Every employee who completes at least one year of continuous service in the UAE is entitled to end-of-service gratuity — a lump-sum payment when they leave. As an employer, this isn't optional. It's a legal obligation that accrues from day one and must be paid within 14 days of contract termination. Here's how it works.
What Is End-of-Service Gratuity?
Gratuity is a mandatory severance payment governed by Federal Decree-Law No. 33 of 2021 (the UAE Labour Law). It's the UAE's equivalent of a retirement benefit — since the UAE has no pension system for expatriate workers, gratuity serves as the primary end-of-employment financial cushion.
Who Is Entitled?
- Full-time employees who complete at least 1 year of continuous service
- Applies to all private-sector workers on mainland and most free zone contracts
- Part-time employees may be entitled to gratuity on a pro-rata basis, depending on their contract terms
- DIFC and ADGM employees fall under separate schemes (covered below)
Who Is NOT Entitled?
- Employees who have worked less than 1 year
- Employees terminated for gross misconduct under Article 44 of the Labour Law
- Government sector employees (covered by separate pension schemes)
The Gratuity Calculation Formula
The formula is straightforward but must be applied precisely:
For the First 5 Years of Service
21 days' basic salary × number of years
Daily rate = Monthly basic salary ÷ 30
Gratuity per year = Daily rate × 21
After 5 Years of Service
30 days' basic salary × number of years (beyond year 5)
Gratuity per year = Daily rate × 30
Maximum Cap
Total gratuity cannot exceed 2 years' basic salary (24 months), regardless of how long the employee has worked.
Calculation Examples
Example 1: Employee with 3 Years of Service
- Basic monthly salary: AED 10,000
- Daily rate: AED 10,000 ÷ 30 = AED 333.33
- Gratuity: AED 333.33 × 21 days × 3 years = AED 20,999.79
Example 2: Employee with 7 Years of Service
- Basic monthly salary: AED 15,000
- Daily rate: AED 15,000 ÷ 30 = AED 500
- First 5 years: AED 500 × 21 × 5 = AED 52,500
- Next 2 years: AED 500 × 30 × 2 = AED 30,000
- Total gratuity: AED 82,500
Example 3: Employee with 12 Years of Service
- Basic monthly salary: AED 20,000
- Daily rate: AED 20,000 ÷ 30 = AED 666.67
- First 5 years: AED 666.67 × 21 × 5 = AED 70,000.35
- Next 7 years: AED 666.67 × 30 × 7 = AED 140,000.70
- Subtotal: AED 210,001.05
- Cap check: 2 years' salary = AED 480,000 — under the cap, so full amount is due
- Total gratuity: AED 210,001.05
Quick Reference Table
| Years of Service | Basic Salary AED 5,000 | Basic Salary AED 10,000 | Basic Salary AED 15,000 | Basic Salary AED 20,000 |
|---|---|---|---|---|
| 1 year | 3,500 | 7,000 | 10,500 | 14,000 |
| 3 years | 10,500 | 21,000 | 31,500 | 42,000 |
| 5 years | 17,500 | 35,000 | 52,500 | 70,000 |
| 7 years | 27,500 | 55,000 | 82,500 | 110,000 |
| 10 years | 42,500 | 85,000 | 127,500 | 170,000 |
What Counts as "Basic Salary"?
This is where most disputes happen. Gratuity is calculated on basic salary only — not total compensation.
Included
- Basic salary as stated in the employment contract
Excluded
- Housing allowance
- Transport allowance
- Phone allowance
- Overtime pay
- Bonuses and commissions
- In-kind benefits (company car, accommodation, etc.)
The Salary Structure Trap
Some employers deliberately set a low basic salary and compensate with high allowances to reduce their gratuity liability. For example:
| Structure | Total Package | Basic Salary | Gratuity per Year |
|---|---|---|---|
| High basic | AED 15,000 | AED 10,000 | AED 7,000 |
| Low basic | AED 15,000 | AED 5,000 | AED 3,500 |
Same total package, but the gratuity liability is halved with a lower basic salary. This is legal, but employees are increasingly aware of it, and it can affect your ability to attract talent.
