End of Service Benefits for Employees in the Private Sector : Gratuity Pay

End of Service Benefits for Employees in the Private Sector : Gratuity Pay

by Aswani

Provisions for end of service benefits

  • If the employee resigns of his or her own free will before completing one year, then they will not be entitled to any gratuity pay.
  • The worker is entitled to a gratuity for the served fraction of a year, provided that he completes one year of continuous service.
  • The end of service gratuity is calculated on basis of last wage which the employee was entitled to, namely the basic salary. Hence, it will not include allowances such as housing, conveyance, utilities, furniture etc.
  • If the employee owes any money to the employer, the employer may deduct the amount from the employee’s gratuity.

Calculations for Gratuity pay

Under limited contract

An employee who has spent one year or more in continuous service shall be entitled to an end of service gratuity upon the termination of his service. The days of absence from work without pay shall not be included in the calculation of the period of service and the gratuity shall be calculated as follows:

  • If an employee has served for less than 1 year, he is not entitled to any gratuity pay.
  • If an employee has served for more than 1 year but less than 5 years, he is entitled to full gratuity pay based on 21 days’ salary for each year of work.
  • If an employee has served more than 5 years, he is entitled to full gratuity of 30 days’ salary for each year of work following the first five years.

In all cases, the total gratuity shall not exceed the wage of two years.

 Under unlimited Contract

In the event where the employer terminates an unlimited contract, calculation will be as follows:

  • If an employee has served for less than 1 year, he is not entitled to any gratuity pay.
  • If an employee has served more than 1 year but less than 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.

In the event where the employee under an unlimited contract resigns, calculation will be as follows:

  • If an employee resigns before completing 1 year of service, he is not entitled to any gratuity pay.
  • If an employee has served between 1 and 3 years, he is entitled to one third (1/3) of 21 days’ basic salary as gratuity pay.
  • If an 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.

Areas of Concern

There are a number of concerns with regards to the current legislation governing the payment of termination gratuity. Some of these are highlighted below:

  • In cases where the employer is in financial difficulties i.e. they become insolvent, the chances of the employee ever recovering their end of service gratuity are limited leaving them with little or no recourse even within the judicial system as there are no funds to make this payment.
  • The current laws might arguably incentivize employers financially to find ways to terminate an employee for a specific cause and without notice under Article 120 of the Labour Law. Termination under Article 120 bars an employee from claiming any gratuity payment.
  • Employees with low income do not have the financial means to fight a court case in instances where an employer fails to fulfill its end of service gratuity obligations.
  • It remains common practice for UAE companies to purposefully allocate an artificially modest basic salary to employees and increase the total salary with additional benefits such as travel and housing etc. as gratuity is based solely on the basic salary.

The Way Forward

There are a number of things that need to be considered by law makers in order to address the areas in which the current Labour Law may not be in keeping with the increasingly sophisticated demands of both employers and employees.

  • Gratuity payments should be based on gross pay or at least a set minimum percentage of total remuneration (such as 75%)
  • Employers should be obliged by law to keep gratuity funds in a separate account that is independently administrated for the benefit of the employees and payments into this fund should be made by the employer annually (similar to pension schemes available in other jurisdictions). These funds could be invested in government-backed securities or fixed deposit accounts with local banks, both low risk options with immediate and ongoing benefits for the local economy. If current reported media developments are an indication, this may change soon.

There are a number of benefits in making such changes to the law. If the calculation of end of service gratuity was more clearly defined in the labour law, this would create more certainty amongst both employers and employees. It would also reduce the amount of litigation in this area, reducing the judicial workload for routine matters.

If separate gratuity funds were established, this money would be protected in the event that the employer runs into financial difficulty or becomes insolvent. The financial sector in the UAE would get a boost due to the extra liquidity generated by such funds.

As the UAE continues to progress towards global standards in many areas, it is very important to ensure that laws governing employment are adequate to handle the increasing sophistication of the economy and the UAE business environment, especially if the UAE wishes to continue to attract and retain foreign inward investment and some of the world’s best talent.

Disclaimer: These calculations are not to be treated as law, they are for reference only.