What is end-of-service gratuity

End-of-service gratuity, also known as end-of-service benefits, is a mandatory financial payment awarded to private sector employees in the United Arab Emirates by their employer upon the completion of employment.

Employees who meet the eligibility requirements laid out under Article 51 of the UAE Labor Law and other supplemental resolutions are entitled to receive this benefit when they cease to be employed by your company. The amount of gratuity owed is influenced by multiple factors, including the employee’s final salary and length of service.

What is the purpose of end-of-service gratuity, and why is it important?

End-of-service gratuity provides a financial safety net for employees when they leave an organization, whether due to retirement, resignation, or termination. The objective of this benefit is to acknowledge your employee’s years of service and ease the transition to the next phase of their career or life via a lump sum payment.

Beyond legal compliance, offering end-of-service gratuity allows your business to compete effectively in the UAE labor market, making you more attractive to potential hires and enhancing your employee satisfaction.

How is end-of-service gratuity calculated?

The formula for calculating gratuity for UAE employees depends on the employee’s basic salary, how long they’ve worked for you, and whether you’re using the old or new end-of-service gratuity scheme.

Understanding how much gratuity your employees are entitled to is critical for promoting transparency and ensuring compliance.

End-of-service gratuity (old scheme)

Under the old system, gratuity is calculated as follows for full-time employees under a limited or unlimited work contract:

• First five years of service: 21 days of their basic salary for each year of employment
• Over five years of service: 21 days of basic salary for the first five years and 30 days’ basic salary for each subsequent year of employment
• Workers in part-time or job-sharing contracts: The number of working hours in the contract per year divided by the number of working hours in the annual full-time contract, multiplied by 100. The resulting percentage is then multiplied by the value of the end-of-service gratuity owed for a full-time contract

The maximum amount of gratuity payable to each employee is capped at two years’ basic salary. However, you can elect to provide additional financial compensation to outgoing employees that exceeds the statutory limit.

Gratuity must be paid within 14 days after the conclusion of the employment arrangement.

Voluntary end-of-service gratuity (new scheme)
As a reflection of its commitment to creating an equitable and supportive environment for its workers, the UAE government introduced an alternative to the old end-of-service gratuity scheme in October 2023.

Under this new scheme, you can contribute towards gratuities for employees who are not citizens of a country in the Gulf Cooperation Council (GCC) by making monthly payments to an approved investment fund.

This minimises the financial burden imposed on companies by the mandatory lump sum payment under the old scheme. Rather than defaulting on obligations or facing cash flow problems when there’s unexpected or higher-than-usual employee turnover, the accumulated benefits and any earned returns on the investment are withdrawn from the fund and paid out to respective employees.

You can also permit employees to make additional personal contributions of up to 25% of their annual salary to grow their gratuity fund. These voluntary contributions can either be withheld from salary and paid by your organization on the employee’s instructions or deposited directly into the fund by the employee as a lump sum or in installments.

Gratuity contributions for full-time workers under the new voluntary scheme must be made as follows:

• First five years of service: 5.83% of the employee’s monthly basic salary
• Over five years of service: 8.33% of the employee’s monthly basic salary
• Workers in part-time or job-sharing contracts: 5.83% or 8.33% of the salary for the number of hours worked based on the employee’s length of service

Contributions must be paid into the investment fund no later than 15 days from the beginning of each month.

What factors affect an employee’s eligibility to receive end-of-service gratuity?

Different criteria can affect an employee’s right to receive end-of-service benefits and the amount of gratuity they get in the UAE, including:

• Citizenship status: End-of-service gratuities can be paid to UAE nationals, GCC citizens, and foreign workers from other countries, but benefits for UAE nationals are regulated by the pensions and securities legislation. In addition, only non-GCC nationals are eligible for the voluntary end-of-service benefits scheme
• Duration of service: Employees must have at least one year of continuous service to qualify for gratuity payments. Length of tenure is calculated using the actual number of days worked, not including unpaid absences or extended leave periods such as sabbaticals
• Reason for termination: Employees who willingly resign before completing the one-year service requirement or those who are terminated due to misconduct or other causes may not be entitled to receive gratuity.

