FAQ-Payment of Gratuity

PAYMENT OF GRATUITY – (End of Service Benefits)

What is the employee entitled to on the termination of his employment contract?

On the termination of the employment contract, an employee is entitled to the following:
1. A notice period, or any amount due in lieu of the notice period in the case of an unlimited contract.

2. In the case of an unlimited contract, compensation for unreasonable dismissal if the contract was terminated by the employer for unreasonable cause.

3. In the case of a limited contract, compensation equivalent to the period until the end of the contract, or three month’s wages, whichever is shorter.

4. Payments equivalent to the balance of unutilised leave or any part thereof.

5. Payments for overtime or any balance of wages due and not yet paid.

6. End of service gratuity calculated on the duration of the employment.

7. Repatriation expenses as per the Law or the employment contact, subject to the employee not being in violation or in breach of either the Law or the employment contract.

What does the term end of service gratuity mean in terms of compensation?

In the case of an employment agreement for a unlimited term, an employee who completes one year or more in continuous service shall be entitled to gratuity at the end of their service. The gratuity shall be calculated as follows:

(1) 21 days wages for each year of the first five years.

(2) 30 days wages for each additional year on condition that the total of the gratuity does not exceed the wages of two years.

How is gratuity calculated?

Gratuity is calculated on an annual basis or part thereof provided that the employee has actually completed one year of employment with the employer or more. Days of absence from work without pay are not included in calculating the length of service. However, he will be entitled to end of service gratuity for fractions of a year he spent in service provided that he has completed at least one year in continuous employment.

On what basis is gratuity calculated?

Without prejudice to what is stipulated by the policies of some establishments in the granting of pensions or retirement benefits to employees, gratuity for those who are paid monthly, weekly or daily wages is calculated according to the employee’s last received basic wage before the employment was terminated. This wage is the basis for calculating the gratuity for the whole period of an employee’s employment.

Would a commission or payment by percentage be considered a basic wage?

According to a court ruling delivered by the UAE court, except for allowances and bonuses, any amount payable to an employee as wages including wages paid by percentage basis, commissions, or for performance will be considered as wage and will be taken into consideration in calculating gratuity.

Can the employer deduct any payment from the gratuity payable to the employee?

The employer may deduct any amount owed to him by the employee such as outstanding loans from the employees end of the service gratuity. If there is any dispute over the payment of gratuity or the amount of gratuity payable, the matter should be referred to the Ministry for mediation.

Is the amount calculated for gratuity affected if the employee resigns from employment?

An employee employed under a contract for an unlimited period who resigns after a continuous service of not less than one year and not more than three years is entitled to one third of the end of service gratuity provided above. If the period of continuous service is more than three years and less than five years he is entitled to two thirds of the gratuity. If his continuous service is more than five years, he is entitled to the full gratuity. If an employee who is employed under a contract for a limited period on the other hand chooses to resign before the end of the contract, he is not entitled to end of service gratuity unless his continuous service exceeds five years.

Under what circumstances can an employee be deprived of his end of service gratuity?

An employee may be deprived of his end of service gratuity if he has been dismissed for one of the reasons stated in Article 120 of the Law, or if he terminated his employment to avoid such dismissal.

Under what circumstances will an employee be entitled to gratuity if he terminates his employment contract without notice?

Under Article 121 of the Law, an employee will be entitled to gratuity on termination without notice in either of the following circumstances:

(1) The employer has failed to comply with his obligations towards the employee, as provided for in the employment contract or in the Law.
(2) The employee was assaulted by his employer or his legal representative.
The above applies to employees who have been continuously employed for a minimum period of one year, regardless of whether the contract of employment is for a fixed or unlimited term.

If the establishment or company has a pension scheme, which is beneficial to the employee, is this a substitution for the payment of gratuity?

If the employer has a pension scheme applicable to all the employees of the business, such a scheme must be published and known to all employees, and must specify that it will be a substitute to the gratuity rules outlined in the Law. It must also be more beneficial to the employees than the gratuity provision of the Law. Otherwise the employee may benefit from both unless the employee agreed or consented to the scheme in question.

Can the employee and the employer agree to pay gratuity for the termination of the employment contract for a preceding period?

The employer and the employee may, upon mutual agreement, decide upon the payment of the employee’s gratuity for the years that he has already served his employer. A new contract will then be entered into between the parties. The employee’s employment with the employer is still considered as a continuous period for the purpose of calculating interest, or, at the time when he resigns, calculating the employee’s total years of service with the employer.

Where an employee has worked for an employer in two or more countries, will he be entitled to gratuity?

This will depend on a number of factors such as the terms of the employment contract, the law of the country the employment is being conducted in and the general practice of the employer. For instance, many multinationals which transfer their employees to another country pay the end of service benefits applicable at the time of transfer. In such cases, the transfer is essentially considered as new employment for the purposes of gratuity payments.
The matter will however depend on the facts of each case as it is not covered by the Law but rather is addressed in certain judgments. Therefore, it should not be assumed that if an employee is transferred to another country that the UAE law will continue to apply or that his employment contract will continue to be enforced. The Law is considered as a matter of public policy and thus certain cases may be different in other jurisdictions. In addition, the country the employee is being transferred to may contain different regulations regarding the transfer of employees to and from other jurisdictions. Therefore, the law of the country the employee is transferred to may prevail and give regard (or otherwise) to the employee’s previous employment contract. In such cases therefore it is advisable to seek independent advice on the matter.
It is also not possible to apply a foreign law to a UAE employment contract. If the governing law in the employment contact is UAE law and filed with the Ministry, then gratuity will be calculated from the commencement date of that contract. This contract will take precedence over any other contract with a foreign governing law.

Can an employee mortgage or assign payment of his gratuity?

It is possible to mortgage or assign payment of an employee’s gratuity to the employer or to a third party by mutual agreement, provided that in the agreement with a third party, the employer and the employee agree to this in writing with an understanding of all parties that the employee may forfeit his right to gratuity which is not yet due if he violates a provision of the Law. In any event, an employee’s gratuity can only be assigned subject to the employee becoming entitled to it.

When does gratuity become due and payable?

Gratuity will only become due and payable on the termination of an employment contract.

Are the end of service gratuity and other dues payable to the employee considered priority debts?

The employee’s wages, overtime, and any other benefits, including end of service gratuity, are considered to be a preferential debt for which the employee shall have a lien over any movable or immovable property owned by the employer ranking second to government charges, judicial fees and family alimony payments.

How effective are foreign employment contracts in the UAE?

Such contracts are enforceable and valid as contracts executed in the UAE. However, if there is an additional local contract and a dispute arises, the provisions in the contract which are more favourable to the employee will probably be upheld, providing there is evidence in support of the provision in question.
In terms of the gratuity payable, where there are two contracts, the employee may only benefit from one.
The enforceable contract will in most cases be the one filed with the Ministry and gratuity calculated according to the salary specified in the UAE employment contract.

The original text of the UAE Federal Labour Law with the section on gratuity payments. Articles 132, 137, and 138 refer specifically to the calculation of gratuity

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