How to calculate gratuity

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How to calculate gratuity:-Working in UAE as an employee or an employer is an enough to reason to be aware of labor laws of the country regardless of your employment status. Companies incorporated within UAE, be it mainland or free zones are bound to comply with the provisions of UAE Labor Law (Federal Law number 8 of 1980) which is further regulated through Ministry of Labor. Such provisions of the Labor Law oblige the employer to pay end of service benefits to the employee post expiration of his employment contract, subject to certain terms and conditions which shall be discussed in this article.

End of service benefits is an extensive topic including variety of benefits wherein gratuity holds the biggest proportion thus, can be quite intimidating, considering multiple terms and conditions attached to calculating gratuity. “How is Gratuity calculated?” as simple the question is, the answer to this can be quite comprehensive. Nevertheless, I will try to simplify the method of gratuity calculation in this article and will try to cover every aspect in different circumstances.

Upon termination or expiration of your contract, you are entitled to receive your End of Service Benefits (EOSB) pursuant to the Labor Law. However, completion of the contract can be both through termination or resignation and in either case the employee is empowered to claim gratuity, however, it has further conditions which will be discussed in this article.

The Basics

The primary step in calculation of gratuity is to consider whether the employee was terminated or he resigned. Secondly, it is important to ascertain the type of the contract which can be either limited or unlimited and in both termination and resignation the calculation of gratuity varies in limited or unlimited contract.

Article 132 of the Labor Law obligates the employer to pay gratuity post completion of 1 year of the contract, the law reads as follows:

“The employee who has completed one (1) or more year of a continuous employment, is entitled to receive end of service remuneration post completion of his service. The day’s absence from work without pay shall not be take into consideration while computing the end of service. The remuneration for services will be calculated as below:

A. Twenty one (21) day’s pay for each year for first five (5) years of the service;

B. Thirty (30) day’s pay for each additional year of service.”

Importantly, gratuity is to be calculated on the basic salary excluding all allowances. The foregoing provision is the basic rule for computing gratuity under the Labor Law.

UNLIMITED CONTRACT

Termination

A. Employment term less than one (1) year

In accordance with Article 132 of the Labor Law, an employee is only entitled to gratuity post completion of one (1) year of service. Thus, for an employment term less than a year, you are not eligible to receive gratuity.

B. Employment service more than one (1) year but less than three (3) years

Upon completion of one year of service, the employee is entitled to receive gratuity worth 21 days of basic salary for each year of service. For instance, if the employee was employed for 24 months of continuous service, wherein his basic salary was AED 10,000 (UAE Dirhams ten thousand), the calculation of gratuity will be as follows:

Basic Salary= AED 10,000

Per-Day Salary= AED 333.3 Approx.

Number of working Years= 2

Gratuity= 333.3 X 21 X 2= AED 13,998.6

C. Employment service more than three (3) but less than five (5) years

For unlimited contract, the gratuity amount for continuous service between three to five years would be 21 days basic wage for each year of service. For instance, if the employee was employed for 4 years of continuous service, wherein his basic salary was AED 10,000 (UAE Dirhams ten thousand), the calculation of gratuity will be as follows:

Basic Salary= AED 10,000

Per-Day Salary= 10,000 X12/365 = 328.7

Number of working Years= Joining – End date and calculate the number of days/years worked

21 days basic wage= Salary per day X 21 days = 328.7 X 21 = AED 6902.7

Gratuity= 6902.7X4 (number of years) = AED 27,610.8

D. Employment service of more than five (years)

Employment service of more than five years under an unlimited contract will allow you to receive gratuity for 21 days of basic wage for first five year of continuous service, whereas, you will receive 30 days of basic salary for each additional year of service post five years. For instance, if the employee was employed for 7.5 years of continuous service, wherein his basic salary was AED 10,000 (UAE Dirhams ten thousand), the calculation of gratuity will be as follows:

Basic Salary= AED 10,000

Per-Day Salary= 10,000 X12/365 = 328.7

Number of working Years= Joining–End date and calculate the number of days/years worked = 7.5

21 days basic wage= Salary per day X 21 days = 328.7 X 21 = AED 6902.7

Gratuity= AED 6902.7 x 5 = 34,513 + 10,000 x 2.5 = 25,000 = 59513 AED

Apart from the receiving gratuity, an employee is subsequently entitled to receive additional benefits which forms a part of EOSB and such benefits are as follows:

