End of service benefits (EOSB), commonly known as gratuity, are legally compulsory payments for employees in the UAE private sector, designed to reward long-term service and provide financial security at the termination of employment. The UAE Labor Law (Federal Decree-Law No.33 of 2021) controls these benefits, ensuring fair treatment of employees and clarity for employers. 

Calculation of End-of-Service Benefits 

EOSB is calculated primarily based on the employee’s last basic salary, excluding allowances such as housing, transportation, bonuses, or commissions. The basic salary used should be the fixed salary amount stated in the employment contract and paid at termination. 

Gratuity by Length of Service  

The calculation depends on the length of continuous service with the employer: 

• Less than one year of service: No gratuity payment is payable. 

• From 1 to 5 years of service: Employees receive an entitlement of 21 days’ basic salary for each year of service. 

• More than 5 years of service: The first five years are calculated at 21 days per year; for every additional year beyond five, the gratuity is 30 days’ basic salary per year. 

Note: Partial years are prorated, meaning if an employee has served a fraction of a year beyond a full year, they receive a proportional amount of gratuity for that fraction. 

There is a maximum cap on gratuity payments: the total amount cannot exceed the equivalent of two years’ basic salary. 

Example Calculation 

For an employee with a basic salary of AED 10,000 and 7 years of service: 

• First 5 years: (21/365) × 10,000 × 5 = AED 28,767.12 

• Next 2 years: (30/365) × 10,000 × 2 = AED 16,438.36 

• Total gratuity = AED 45,205.48  

Rules Affecting Calculation and Eligibility 

• Basic Salary Only: Only the basic salary is considered; allowances and bonuses are excluded. 

• Contract Type: The type of contract—limited (fixed-term) or unlimited (open-ended)—affects gratuity, especially if the employee resigns. Termination rules and employee rights under each contract differ and may influence gratuity entitlement. 

• Termination Reason: EOSB varies depending on whether the employee resigns voluntarily, is terminated by the employer, or is dismissed for misconduct. For example, employees dismissed for gross misconduct under Article 44 of UAE Labour Law do not qualify for gratuity . 

• Unpaid Leave: Days of unpaid leave are excluded from the calculation of service duration. 

• Pro-rated Service: Even partial years count as a proportion of gratuity if the employee has completed at least one full year. 

• Employees Covered: EOSB applies primarily to private sector employees, including those in free zones, but government employees may have different provisions. 

Best Practices for Employees and Employers 

For Employees: 

• Review your Employment Contract: Confirm the specific terms relating to EOSB, including any enhanced gratuity schemes beyond the law’s minimum. 

• Track Employment Records: Maintain accurate records of your service duration, salary payments, and contract details to facilitate correct gratuity claims. 

• Use Online Calculators or Seek Expertise: Use reputable UAE gratuity calculators or consult HR/legal professionals to verify the accuracy of your expected EOSB. 

• Understand Termination Conditions: Know how your termination type may affect your entitlements (e.g., resignation vs. dismissal). 

For Employers: 

• Plan Financially: Anticipate EOSB liabilities by setting aside funds and incorporating gratuity payments into financial audits. 

• Comply with Legal Frameworks: Ensure clarity in contract formulation and EOSB calculations to avoid disputes and penalties. 

• Communicate Clearly: Provide employees with transparent information on their EPSB entitlements. 

• Consider the Voluntary EOS Savings Scheme: From 2023, employers can opt into a savings scheme that allows monthly contributions towards EOSB, promoting financial security and flexibility. 

Recent Developments 

The UAE introduced a Voluntary End of Service Benefits Savings Scheme in 2023 as an alternative to lump-sum gratuity payouts. Employers contribute a percentage of the employee’s basic salary monthly (5.83% for under 5 years’ service, 8.33% for 5+ years). Employees can also make voluntary contributions up to 25% of their total salary, with flexibility to withdraw funds even after employment ends. This scheme targets enhanced financial security for the expatriate workforce. 

Summary Table of UAE EOSB Calculation 

Service Duration	Gratuity Rate	Notes
Less than 1 year	No gratuity	No entitlement
1 to 5 years	21 days’ basic salary per year	Based on last basic salary
More than 5 years	21 days per year for first 5 years; 30 days per year thereafter	Total gratuity capped at max 2 years’ salary
Partial years	Pro-rated based on length of service	Applies if >1 year completed

 

Important Notes 

• Better than minimum terms: Some employers may offer better benefits under EOSB terms than the minimum requirement, so it is vital for employees to review their contracts carefully.  

• Free zones/government: Specific provisions may apply to free zone employees or government workers, who should consult tailored policies. 

• Dismissal for gross misconduct: Employees terminated for gross misconduct do not receive gratuity. 

Understanding UAE end-of-service benefits ensures employees can secure their rightful entitlements, and employers can manage their legal obligations effectively, helping maintain a fair and compliant labor environment. 

How Payroll.ae Can Assist? 

Payroll.ae can help by providing an easy-to-use, accurate online platform to calculate UAE end-of-service benefits quickly, ensuring compliance with the latest labor laws and contract types. 

FAQs 

What is the end-of-service benefits in the UAE? 

According to the UAE Labor Act, they are lump sum payments to employees at the end of their service. 

How are the end-of-service benefits calculated? 

They are based on basic salary, service length, and contract type (limited or unlimited). 

Who is eligible for end-of-service gratuity in the UAE? 

Employees who complete at least one year of continuous service are eligible for employment. 

What are the best practices for managing end-of-service payouts?  

Keep clear records, calculate regularly, and stay updated on changes in the UAE labor law.