When working in the United Arab Emirates (UAE) under an unlimited contract, it is essential to understand how end-of-service benefits commonly known as gratuity are calculated. Gratuity is a legal entitlement for employees who complete at least one year of continuous service with the same employer. It serves as a financial reward upon resignation or termination and is regulated by UAE Labour Law.
Understanding Unlimited Contracts in UAE
Unlimited contracts in the UAE are open-ended agreements that do not specify a fixed term. Unlike limited contracts, which have a set duration, unlimited contracts allow more flexibility and are generally used in ongoing employment scenarios.
While they offer more leeway in terms of termination and renewal, the calculation of gratuity under these contracts follows specific legal guidelines based on years of service and the manner in which employment ends.
Conditions for Gratuity Eligibility
To qualify for a gratuity payment, an employee must complete at least one year of continuous service. The mode of termination, resignation or dismissal also affects the amount.
UAE Labour Law distinguishes between various types of employment terminations, such as resignation, termination with cause, and termination without cause. The eligibility and calculation of gratuity change based on these scenarios.
Key Factors Affecting Gratuity Calculation
Several factors influence the final gratuity amount for unlimited contracts. These include:
Basic Salary: Gratuity is calculated only on the employee’s basic salary, excluding allowances such as housing, transportation, and other benefits.
Years of Service: The total duration of employment plays a significant role. Employees who have worked longer generally receive a higher gratuity.
Type of Termination: Whether the employee resigns or is terminated impacts the calculation. Additionally, the reason behind the termination, such as redundancy or misconduct, also matters.
Gratuity Calculation for Resignation Under Unlimited Contract
When an employee resigns under an unlimited contract, the calculation depends on the years of service:
Resignation After 1 to 3 Years: The employee is entitled to one-third (1/3) of the 21 days’ basic salary per year of service.
Resignation After 3 to 5 Years: The entitlement increases to two-thirds (2/3) of the 21 days’ basic salary per year.
Resignation After 5 Years or More: The employee is entitled to the full 21 days’ basic salary per year for the first five years, and 30 days’ basic salary for each year beyond the five-year mark.
Gratuity Calculation for Termination by Employer
If an employee is terminated without cause, the gratuity is calculated more generously:
Less Than 5 Years of Service: The employee receives 21 days’ basic salary for each year of service.
More Than 5 Years of Service
For the first five years, 21 days’ basic salary per year is given. For every year beyond five years, the calculation changes to 30 days’ basic salary per year.
It’s important to note that if the employee is dismissed for gross misconduct, they may forfeit their right to gratuity.
Step-by-Step Gratuity Calculation Example
Let’s consider an example to understand how the gratuity calculation works in practice.
Assume an employee resigns after 6 years of continuous service, with a basic monthly salary of AED 10,000.
First 5 years: 21 days of basic salary per year = (21/30) × AED 10,000 = AED 7,000 Gratuity for 5 years = 5 × AED 7,000 = AED 35,000
6th year: 30 days of basic salary = (30/30) × AED 10,000 = AED 10,000 Gratuity for 6th year = AED 10,000
Total Gratuity = AED 35,000 + AED 10,000 = AED 45,000
If the same employee had resigned instead of being terminated, the entitlement would vary depending on the duration and applicable fraction (1/3, 2/3, or full).
Gratuity Cap Under UAE Law
According to UAE Labour Law, the total gratuity amount should not exceed the equivalent of two years’ wages. This rule applies regardless of the length of service or the method of termination. It is a critical limitation to consider, especially for employees with long tenures and high salaries.
Adjustments for Partial Years
If an employee works for a partial year beyond full years of service, gratuity is calculated proportionally. For instance, if someone worked for 5 years and 6 months, the gratuity for the 6 months would be calculated as a fraction (e.g., 0.5 of the annual entitlement).
Example: Basic salary = AED 8,000 21 days gratuity for 5 years = (21/30) × 8,000 × 5 = AED 28,000 30 days gratuity for 6 months = (30/30) × 8,000 × 0.5 = AED 4,000 Total Gratuity = AED 28,000 + AED 4,000 = AED 32,000
Legal Changes and Reforms
Recent changes in UAE Labour Law under the Federal Decree Law No. 33 of 2021 have redefined employment relations. While the old unlimited and limited contracts are being phased out in favour of unified fixed-term contracts, the principles of gratuity calculation for existing unlimited contracts remain protected during the transition period. Employers and employees should stay updated on any legal reforms and consult legal experts for personalized advice.
Conclusion
Gratuity serves as a vital part of an employee’s financial safety net upon ending employment. For those working under an unlimited contract in the UAE, understanding the intricacies of gratuity calculation can help in planning better for the future. By keeping track of years of service, knowing your basic salary, and understanding the laws governing resignation or termination, you can estimate your entitlements accurately.
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