Gratuity is the UAE’s most-miscalculated payroll line. Employees routinely underestimate it because they calculate against total salary instead of basic. Employers routinely understate profit because they treat gratuity as a payment event instead of a monthly accrual. Both get caught out when someone leaves and a six- or seven-figure dirham liability suddenly needs to clear in fourteen days.

The rules are actually simple once you separate the 2022 changes from the folk wisdom still floating around HR WhatsApp groups. Under Federal Decree-Law 33 of 2021, resignation no longer reduces the amount, the calculation runs strictly off basic salary, and the payment window is fixed. This guide walks through the formula, the termination scenarios, the accounting treatment, and the specific mistakes that turn a predictable liability into a cash flow shock.

Quick answers

  • Who qualifies: Private sector employees with at least 1 year of continuous service.
  • Calculation base: Basic salary only (housing, transport, and other allowances are excluded).
  • Rate: 21 days basic salary per year for the first 5 years, 30 days per year thereafter, capped at 2 years total basic salary.
  • Resignation: Since February 2022, resignation no longer reduces gratuity. Full entitlement applies whether the employee resigns or is terminated.
  • Payment deadline: All end-of-service entitlements must be settled within 14 days of the termination date.
  • Accounting: Accrue monthly on the balance sheet; do not wait until the employee leaves.

What is End-of-Service Gratuity?

End-of-service gratuity (also called an “end-of-service benefit” or simply “gratuity”) is a mandatory lump-sum payment made by an employer to an employee upon the termination of their employment, provided certain conditions are met.

It is governed by Federal Decree-Law No. 33 of 2021 on the Regulation of Labour Relations (the new UAE Labour Law), which came into effect on 2 February 2022 and significantly reformed the previous framework. The regulations apply to private sector employees in the UAE mainland. Free zone employees are subject to their respective free zone employment regulations, which typically mirror the federal framework.

Who is Entitled to Gratuity?

An employee is entitled to end-of-service gratuity if they have completed at least one year of continuous service with the employer.

  • Qualifying employees: All full-time and part-time private sector employees who complete 1 year or more of service.
  • Domestic workers: Domestic employees (housemaids, nannies, drivers) are covered by a separate law — Federal Law No. 10 of 2017 — which provides for gratuity after 1 year of service.
  • UAE and GCC Nationals: UAE and GCC national employees are enrolled in the national pension schemes (GPSSA for UAE nationals) rather than gratuity — the employer makes pension contributions instead.

How is Gratuity Calculated?

Gratuity is calculated on the basis of the employee’s basic salary at the time of termination — not the total package (housing allowances, transport allowances, and other benefits are excluded from the calculation base).

Standard Gratuity Formula

Period of Service Gratuity Entitlement
First 5 years of continuous service 21 calendar days’ basic salary per year
Each year after 5 years 30 calendar days’ basic salary per year
Maximum gratuity payable 2 years’ total basic salary

Daily Rate Formula: Daily Rate = Monthly Basic Salary × 12 ÷ 365

Example Calculation: An employee with a monthly basic salary of AED 10,000 who has worked for 7 years:

  • First 5 years: (AED 10,000 × 12 ÷ 365) × 21 × 5 = AED 34,520
  • Years 6 and 7: (AED 10,000 × 12 ÷ 365) × 30 × 2 = AED 19,726
  • Total gratuity: AED 54,246

For periods less than a full year (partial years), gratuity is calculated on a pro-rated basis.

Impact of Resignation vs. Termination

Under the new Labour Law (effective February 2022), the full gratuity entitlement applies in all cases — whether the employee resigns voluntarily or is terminated by the employer (including redundancy), provided they have completed 1 year of service.

This is a significant change from the previous law, which reduced gratuity entitlement for employees who resigned (to 1/3 of entitlement for 1–3 years, 2/3 for 3–5 years, and full entitlement after 5 years). Under the current law, resignation no longer reduces gratuity — employees who resign after completing 1 year of service receive 100% of the calculated gratuity.

Exceptions — cases where gratuity may be forfeited: Under Article 44 of the Labour Law, an employer may terminate an employee without notice and without gratuity in specific serious misconduct cases, including:

  • Assuming a false identity.
  • Causing significant financial loss to the employer.
  • Disclosing confidential business information.
  • Being convicted of a crime involving dishonesty.
  • Being absent without authorised leave for more than 20 days in a year (or 7 consecutive days).

When Must Gratuity Be Paid?

The UAE Labour Law requires that all end-of-service entitlements — including gratuity — be settled within 14 days of the termination date. Failure to pay within this period exposes the employer to complaints through the Ministry of Human Resources and Emiratisation (MOHRE) and potential labour court proceedings.

