A restaurant owner in Deira called me last year after an ex-employee filed a MOHRE complaint for AED 47,000 in unpaid gratuity. The owner had calculated AED 31,000. The difference? He'd included the housing allowance in the basic salary for the first three years but not the last two — because he "changed the contract." Except you can't retroactively change the gratuity calculation mid-employment. He paid AED 47,000 plus AED 3,500 in legal fees. Don't be that employer.
The Basic Gratuity Formula
Under Federal Decree-Law No. 33 of 2021 (UAE Labour Law), an employee who completes one or more years of continuous service is entitled to an end-of-service gratuity. The calculation uses BASIC SALARY only — not total package. No housing allowance, no transport, no commissions. Just the number on the contract line that says "basic salary."
| Service Period | Gratuity Rate | Formula |
|---|---|---|
| First 5 years | 21 days per year | (Basic Salary ÷ 30) × 21 × years |
| After 5 years | 30 days per year | (Basic Salary ÷ 30) × 30 × years |
📌 Maximum cap: Total gratuity cannot exceed 2 years of basic salary (Article 51, Federal Decree-Law No. 33/2021). This matters for long-serving employees on high salaries.
Worked Example 1: Standard Resignation After 7 Years
Let's say Rajan has worked for your company for 7 years and 4 months. His last basic salary is AED 12,000/month. He resigns voluntarily.
Step 1 — First 5 years: (12,000 ÷ 30) × 21 × 5 = AED 42,000. Step 2 — Remaining 2 years 4 months (2.333 years): (12,000 ÷ 30) × 30 × 2.333 = AED 28,000. Step 3 — Total gratuity: AED 42,000 + AED 28,000 = AED 70,000. Since he resigned (not terminated), and he served more than 5 years, he gets the full amount. No reduction applies under the new law.
Worked Example 2: Termination After 2.5 Years
Priya has been with you for 2 years and 6 months. Basic salary: AED 8,000. You terminate her contract (not for cause under Article 44).
Calculation: (8,000 ÷ 30) × 21 × 2.5 = AED 14,000. She gets the full AED 14,000 because termination by the employer always entitles the employee to full gratuity — regardless of service length.
Worked Example 3: Resignation Before 5 Years
Under the old law (Federal Law No. 8 of 1980), employees who resigned before 5 years received a reduced gratuity. Under the new law — Federal Decree-Law No. 33/2021, effective February 2, 2022 — this reduction no longer applies for employees on limited contracts. All contract types under the new law are treated as limited (fixed-term), typically 2–3 years, renewable.
So if Ahmed resigns after 3 years with a basic salary of AED 15,000: (15,000 ÷ 30) × 21 × 3 = AED 31,500. He gets the full AED 31,500. The one-third and two-thirds reductions from the old law? Gone — as long as his contract was issued or renewed after February 2, 2022.
⚠️ Transition Rule: Employees who started before February 2, 2022 and haven't had their contract converted to the new format may still be subject to the old law's gratuity reduction rules for their pre-2022 service period. Check your contracts.
What Counts as Basic Salary?
Only the basic salary as stated in the employment contract and registered in MoHRE's system. NOT:
- Housing allowance
- Transport allowance
- Phone or car allowance
- Commissions (unless the contract specifies they are part of basic salary — rare and risky)
- Overtime pay
- Bonuses
- Tips or service charges
The last basic salary is what matters — not an average, not the starting salary. If you gave an employee a basic salary increase from AED 8,000 to AED 10,000 in their final year, the entire gratuity is calculated at AED 10,000. Yes, even for the first 5 years. This is a common source of sticker shock for employers who give generous raises right before an employee leaves.
When Gratuity Is NOT Payable
- Employee has less than 1 year of continuous service
- Employee is dismissed for gross misconduct under Article 44 of Federal Decree-Law No. 33/2021 (theft, assault, fraud, etc.)
- Employee is on probation and terminated during the probation period (unless your contract says otherwise)
Accruing Gratuity in Your Books
IAS 19 — Employee Benefits — requires you to accrue end-of-service gratuity as a defined benefit obligation. You should be booking a monthly journal entry:
Dr. Staff Benefits Expense (P&L) → Cr. Provision for End-of-Service Gratuity (Balance Sheet). For a 50-employee company with an average basic salary of AED 7,000, monthly gratuity accrual is approximately AED 24,500. Miss this and your P&L understates expenses, your balance sheet understates liabilities, and your auditor will qualify.
Common Gratuity Mistakes
- Including allowances in the calculation — only basic salary counts.
- Using the starting salary instead of the last basic salary.
- Not prorating partial years — 3 years and 7 months is 3.583 years, not 3 years.
- Applying old-law reduction percentages to new-law contracts.
- Not accruing monthly — then scrambling for cash when 3 employees leave in the same month.
- Forgetting the 2-year cap on total gratuity.
- Paying gratuity in installments without written agreement — the employee can file a complaint for the full amount.
How Emirate ERP Handles Gratuity Automatically
- 🧮 Automatic monthly gratuity accrual based on each employee's basic salary and tenure
- 📊 Real-time gratuity liability dashboard — know your total exposure at any moment
- 🔄 Handles the old-law vs new-law transition automatically based on contract date
- 💼 Generates gratuity settlement reports when an employee exits — ready for MoHRE if needed
- ✅ Prorates partial years to the day, not just the month
- 🚫 Flags if basic salary vs total salary ratio looks suspicious (common in audits)
Stop calculating gratuity in spreadsheets. Emirate ERP automates EOSG accrual, calculation, and settlement — compliant with Federal Decree-Law No. 33/2021. Start your free trial.