the employees. As per Article 141, if the establishment has a retirement system, an insurance or any similar scheme, the employee has an option to chose between the more beneficial retirement scheme or severance pay.

For any queries or services regarding Labour matters, you can contact us at +971 4 3298711 or send us an e-mail on consultants@uaeahead.com . Also visit our website www.uaeahead.com

Article by ProConsult Advocates & Legal Consultants the Leading Dubai Law Firm providing full legal services & legal representation in UAE courts