· Salary for notice period (1-3 months) as what is mentioned in the employment contract, according to Article 118 of the labor law;

· Salary towards unused annual leave or any certain part of it;

· Additional bonus or commission earned by the employee, yet unpaid and agreed between the parties via employment contract;

· Salary towards additional time or overtime worked;

· Payment towards one way ticket to home country as agreed between the parties pursuant to the terms of the Employment Contract, according to Article 131 of the Labor Law;

· If the termination of employment contract was unreasonable and unjustified, the employee shall receive compensation for a maximum of 3 months’ salary, pursuant to Article 122 of the labor law.

Resignation

A. Employment term less than one (1) year

The employee is not entitled to receive gratuity if he has resigned from his employment under an unlimited contract before completion of one year. This is in accordance with Article 132 of the Labor Law.

B. Employment term more than one (1) year but less than three (3) years

In reference to Article 137 of the Labor Law, the employee working under an unlimited contract resigns post completion of one year but less than three (3) years, shall be eligible to receive gratuity equal to 1/3rd of the 21 days of basic salary for each year of employment. For instance, if the employee was employed for 1.5 years of continuous service, wherein his basic salary was AED 10,000 (UAE Dirhams ten thousand), the calculation of gratuity will be as follows:

Basic Salary= AED 10,000

Per-Day Salary= 10,000 X12/365 = 328.7

Number of working Years= Joining–End date and calculate the number of days/years worked = 1.5

21 days basic wage= Salary per day X 21 days = 328.7 X 21 = AED 6902.7

Gratuity= AED 6902.7 x 1.5 = 10354.05 / 3 = AED 3451.35

C. Employment term more than three (3) year less than five (5) years

For an employee who has worked for more than three years, yet less than five years and resigned under an unlimited contract, shall be entitled to 2/3rd of 21 days of basic wage for each year of service. For instance, if the employee was employed for 4 years of continuous service, wherein his basic salary was AED 10,000 (UAE Dirhams ten thousand), the calculation of gratuity will be as follows:

Basic Salary= AED 10,000

Per-Day Salary= 10,000 X12/365 = 328.7

Number of working Years= Joining–End date and calculate the number of days/years worked = 4

21 days basic wage= Salary per day X 21 days = 328.7 X 21 = AED 6902.7

Gratuity= AED 6902.7 x 4 = 27,610X 2/3 = AED 18,407.2

D. Employment term more than five (5) years

Resignation under an unlimited contract post completion of five (5) years or more will empower the employee to receive gratuity for 21 days of basic salary for first 5 years and 30 days of basic salary for each additional year after 5 years. For instance, if the employee was employed for 7.5 years of continuous service, wherein his basic salary was AED 10,000 (UAE Dirhams ten thousand), the calculation of gratuity will be as follows:

Basic Salary= AED 10,000

Per-Day Salary= 10,000 X12/365 = 328.7

Number of working Years= Joining–End date and calculate the number of days/years worked = 7.5

21 days basic wage= Salary per day X 21 days = 328.7 X 21 = AED 6902.7

Gratuity= AED 6902.7 x 5 = 34,513 + 10,000 x 2.5 = 25,000 = 59513 AED

LIMITED CONTRACT

The calculation of gratuity for limited contract varies from the gratuity calculation for unlimited contract and it further varies in cases where the employer terminates the limited contract or if the contract is finished due to resignation.

Termination

A. Employment service less than one (1) year

Regardless of the type of your contract, if you have been terminated before one (1) year of completion of service, you are not entitled to receive gratuity. Although, it is possible to receive other EOSB depending upon the circumstances under which the contract was terminated.

B. Employment service for more than one (1) year

In case of termination of a limited contract post completion of one (1) year of service and up to three (3) years, the employee is entitled to receive 21 days of basic salary for each year. For instance, if the employee was employed for 2 years of continuous service, wherein his basic salary was AED 10,000 (UAE Dirhams ten thousand), the calculation of gratuity will be as follows:

Basic Salary= AED 10,000

Per-Day Salary= 10,000 X12/365 = 328.7

Number of working Years= Joining–End date and calculate the number of days/years worked = 2

Gratuity= 328.7 X 21 X 2= AED 13,998.6

Resignation

The resignation under a limited contract within 5 years of service will not allow the employee to receive or claim any gratuity. This is in accordance with Article 138 of the Labor Law, which reads as follow:

“Where an employee under a limited term contract resigns from his employment at his own initiative before the expiry of his employment term, he shall not be entitled to gratuity unless his continuous period of service exceeds five years.”

