End-of-service gratuity is the payment HR and payroll teams get wrong most often in the UAE – usually because it is calculated by hand at the last minute. This guide explains the rules under Federal Decree-Law No. 33 of 2021 for private-sector employees and how to make sure every final settlement is right.
The basic rules
- Basis: gratuity is calculated on the employee’s last basic wage – not gross salary with allowances.
- First five years: 21 days of basic wage for each year of service.
- After five years: 30 days of basic wage for each additional year.
- Minimum service: at least one year of continuous service; below one year, no gratuity is due.
- Part years: pro-rated for the part of a year worked.
- Cap: total gratuity cannot exceed two years’ wages.
- Deadline: wages and gratuity must be paid within 14 days of the end of the contract.
A worked example
An employee with a basic salary of AED 6,000 leaves after 7 years and 6 months.
- Daily basic wage: 6,000 × 12 ÷ 365 = AED 197.26
- First 5 years: 5 × 21 × 197.26 = AED 20,712
- Remaining 2.5 years: 2.5 × 30 × 197.26 = AED 14,795
- Total gratuity: about AED 35,507 (well under the two-year cap)
Unused annual leave is paid separately in the final settlement, not inside the gratuity figure, and loans or advances are recovered as separate lines.
Gratuity and different contract situations
Under the 2021 law, employment contracts in the UAE private sector are fixed-term, and the gratuity formula above applies to the employee’s total continuous service. A few situations need extra care in payroll:
- Transfers within a group: confirm whether service with the previous group company is carried over, and record the correct start date.
- Salary changes: the calculation uses the last basic wage, so salary history matters for audits and disputes.
- Unpaid leave: long unpaid absences can affect continuous service and should be recorded properly.
- Free zones and DIFC: some jurisdictions have their own employment rules and end-of-service schemes, so check which rules apply to each entity.
Booking a monthly gratuity provision
Gratuity is a liability that builds up every month, even if nobody leaves. Booking a monthly provision – the increase in each employee’s accrued gratuity – spreads the cost correctly, keeps the balance sheet accurate for auditors and banks, and avoids a large unexpected expense when several employees leave at once.
Where companies go wrong
- Using gross salary instead of basic salary.
- Forgetting periods of unpaid leave or the correct joining date after a transfer between group companies.
- Not keeping a monthly gratuity provision, so the cost hits one month’s profit when several people leave.
- Missing the 14-day payment deadline because the calculation, approval and bank transfer are manual.
How payroll software helps
Good payroll software in the UAE calculates gratuity from the employee’s service history and basic salary, books the provision every month and produces the full final settlement – gratuity, leave salary, final salary and recoveries – for approval in minutes. Our own ZEO HRMS & Payroll also posts the journal to your accounting system.
Frequently asked questions
Is gratuity paid on basic or gross salary?
On the last basic wage the employee was entitled to.
Is there gratuity for less than one year?
No. At least one year of continuous service is required.
Is unused leave included in gratuity?
No – it is paid separately in the final settlement.
This guide is general information, not legal advice. For specific cases, check with MOHRE or a labour-law adviser. Talk to us about automating gratuity and final settlements.
