Introduction
Gratuity is a form of end-of-service benefit provided to employees as a token of appreciation for their service. It is particularly significant in the UAE and other countries that follow labor laws ensuring financial security for employees after their tenure with a company. Understanding how to compute gratuity is crucial for both employers and employees to ensure compliance with legal regulations and proper financial planning.
Eligibility for Gratuity
To be eligible for gratuity, an employee must meet the following conditions:
- Must have completed at least one year of continuous service with the employer.
- Should be under a permanent contract or an unlimited contract (fixed-term contracts have different rules).
- Resignation or termination affects the calculation of gratuity differently.
Types of Gratuity Calculation
Gratuity is computed differently based on the type of employment contract: limited contract and unlimited contract.
1. Gratuity Calculation for a Limited Contract
For employees under a limited contract, gratuity is calculated as follows:
- If the employee completes less than 1 year of service: No gratuity is paid.
- If the employee completes 1-5 years of service: Gratuity is calculated at 21 days’ basic salary per year of service.
- If the employee completes more than 5 years of service: Gratuity is calculated at 30 days’ basic salary per year of service after the first five years.
Formula:
[ Gratuity = (Basic Salary ÷ 30) × Number of Days Entitled × Number of Years of Service ]
2. Gratuity Calculation for an Unlimited Contract
For employees under an unlimited contract, gratuity depends on whether they resign or are terminated:
- If the employee is terminated:
- 1-5 years: 21 days’ salary per year of service.
- More than 5 years: 30 days’ salary per year for additional years after five years.
- If the employee resigns:
- 1-3 years: One-third (1/3) of the gratuity amount.
- 3-5 years: Two-thirds (2/3) of the gratuity amount.
- More than 5 years: Full gratuity.
Formula:
[ Gratuity = (Basic Salary ÷ 30) × Number of Days Entitled × Number of Years of Service × Eligibility Factor ]
Important Considerations
- Basic Salary Basis: Gratuity is calculated only on the basic salary, excluding allowances such as housing, transport, and other benefits.
- Maximum Gratuity Limit: The total gratuity should not exceed two years’ worth of salary.
- Unpaid Leave Impact: Unpaid leave periods are not included in the gratuity calculation.
- Deductions: Employers can deduct any outstanding dues or liabilities before final gratuity payment.
Example Calculation
Assume an employee with a basic salary of AED 10,000 worked for 6 years under an unlimited contract and was terminated.
- First 5 years: [ (10,000 ÷ 30) × 21 × 5 = AED 35,000 ]
- Additional year: [ (10,000 ÷ 30) × 30 × 1 = AED 10,000 ]
- Total Gratuity: AED 45,000
Conclusion
Gratuity computation is a critical financial aspect of employment, ensuring employees receive their rightful benefits upon leaving a company. By understanding the applicable formulas and legal requirements, employees and employers can better navigate the gratuity system for a fair and transparent payout. For specific cases, consulting a labor law expert or using official government calculators is recommended to ensure accuracy.
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