UAE Gratuity Calculation: Labor Law Rules and Practical Examples

End-of-service gratuity is a lump-sum payment that UAE employers are required to pay employees when their employment ends. It is governed by Federal Decree-Law No. 33 of 2021 (the UAE Labour Law) and applies to all employees in the private sector who have completed at least one year of continuous service.

Gratuity is not a bonus or a pension contribution — it is a legal obligation. Failing to pay it is a labour law violation that can result in MOHRE complaints and legal proceedings.

The gratuity calculation is based on the employee's basic salary (not total package) and years of service:

• First 5 years: 21 days' basic salary for each year of service
• After 5 years: 30 days' basic salary for each additional year
• Maximum: Total gratuity cannot exceed 2 years' total remuneration (basic salary + allowances)

The "daily salary" for this calculation is the basic salary divided by 30 (not 365 or actual working days).

Under the current UAE Labour Law (effective February 2022), the distinction between resignation and termination for gratuity purposes has been simplified:

• Termination by employer: Full gratuity is payable as per the formula above
• Resignation by employee: Full gratuity is payable as per the formula above (this changed from the old law, which reduced gratuity for resignations under 5 years)
• Termination for cause (Article 44): Gratuity may be forfeited entirely if the employee is dismissed for specific misconduct reasons listed in the law

The key change from the old law: employees who resign now receive the same gratuity as those who are terminated. This applies to contracts entered into or renewed after February 2, 2022.

Gratuity is calculated proportionally for partial years. If an employee works for 3 years and 7 months:

• Full years: 3 x 21 days x daily salary
• Partial year: 7/12 x 21 days x daily salary

The minimum qualifying period is one year of continuous service. Employees who leave before completing one year are not entitled to gratuity.

Gratuity must be paid within 14 days of the end of the employment contract. This applies regardless of whether the employee resigned or was terminated.

The employer may deduct any amounts owed by the employee (loans, advances, penalties) from the gratuity payment, but must provide an itemized statement of deductions.

Practical tip for employers: do not wait until an employee leaves to calculate gratuity. Accrue it monthly in your books so it is not a cash flow shock. If you have 10 employees averaging 3 years of service, the gratuity liability can easily exceed AED 300,000.

From a bookkeeping perspective, gratuity should be treated as a monthly accrual:

• Monthly journal entry: Debit "Gratuity Expense" (P&L), Credit "Gratuity Provision" (Balance Sheet)
• On payment: Debit "Gratuity Provision" (Balance Sheet), Credit "Bank" (Balance Sheet)

The monthly accrual amount for each employee is their annual gratuity entitlement divided by 12. Recalculate whenever basic salary changes.

Maya Finance calculates and accrues gratuity automatically for each employee in the payroll module. The provision updates in real time as employees accumulate service, and the accrual adjusts automatically when salaries change.