Gratuity and Unlimited vs. Limited Contracts

Since February 2022, the UAE has moved to a unified contract model — all employment contracts must be fixed-term (limited duration). Unlimited contracts are no longer issued for new employees.

Existing unlimited contracts entered into before February 2022 had a two-year transition period to be converted to fixed-term contracts. The gratuity calculation rules are the same regardless of contract type.

For Employers: Accounting for the Gratuity Liability

One of the most significant accounting obligations arising from gratuity is the need to accrue for this liability on your balance sheet. Many UAE SMEs fail to do this, which results in:

  • An understated liability on the balance sheet.
  • An overstated profit in the P&L (because the gratuity cost is not being recognised as it accrues).
  • A cash flow shock when employees leave — a large unexpected outflow with no accumulated provision.

Best practice for accounting:

  1. Calculate the gratuity liability for each employee as at the last day of each month based on their current basic salary and years of service.
  2. Record a monthly journal entry: Debit Gratuity Expense → Credit Gratuity Provision (liability).
  3. When an employee leaves and gratuity is paid: Debit Gratuity Provision → Credit Bank.
  4. Adjust the provision up or down annually for salary changes.

For Corporate Tax purposes, the gratuity provision is generally deductible as an expense as it accrues, subject to the general rules on deductible vs non-deductible expenses, because it represents a real liability the business has to employees for services already rendered. Reflecting this correctly is also important for understanding your financial statements.

The New UAE Savings Scheme: DEWS and Beyond

The traditional gratuity system is undergoing a significant structural reform. The DIFC Employee Workplace Savings (DEWS) scheme, launched in 2020, replaced the traditional end-of-service gratuity model for DIFC-based employees with a portable, invested savings scheme. Under DEWS:

  • Employers make monthly contributions to a regulated fund on behalf of each employee.
  • The contributions (equivalent to the gratuity accrual rate) are invested and grow over time.
  • Upon departure, the employee receives the accumulated fund — which may be more than the standard gratuity if investment returns are positive.

Abu Dhabi introduced a similar scheme for ADGM employees. The UAE government has signalled a broader roll-out of a comparable mandatory savings scheme for mainland and other free zone employees, as a replacement for the traditional gratuity model. Employers should monitor updates from MOHRE on the implementation timeline.

Common Mistakes Employers Make with Gratuity

  1. Not accruing monthly: Treating gratuity as a cost only when it is paid, rather than as it accrues.
  2. Using total salary instead of basic salary: Gratuity is calculated on basic salary only. Including allowances inflates the liability.
  3. Failing to update the provision after salary increases: When an employee gets a pay rise, the gratuity liability must be recalculated from year one using the new basic salary rate.
  4. Deducting gratuity for resignations post-February 2022: Under the new law, resignation does not reduce gratuity. Employers who still apply the old rules are exposed to labour complaints.
  5. Not budgeting for gratuity in cash flow planning: A team of 10 employees with 3+ years of service can represent several hundred thousand dirhams in accrued gratuity, a material cash outflow when key staff leave simultaneously. Build it into your cash flow management process early.

For startups still budgeting their first hires, the build a budget for your UAE startup guide explains how to fold gratuity accrual into your monthly fixed costs from day one.

Frequently Asked Questions

Who is entitled to end-of-service gratuity in the UAE? Private sector employees who complete at least 1 year of continuous service. UAE and GCC nationals are enrolled in pension schemes (GPSSA) instead and do not receive traditional gratuity.

Is gratuity calculated on basic salary or total salary? Basic salary only. Housing, transport, and other allowances are excluded from the calculation base.

How is the amount calculated? 21 calendar days of basic salary per year for the first 5 years of service, and 30 calendar days per year thereafter, capped at a maximum of 2 years of total basic salary.

Does resignation reduce my gratuity? No. Since the new Labour Law came into effect on 2 February 2022, full gratuity applies regardless of whether the employee resigns or is terminated, provided they have completed 1 year of service.

When must gratuity be paid after the end of employment? All end-of-service entitlements, including gratuity, must be settled within 14 days of the termination date.

How should employers account for gratuity? Accrue the liability monthly on the balance sheet (debit gratuity expense, credit gratuity provision). Recalculate after every salary change. Treating gratuity as a cost only when paid overstates profit and creates cash flow shocks.

Can an employer refuse to pay gratuity? Only in narrow circumstances of serious misconduct under Article 44 of the Labour Law (false identity, significant financial loss to the employer, prolonged unauthorised absence, and similar). Resignation is not one of them.

How Success Business Advisors can help

We calculate gratuity exposure across your workforce, set up monthly accrual accounting, and align your employment terms with the 2022 Labour Law. Schedule a call and we will review your gratuity position in 30 minutes.