End of Service Gratuity a Statutory Compensation Claim

 

The UAE has enshrined a legally guaranteed severance pay (End of Service Gratuity) in its labour law. This right to severance pay is governed by the Labour Law (UAE Federal Law No. 8 of 1980) and must be paid by the employer to the employee upon termination of employment. The amount of the End of Service Gratuity depends on the type of employment relationship (fixed-term or open-ended contract), the circumstances in which the employment relationship was terminated (termination by the employer or the employee), the duration of the employment relationship and the respective “basic” remuneration.

 

Basis of assessment of the End of Service Gratuity:

The assessment basis for the End of Service Gratuity is the employee’s salary, the base salary. This base salary, which is shown as “basic salary” in the official standard employment contract of the respective authorities (free zones) or the base salary that the employee last received.

The “basic salary” does not include all additional payments (called “allowances” in the UAE) such as transport allowance, housing allowance, overtime payment, travel allowance, family allowance, bonus, etc.

Which employment contract is available? Fixed-term or open-ended employment contract

When calculating the End of Service Gratuity, a basic distinction must be made between a fixed-term and an open-ended employment contract. While open-ended employment contracts are concluded for an indefinite period (with a notice period of at least 1 month to a maximum of 3 months), fixed-term employment contracts can be concluded for a maximum period of 2 years.

Termination before the end of the agreed term of the fixed-term employment relationship usually constitutes a breach of contract. As a consequence, no End of Service Gratuity has to be paid. However, a compensation can be demanded due to a breach of contract (premature notice). Such compensation can be agreed between the parties individually at the time of conclusion of the contract. The height may not exceed 3 monthly salaries with a notice by the employer and with a notice on the part of the employee 1,5 monthly salaries.

Unlimited employment contract and termination by the employer:

In the event of termination of an indefinite employment contract by the employer, the employee is entitled to compensation in the amount of 21 days of basic salary for each year of employment in the first five years. From the sixth year of employment he receives 30 days of basic salary. The severance payment is limited to a maximum of 2 annual basic salaries. If the employee worked for the employer for less than one year, he is not entitled to a severance payment.

Example:

An employee in a permanent employment relationship is dismissed by his employer after 1.5 years. He has a base salary of AED 10,000. The End of Service Gratuity is then calculated as follows:

Case study 1:

Permanent employment relationship

Duration of employment: 1.5 years

Termination by employer

Monthly base salary: AED 10,000

Calculation:

Monthly basic salary x 12 months’ x 21 days’ x length of employment

365

AED 10,000 x 12 x 21 x 1.5

365                                                 = AED 10,356.16

In this example, the employee receives an End of Service Gratuity of AED 10,356.15 (in the event of termination by the employer).

Calculation steps in detail:

AED 10,000 x 12 = AED 120,000 (annual base salary)

AED 120,000 / 365 = AED 328.77 (daily basic remuneration)

AED 328.77 x 21 = AED 6,904.11 (End of Service Gratuity for 1 year)

AED 6,904.11 x 1.5 = AED 10,356.16 (End of Service Gratuity for 1.5 years)

This is different in the case of termination without notice of an employment relationship of indefinite duration by the employer on presentation of a reason for termination in accordance with Art. 120 Labour Law, in which case the employee is not entitled to the End of Service Gratuity.

Unlimited employment contract and dismissal by the employee

If an employee terminates his or her permanent employment contract himself or herself, he or she is also entitled to severance pay if the employment contract lasted longer than 1 year.

However, the End of Service Gratuity for termination by the employee is only 1/3 of the 21 days if the employment relationship lasted at least one year and not more than 3 years. If the employment relationship lasted at least 3 years and not more than 5 years, the employee is entitled to 2/3 of the 21 days. The employee only receives full severance pay if the employment relationship lasted for more than 5 years at the time of termination.

Case study 2:

Unlimited employment relationship

Duration of employment: 1.5 years

Termination by employees

Monthly base salary: AED 10,000

Calculation:

Monthly basic salary x 12 months’ x 21 days’ x duration of employment x factor of employee termination

365

AED 10,000 x 12 x 21 x 1.5 x 1/3

365                                                        = AED 3,452.05

Thus, if the employee voluntarily terminates an indefinite employment contract, the End of Service Gratuity is reduced by a certain factor that depends on the duration of the employment itself. In case study 2, the employee therefore only has a claim to a severance payment of AED 3,452.05. The amount of the severance payment is the same as in case study 2.

End of Service Gratuity for fixed-term employment contracts

In the case of a fixed-term contract, the employee is entitled to a severance payment at the end of that contract. This is again 21 days of the basic remuneration for each year of employment.

Case study 3:

Temporary employment relationship

Duration of employment: 2 years

Expiry of the time limit after 2 years

Monthly base salary: AED 10,000

Calculation:

Monthly basic salary x 12 months’ x 21 days’ x length of employment

365

AED 10,000 x 12 x 21 x 2

365                                             = AED 13,808.22

In this case, the employee receives an End of Service Gratuity of AED 13,808.22 after expiry of the fixed-term employment contract for a period of employment of 2 years. If, however, the employee terminates his fixed-term employment contract before expiry of the fixed-term contract, he generally does not receive any severance payment.

If the fixed-term employment relationship is terminated without notice on the basis of a reason for termination in accordance with Art. 120 Labour Law, the employee’s entitlement to the End of Service Gratuity does not apply.

Conclusion:

The End of Service Gratuity must be calculated individually for each departing employee. Decisive factors for the calculation of the severance payment under Labour Law include the type of employment relationship (fixed-term or open-ended employment contract), the duration of the employment relationship, the basic remuneration and the circumstances in which the employment relationship was terminated (termination by the employer or employee), so that a blanket statement or calculation is simply not possible.

It should be noted that the Labour Law stipulates the minimum amount of an employee’s severance pay when the employment relationship is terminated. However, the contracting parties are free to agree a higher End of Service Gratuity than that stipulated in Labour Law.

In principle, the Labour Law provisions mentioned here apply to all employees and many Free Zones also refer to the Labour Law. In the case of claims arising from an employment relationship, however, the extent to which the provisions of Labour Law apply to the specific individual case must be examined in advance.

If you have any questions on End of Service Gratuity, please do not hesitate to contact us.