What is the role of HR in managing end-of-service gratuity?

As an HR personnel, your key responsibilities in overseeing the administration and distribution of gratuity payments include:

• Maintain accurate records: Keep relevant employee documentation that may be required to support gratuity claims, such as contracts, payslips, leave requests, salary increases, and evidence of fund contributions.
• Payroll management: Ensure that leave accruals, basic salary, years of service, and gratuity entitlements are calculated correctly, and the due amount is paid into the appropriate account on time
• Promote transparency: Inform employees about gratuity policies, method of calculation, payment dates, and voluntary contributions so they understand their rights under UAE labor law
• Monitoring compliance: Stay up-to-date on changing labor regulations to avoid legal liabilities and financial penalties for poor or non-compliance
• Handle disputes: Address and resolve any employee complaints around gratuity eligibility, calculations, or payment while maintaining a fair perspective

Are there any legal risks if an employer fails to provide end-of-service gratuity?

Yes, failing to comply with UAE rules and timelines for gratuity lump sum payments or monthly contributions can lead to serious financial and legal repercussions, including:

• Fines and penalties: If you fail to make gratuity subscription payments for two months under the new scheme, you'll be prevented from applying for work permits until the outstanding contributions are paid. You may also attract fines of AED 1,000 per employee each month the subscription remains unpaid
• Lawsuits: Aggrieved employees may file complaints with labor courts or regulatory authorities against your company for not remitting their gratuity, or for late or incorrect payments
• Reputational damage: Non-adherence to gratuity policies and obligations can harm your employer brand and impact employee recruitment and retention

How can HR ensure compliance with gratuity laws in a global workforce?

Adopting a well-structured approach to managing end-of-service gratuity in the UAE and beyond reduces the risk of employee dissatisfaction or legal complications and promotes fairness and security.

• Understand local laws: Ambiguities in local laws can lead to confusion about gratuity eligibility and entitlement amounts. Collaborating with legal advisors with cross-border or regional expertise in the countries you operate in eliminates these barriers, enabling compliance
• Standardize processes: Designing a global framework for gratuity management can make it easier to develop localized approaches that are proactive and efficient
• Offer training: Educate your HR team about applicable laws, compliance requirements, and any company-specific gratuity policies
• Regular audits: Periodically review your payroll records and operations to confirm that gratuity calculations and payments are error-free and lawful
• Payroll planning: Employers must budget for gratuity liabilities, particularly for long-serving employees, to avoid cash flow issues
• Leverage technology: Automate gratuity calculations, payments, compliance, documentation, and other related HR processes with tools and services like Deel EOR and Deel Global Payroll for accuracy and transparency

How can employers budget for gratuity liabilities effectively?

Employees can leave you or be let go for a multitude of reasons. Predicting when this will happen and how many are likely to churn isn't always straightforward, hence the need to be proactive about managing gratuity so you can meet liabilities as they arise:

• Using actuarial valuation: Enlist the services of actuarial experts to assess and estimate your end-of-service gratuity liabilities based on your workforce demographics and salary trends
• Setting aside reserves: Rather than waiting until the termination of employment to budget for gratuity payments, regularly allocate funds in a separate bank account to cover accrued gratuity entitlements for each employee
• Reviewing policies annually: Reevaluate your gratuity obligations regularly to account for salary changes, employee demographics, staff size, or work contracts

Streamline hiring, payroll, and compliance with Deel

Whether you have UAE-based employees or are considering expanding into the region, Deel helps your business manage international payroll, administer benefits, centralize employee information, and navigate local laws in 150+ countries, including the United Arab Emirates.

With Deel, you can hire, pay, and manage employees quickly, accurately, and compliantly without undergoing the rigorous process of setting up an entity from scratch.

For more insights into how Deel can expand your hiring reach and navigate compliance, book a demo.