End-of-service gratuity in the UAE, how it’s calculated, examples, and common mistakes
End-of-service gratuity can feel like a simple promise: work hard, finish your contract properly, and you’ll receive a fair lump sum. In reality, many UAE employers and employees only discover the tricky parts at the worst time, the final settlement day.
We see the same problems in Dubai start-ups, Sharjah trading firms, Abu Dhabi professional services, and even large hospitality and construction teams. The maths is not complex, but the details matter.
In this guide, we’ll explain UAE gratuity calculation, show clear examples, and highlight common mistakes that cause disputes, delays, and unexpected costs.
End-of-service gratuity in the UAE: who qualifies and what salary counts
Gratuity is generally due when an employee completes at least one year of continuous service and the employment ends (subject to legal conditions around termination and disciplinary dismissal). It’s part of the employee’s end-of-service benefits, alongside final salary, unused leave pay (if applicable), and other contractual dues.
The biggest point of confusion is what “salary” means for gratuity.
In most cases, gratuity is based on the last basic salary only. Basic salary is the fixed amount stated in the contract, before allowances. Common allowances that are usually excluded from gratuity include:
- Housing allowance
- Transport allowance
- Phone or other fixed allowances
- Commission and bonuses (unless your contract clearly structures them as part of basic pay)
Why does this matter? Because two employees can both earn AED 15,000 per month, but if one has a basic salary of AED 10,000 and the rest as allowances, their gratuity will be lower. Basic salary is the anchor point, so we should make sure it is correctly recorded and consistently applied.
Eligibility can also be affected by how the contract ends. Resignation, termination, mutual separation, or dismissal for serious misconduct can change entitlements. If there’s any uncertainty, it’s worth checking official guidance from the Ministry of Human Resources and Emiratisation (MoHRE), starting with MoHRE’s “Dear Worker, Know Your Rights” page.
UAE gratuity calculation: the standard formula (with a simple method)
Think of gratuity like a loyalty reward that grows with time. The first five years earn at one rate, then it increases.
The standard approach uses these rules:
- 21 days’ basic pay for each year of service in the first five years
- 30 days’ basic pay for each additional year after five years
- The total gratuity is capped at two years of basic salary
To make this practical, we calculate a daily basic wage first.
Step-by-step method most payroll teams use
- Find the monthly basic salary from the employment contract or HR system.
- Convert to a daily rate: monthly basic salary ÷ 30.
- Apply the gratuity days:
- First 5 years: daily rate × 21 × years (up to 5)
- After 5 years: daily rate × 30 × additional years
- If the employee has a partial year, calculate pro rata (based on the actual period worked in that final year).
One detail that saves arguments
Gratuity is typically calculated on the last basic salary, not an average. That’s helpful when an employee’s basic salary rises over time, but it also means payroll needs clean records of contract changes and effective dates.
Also keep the cap in mind. If someone has long service and a higher basic salary, the statutory maximum can be reached. This is where employers sometimes pay more than required, simply because no one checks the cap.
Worked examples and the mistakes that cause disputes
Numbers settle nerves. Here are three quick scenarios using the same method.
| Scenario | Monthly basic salary | Service length | Approx. gratuity outcome |
|---|---|---|---|
| A | AED 6,000 | 3 years | (6,000 ÷ 30) × 21 × 3 = AED 12,600 |
| B | AED 10,000 | 5 years | (10,000 ÷ 30) × 21 × 5 = AED 35,000 |
| C | AED 18,000 | 7 years | (18,000 ÷ 30) × (21 × 5 + 30 × 2) = AED 99,000 |
These examples assume eligibility is met and no legal exclusions apply. In real final settlements, we also need to consider outstanding loans, salary advances, or deductions that are permitted under the law.
Common mistakes we see (and how to avoid them)
Mistake 1: Using total package instead of basic salary
This is the number one cause of overpayment or underpayment. The fix is simple: store basic salary as a separate field in payroll, and link it back to the contract.
Mistake 2: Forgetting pro rata for partial years
If someone works 6 years and 3 months, that extra three months should be counted pro rata (assuming eligibility). Many businesses round down to the last full year, which can trigger complaints.
Mistake 3: Mixing up “days” and “months”
Gratuity is based on a number of days of pay per year, not months. If we treat 21 days as “about a month”, the numbers drift quickly.
Mistake 4: Ignoring unpaid leave and broken service
Periods of unpaid leave can affect service calculations. Also, if an employee leaves and later returns on a new contract, the service period may not be continuous.
Mistake 5: Not paying final dues on time
The Labour Law sets a short window to settle an employee’s wages and entitlements after employment ends (commonly referenced as 14 days). Late payment risks escalation and reputational damage, especially in tight talent markets like Dubai and Abu Dhabi.
A note on the alternative end-of-service benefits system
Some employers may choose the voluntary alternative system, where contributions are made into approved funds as an alternative to the traditional gratuity model. If you’re considering this route, read the official framework in MoHRE’s Cabinet Resolution No. (96) of 2023 and get proper HR and legal advice before changing any employee benefits structure.
Conclusion: treat gratuity like a checklist, not a guess
End-of-service gratuity is not just a payroll line item, it’s a trust moment. When we use the last basic salary, apply the 21-day and 30-day rules correctly, and document service periods cleanly, the final settlement becomes routine.
If you want fewer disputes, check two things early: the contract’s basic salary history, and the exact service dates. That’s where most UAE gratuity calculation errors start.
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