The only exception to this general rule is that you should exceed you limited term contract with a service for more than five years.

A. Employment service for 5 years

Upon completion of 5 years of services in limited contract, the employee is eligible to receive 21 days of basic salary for each year of service. It can be simply calculated and you can refer to the afore-mentioned calculation method highlighted in above provisions.

B. Employment service for more than 5 years

As similar to the unlimited contract, the employee who has completed more than 5 years under an unlimited contract and has resigned thereafter, he shall be entitled to receive 21 days of basic pay for first five years and 30 days of basic salary for each year of service thereafter. For instance, if the employee was employed for 7.5 years of continuous service, wherein his basic salary was AED 10,000 (UAE Dirhams ten thousand), the calculation of gratuity will be as follows:

Basic Salary= AED 10,000

Per-Day Salary= 10,000 X12/365 = 328.7

Number of working Years= Joining–End date and calculate the number of days/years worked = 7.5

21 days basic wage= Salary per day X 21 days = 328.7 X 21 = AED 6902.7

Gratuity= AED 6902.7 x 5 = 34,513 + 10,000 x 2.5 = 25,000 = 59,513 AED

Additional Facts about Gratuity

I believe the afore-mentioned calculations will give you a clear idea of how gratuity shall be calculated depending upon the type of the contract and the way it has been finished. Whereas, labor law has mentioned some additional provisions in relation to gratuity which shall be taken into consideration before claiming your gratuity, which are as follows:

· Maximum Gratuity

Article 132 of the Labor Law restricts you to a certain amount of gratuity which can be claimed from the employer, in any given scenario which shall not exceed you 2 years of salary. The concerned provisions explicitly states that “The severance pay shall not exceed the entire total remuneration of 2 years.”

· NO Gratuity

In accordance with Article 139 of the Labor Law, an employee is not entitle to receive gratuity, if he has been terminated under Article 120 of the Labor Law or the employee willingly resigns under the contract without giving any notice in cases other than Article 121 of the Labor law. The concerned provision is as follows:

Article 139:

“An employee shall forfeit entitlement to his entire severance pay in any of the following two cases:

  1. If he is dismissed from service for any of the reasons specified in Article 120 hereof or if he abandons his employment in order to avoid being dismissed in accordance with that Article.
  2. If he abandons his employment of his own accord, otherwise than in either of the two cases specified in Article 121 hereof, without notice (in the case of indefinite term contracts) or before completing five years of continuous service (in case of definite term contracts).”

In order to explicitly understand Article 139, one shall also understand Article 120 and Article 121 of the Labor Law, which are as follows:

Article 120:

“An employer may dismiss a worker without notice if and only if the worker:

  1. Assumes a false identity or nationality or submits forged certificates or documents.
  2. Is engaged on probation and is dismissed during or at the end of the probationary period;
  3. commits a fault resulting in substantial material loss to the employer, provided that the latter notifies the labour department of the incident within 48 hours of his becoming aware of its occurrence;
  4. disobeys instructions on the safety of work or workplace, provided that such instructions are in writing and posted at a conspicuous place and are communicated verbally to the worker, in case he is illiterate;
  5. defaults on his basic duties under the contract and fails to redress such default despite awritten interrogation and a warning that he will be dismissed if such default is repeated;
  6. is finally convicted by a competent court of a crime against honour, honesty or public morals
  7. reveals any confidential information of his employer;
  8. is found in a state of drunkenness or under the influence of a narcotic drug during working hours;
  9. assaults the employer, the manager in charge or any of his workmates during working hours; or
  10. absents himself from work without a valid reason for more than 20 non-successive days in one single year, or for more than seven successive days.”

Article 121

“A worker may abandon his work without notice in either of the following cases:

  1. If the employer fails to honour his obligations towards the worker, as provided for in the contract or in this Law.
  2. If he is assaulted by the employer or the employer’s legal representative.”
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