How is the gratuity calculated after leaving the job from Feb 2 onwards?

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The United Arab Emirates has issued the new Federal Decree-Law No. 33/2021 on Regulation of Labor Relations (the “new labor law”), which repeals the long-held Federal Law number 8 of 1980. The new labor law has been implemented with the twin objectives of ensuring the efficiency of the UAE’s employment sector by retaining its allure in attracting and maintaining the best, competent and future skills driven workforce and thus providing an attractive business environment for employers in the country. The new labor law particularly also focuses on regulating the rights and obligations of both the employer and employees in a balanced manner and thus, introduces many key regulations and changes.

The new labor law applies to all establishments, employers and workers in the private sector in the UAE. However, it excludes in its application employees of federal and local government entities, members of the armed forces, police and security as well as domestic workers.

Calculation of gratuity:

In order to understand the concept of gratuity under the new labor law, the following key terms should be understood first.

Gratuity is calculated based on an employees’ basic wage. ‘Basic wage’ refers to, ‘the remuneration stipulated in the employment contract, which is given to the employee or worker in return for his work under the employment contract, on a monthly, weekly, daily, hourly or piecework basis, and does not include any other allowances, commissions, or benefits in kind’. While ‘Remuneration’ refers to “the basic salary in addition to the cash allowances, commissions and benefits in kind that are prescribed for the employee or worker”. Thus, the total salary of an employee is considered his remuneration, whilst the gratuity for an employee will be calculated only on the ‘basic wage’ and not the remuneration.

The basic wage will be as accorded in the labor contract for the said employee, and the gratuity will be calculated as follows:

  • The employee will be eligible for gratuity only when he or she has completed at least a continuous year in full-time employment service.
  • The gratuity will be calculated only as per the basic salary
  • For, every first five years of service, the employee will be paid twenty-one days of basic wage as gratuity.
  • For every year after the first five years, the employee will be paid thirty days of basic wage as gratuity.
  • The days of absence of the employee without pay shall not be included in the calculation of the gratuity due to the employee.
  • The total gratuity due to an employee shall not exceed in its entirety two years’ remuneration.
  • The Employer is allowed to make a deduction on the total gratuity due to an employee as long as such deductions are legally inclined with the provisions of the new labor law and its implementing regulations.
  • The employer is required to disburse the total gratuity due to the employee within a time period of fourteen days from the date of termination of the employment contract.
  • In the event of the death of the employee, the employer is required to transfer the gratuity to the employee’s family along with any other remuneration or financial entitlements due to such employee, within a period of ten days from the date of the death of the employee.

The new labor law has thus incorporated definitive rules in place governing employment relations in the UAE. The new changes seek to introduce both flexibilities, as well sustainability in the UAE’s employment sector by addressing the developments as well as the exceptional circumstances that might arise in an employment relationship.

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