Gratuity Calculation in UAE: Complete Guide to End-of-Service Benefits (2026).

End-of-service gratuity is the statutory severance payment that every private-sector employer in the UAE must pay to employees upon termination of their employment. Governed by Federal Decree-Law No. 33 of 2021 on the Regulation of Labour Relations and its Implementing Regulations, the gratuity is calculated based on the employee's basic salary and length of service, and represents one of the most significant employment-related financial obligations for businesses operating in the UAE.

This guide, prepared by GSDA Legal Consultants' employment law team, provides a comprehensive analysis of how gratuity is calculated, what has changed under the 2021 Labour Law, the interaction between gratuity and the new Savings Scheme, common disputes, and practical guidance for both employers and employees.

The Legal Framework for Gratuity

The end-of-service gratuity is established under Article 51 of Federal Decree-Law No. 33 of 2021. Every employee who has completed one year or more of continuous service is entitled to an end-of-service gratuity calculated as follows:

For the first five years of service: 21 calendar days' basic salary for each year of service.

For each additional year of service beyond five years: 30 calendar days' basic salary for each year.

The total gratuity amount may not exceed two years' total remuneration (not just basic salary — total remuneration including allowances).

For periods of less than one full year, the gratuity is calculated proportionally. An employee who has worked for 3 years and 7 months, for example, would receive 21 days' basic salary multiplied by 3, plus 21 days' basic salary multiplied by 7/12 for the fractional year.

The Gratuity Calculation Formula

The calculation uses the employee's basic salary at the time of termination — not the average salary over the employment period. The basic salary is the salary stated in the employment contract as "basic salary," excluding housing allowances, transport allowances, commission payments, overtime pay, bonuses, and any other supplementary payments.

Step-by-step calculation for an employee with a basic salary of AED 15,000 per month and 8 years of service:

Daily basic salary = AED 15,000 ÷ 30 = AED 500

Gratuity for first 5 years = 21 days × AED 500 × 5 years = AED 52,500

Gratuity for remaining 3 years = 30 days × AED 500 × 3 years = AED 45,000

Total gratuity = AED 52,500 + AED 45,000 = AED 97,500

Verification against the cap: Two years' total remuneration. If the employee's total monthly remuneration (including all allowances) is AED 25,000, the cap is AED 25,000 × 24 = AED 600,000. Since AED 97,500 is well below this cap, the full amount is payable.

For a more senior employee with a basic salary of AED 50,000 and 20 years of service:

Daily basic salary = AED 50,000 ÷ 30 = AED 1,667

Gratuity for first 5 years = 21 × AED 1,667 × 5 = AED 175,035

Gratuity for remaining 15 years = 30 × AED 1,667 × 15 = AED 750,075

Total calculated = AED 925,110

Cap verification: If total monthly remuneration is AED 70,000, the cap is AED 70,000 × 24 = AED 1,680,000. The calculated amount of AED 925,110 is below the cap, so the full amount is payable.

Key Changes Under the 2021 Labour Law

The most significant change introduced by the 2021 Labour Law is the elimination of the gratuity reduction for employees who resign. Under the previous 1980 law, employees who resigned (rather than being terminated) received a reduced gratuity based on their length of service: no gratuity for less than one year, one-third for 1–3 years, two-thirds for 3–5 years, and the full amount only after 5 years of service.

Under the current law, the full gratuity is payable regardless of whether the employment ends by resignation, termination, contract expiry, or mutual agreement. The only exception is termination for gross misconduct under Article 44 of the Labour Law, where the employer may withhold the gratuity entirely.

This change has significant financial implications for employers. Under the previous law, an employer could estimate that a substantial portion of employees would resign within the first five years and receive reduced gratuity. Under the current law, the full gratuity accrues from day one — creating a larger contingent liability on the employer's balance sheet.

The Workplace Savings Scheme Alternative

The 2021 Labour Law introduced a voluntary alternative to the traditional gratuity system: the Workplace Savings Scheme established under Cabinet Decision No. 96 of 2023. Under this scheme, employers may opt to contribute monthly amounts to approved investment funds managed by licensed financial institutions, in lieu of the end-of-service gratuity obligation.

The contribution rates under the Savings Scheme are designed to be equivalent to the gratuity entitlement: for the first five years, the employer contributes 5.83% of the employee's basic salary per month (equivalent to 21 days' salary per year), and from the sixth year onward, the contribution increases to 8.33% (equivalent to 30 days' salary per year).

The Savings Scheme offers potential advantages for both employers and employees. Employers benefit from converting a lump-sum end-of-service liability into regular monthly payments, improving cash flow predictability. Employees benefit from having their gratuity invested in regulated funds that generate returns — potentially resulting in a payout that exceeds the statutory gratuity calculation. Employees in the Savings Scheme can also choose between different investment risk profiles (conservative, balanced, or growth) based on their preferences.

Participation in the Savings Scheme is voluntary — the employer must opt in, and employees must consent. Employers who do not participate remain subject to the traditional gratuity calculation described above.

Common Gratuity Disputes

In our practice, the most common gratuity disputes involve:

Disagreement over the "basic salary" for calculation purposes. Employers sometimes structure compensation packages with a low basic salary and high allowances to minimise the gratuity liability. While this is technically permissible, MOHRE and the UAE courts have in recent cases looked beyond the contractual labels to examine whether the salary structure reflects a genuine commercial rationale or is designed to artificially reduce the gratuity. Where allowances are fixed, regular, and not linked to any specific expense, courts have in some cases reclassified them as part of the basic salary for gratuity purposes.

Disputes over the period of continuous service. Breaks in employment — such as termination followed by re-hiring, or transfer between related entities — can create ambiguity about whether the service is "continuous" for gratuity purposes. The general principle is that service is continuous if there is no break in the employment relationship, even if the employee is transferred between affiliated companies.

Withholding of gratuity for alleged misconduct. Employers sometimes invoke Article 44 to justify withholding gratuity from terminated employees. However, the threshold for Article 44 is high — the misconduct must fall within one of the specific categories listed in the article, and the employer bears the burden of proof. MOHRE and the courts have consistently held that poor performance, personality conflicts, and minor policy violations do not constitute grounds for gratuity withholding.

Delays in payment. The law requires the employer to pay the final settlement (including gratuity) within 14 days of the last working day. Employers who fail to meet this deadline may be subject to MOHRE complaints and, in egregious cases, administrative fines.

GSDA Legal Consultants advises both employers and employees on gratuity calculations, final settlement disputes, Savings Scheme implementation, and MOHRE proceedings. Whether you need a gratuity audit for your workforce or representation in a dispute, our employment law team provides practical, results-oriented advice. Contact our Dubai office.