2026 Changes: What's New
All Contracts Are Now Limited-Term
Since the 2021 Labour Law update, the UAE no longer distinguishes between "limited" and "unlimited" contracts for gratuity purposes. All contracts are fixed-term (maximum 3 years, renewable). The same gratuity calculation applies regardless of contract type.
Voluntary End-of-Service Savings Scheme
The UAE government introduced an alternative voluntary savings scheme as an option to replace the traditional gratuity system. Key features:
- Employers can opt to contribute to an investment fund instead of paying lump-sum gratuity
- Contributions are made monthly (similar to DIFC DEWS)
- Employees may earn investment returns on their contributions
- The scheme is voluntary for employers in mainland and most free zones
This scheme is designed to benefit both employers (predictable monthly costs instead of large lump-sum liabilities) and employees (potential investment returns).
DIFC: The DEWS Scheme
The Dubai International Financial Centre (DIFC) operates its own employment law and replaced traditional gratuity with the DIFC Employee Workplace Savings (DEWS) plan in February 2020.
How DEWS Works
- Employers make mandatory monthly contributions to a defined-contribution scheme
- Contribution rates:
- 5.83% of basic salary for employees with less than 5 years' service
- 8.33% of basic salary for employees with 5+ years' service
- Employees can make voluntary additional contributions (up to 25% of salary)
- Funds are invested through approved fund managers
- On termination, the employee receives their accumulated contributions plus investment returns
DEWS vs Traditional Gratuity
| Feature | Traditional Gratuity | DIFC DEWS |
|---|---|---|
| Payment type | Lump sum at end | Monthly contributions |
| Calculation base | Last basic salary | Monthly basic salary |
| Investment returns | None | Market returns |
| Risk for employer | Salary increases raise liability | Fixed monthly cost |
| Portability | Not portable | Potentially portable |
| Employer cost certainty | Low | High |
For companies in DIFC, DEWS is mandatory — you cannot opt for traditional gratuity.
Deductions from Gratuity
Employers can deduct certain amounts from the gratuity payment:
Permitted Deductions
- Outstanding loans the employee owes to the employer
- Company property not returned (laptop, phone, car, access cards)
- Damages caused by the employee through negligence (must be documented)
- Notice period not served (if the employee leaves without serving the required notice)
Not Permitted
- Deductions for training costs (unless there's a specific, legally valid training bond agreement)
- Arbitrary deductions without documentation
- Deductions exceeding the gratuity amount (you can't create a negative balance)
Payment Timeline
Under the 2021 Labour Law, employers must pay gratuity and all final settlements within 14 days of contract termination. This includes:
- End-of-service gratuity
- Any unpaid salary
- Payment for unused annual leave
- Repatriation flight ticket (if applicable per contract)
What Happens If You Don't Pay on Time
- The employee can file a complaint with MOHRE
- MOHRE can issue an order for immediate payment
- The employer may face administrative fines
- In extreme cases, the employer can face a labour ban preventing future hiring
- Interest may accrue on the overdue amount
Gratuity in Different Scenarios
Resignation by Employee
Full gratuity is paid if the employee has completed 1+ years of service and serves the contractual notice period.
Termination by Employer (Without Cause)
Full gratuity is paid. The employer must also pay the notice period (in lieu, if not served) and any remaining contractual entitlements.
Termination for Gross Misconduct (Article 44)
The employer can forfeit the employee's gratuity if termination is for reasons listed in Article 44, including:
- Assuming a false identity or submitting forged documents
- Committing a fault causing substantial material loss to the employer
- Violating workplace safety instructions
- Being absent for more than 20 non-consecutive days (or 7 consecutive days) in a year without valid reason
- Disclosing work secrets
Important: The burden of proof is on the employer. Document everything meticulously if you're considering termination under Article 44.
Death of Employee
Full gratuity is paid to the employee's legal heirs or beneficiaries.
