How Gratuity is Calculated Under UAE’s Labour Law and Why Your Basic Pay Matters More Than Allowances

Many employees in the UAE are uncertain about how end-of-service gratuity is calculated, particularly when it comes to the difference between basic salary and gross salary. The confusion often arises because employment packages in the UAE usually include multiple components such as housing allowance, transport allowance, commissions and other benefits in addition to the fixed monthly basic pay.

Under the UAE Labour Law, gratuity for full-time employees is calculated on the basis of the employee’s basic salary and not on the gross monthly salary that includes allowances and benefits. However, the law also states that the total severance package cannot exceed the equivalent of two years’ wage, which creates a separate calculation based on the employee’s total earnings.

The distinction between “basic wage” and “wage” is important under UAE Federal Decree-Law No. 33 of 2021 regulating labour relations in the private sector.

The basic salary refers to the fixed amount mentioned in the employment contract and paid in return for the employee’s work. It does not include housing allowance, transportation allowance, commissions, sales incentives, bonuses or other benefits provided by the employer.

Gross salary, also referred to as total wage, includes the basic salary along with cash allowances and benefits in kind agreed upon in the employment contract. This can include accommodation allowance, cost-of-living support, commissions linked to sales or profit-sharing arrangements.

Article 51 of the UAE Labour Law specifically states that end-of-service gratuity for full-time employees must be calculated on the employee’s “basic wage”. This means allowances are excluded while calculating the gratuity amount itself.

The law also sets out the gratuity structure based on the employee’s length of service. Employees who complete less than one year of continuous service are not entitled to gratuity. Employees who complete more than one year but less than five years are entitled to 21 days of basic salary for each year of service. Employees who complete more than five years are entitled to 21 days of basic salary for each of the first five years and 30 days of basic salary for every additional year thereafter.

At the same time, the law imposes an overall cap stating that gratuity cannot exceed two years’ total wage. This is where the difference between basic salary and gross salary becomes important.

For example, if an employee earns a total salary of Dh10,000 per month, including a basic salary of Dh9,000, and completes 30 years of service, the gratuity is first calculated using only the basic salary.

For the first five years, the employee would receive 21 days’ basic salary for each year of service. This works out to Dh31,500.

For the remaining 25 years, the employee would receive 30 days’ basic salary for each year, amounting to Dh225,000.

The total gratuity in this case would come to Dh256,500.

However, because the law states that gratuity cannot exceed two years’ total wage, the maximum payable amount would be limited to Dh240,000, calculated on the employee’s gross monthly salary of Dh10,000 over a two-year period.

As a result, despite the gratuity calculation reaching Dh256,500 based on the employee’s basic salary and years of service, the final payout would be capped at Dh240,000.

Employees in the UAE are therefore advised to carefully review the salary structure mentioned in their employment contracts, especially the division between basic salary and allowances, as this directly affects gratuity entitlements, overtime calculations, public holiday compensation and benefits linked to job loss insurance schemes.

Workers can verify their basic salary details through their employment contracts available on the Ministry of Human Resources and Emiratisation platforms. The labour contract can be accessed through the MOHRE app by signing in with UAE Pass and selecting the contract details from the dashboard. Employees can also retrieve the labour contract through the UAE Pass application under the documents section by requesting professional records linked to their employment profile.