Probation Period Termination
If the employee is terminated during probation (before completing 1 year), no gratuity is owed.
Accounting for Gratuity: What Employers Must Do
Accrue Monthly
Gratuity is a liability that accrues from day one of employment. Good accounting practice (and audit requirements) demand that you accrue gratuity monthly:
- Monthly accrual per employee = (Basic salary ÷ 30 × 21) ÷ 12 = approximately 5.83% of basic salary
After 5 years, the accrual increases to approximately 8.33% of basic salary.
Set Aside Funds
Don't wait until an employee leaves to find the money. Set aside gratuity funds monthly in a dedicated account. Options:
- Separate savings account: Simple and accessible
- Gratuity fund: Some UAE banks offer dedicated gratuity management products
- Voluntary savings scheme: The new government-backed alternative
Use Proper Software
Your accounting software should track gratuity provisions automatically. Most UAE-focused platforms (Zoho Books, Wafeq, GreytHR) include gratuity calculation modules.
Common Mistakes Employers Make
1. Not Accruing Gratuity
Many startups ignore gratuity until an employee leaves, then scramble to find AED 20,000–50,000 for the payout. Accrue monthly — it's a known liability.
2. Using Total Salary Instead of Basic Salary
Gratuity is calculated on basic salary only. Including allowances inflates the payment and creates an unnecessary cost.
3. Forgetting Pro-Rata for Partial Years
If an employee works 3 years and 4 months, gratuity is calculated for 3 years plus 4/12 of a year. Don't round down.
4. Not Documenting Termination Reasons
If you terminate for gross misconduct and want to withhold gratuity, you need documented evidence. Verbal warnings don't count. Written warnings with dates, details, and employee acknowledgment are essential.
5. Mixing Up DIFC Rules
If you operate in DIFC, you follow DEWS — not the standard gratuity formula. Using the wrong calculation is a compliance violation.
Gratuity for Free Zone Employees
Most free zones follow the federal Labour Law for gratuity calculations:
| Free Zone | Gratuity System | Notes |
|---|---|---|
| DMCC | Federal Labour Law | Standard gratuity formula |
| JAFZA | Federal Labour Law | Standard gratuity formula |
| IFZA | Federal Labour Law | Standard gratuity formula |
| Meydan | Federal Labour Law | Standard gratuity formula |
| Shams | Federal Labour Law | Standard gratuity formula |
| RAKEZ | Federal Labour Law | Standard gratuity formula |
| DWTC | Federal Labour Law | Standard gratuity formula |
| DIFC | DEWS | Defined-contribution scheme |
The key outlier is DIFC. All other major free zones use the standard calculation.
Practical Tips for Small Businesses
Budget from Day One
For every employee, budget an additional 5.83% of their basic salary monthly for gratuity (8.33% after 5 years). Include this in your total cost of employment.
Factor Gratuity into Hiring Decisions
When calculating the true cost of an employee at your chosen free zone, add:
- Visa costs
- Health insurance
- WPS setup
- Gratuity provision (5.83% of basic salary)
Consider the Voluntary Savings Scheme
If you prefer predictable monthly costs over uncertain lump-sum liabilities, the voluntary savings scheme may suit your business. It functions like a defined-contribution pension — you pay monthly, and the liability is always current.
Get Professional Advice for Complex Situations
If you have employees with 10+ years of service, multiple entities, or DIFC operations, consult a UAE labour lawyer or HR consultant. The cost of professional advice is far less than the cost of a miscalculated gratuity payment and the resulting labour dispute.
Bottom Line
Gratuity is one of the most significant employment costs in the UAE. For an employee earning AED 10,000 basic salary, you're looking at AED 7,000 per year in gratuity liability — that's AED 35,000 after 5 years, AED 55,000 after 7 years.
Accrue it monthly, use the correct formula (21 days/year for the first 5 years, 30 days after), base it on basic salary only, and pay within 14 days of termination. Get these basics right and gratuity is a predictable, manageable cost rather than a nasty surprise.
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