End of Service Gratuity
End of Service Gratuity
01 May, 2015
End of Service Gratuity : What Employers Need to Keep in Mind
All companies employing staff in the UAE should be familiar with and understand the mandatory end of service gratuity laws.
In simple terms these laws entitle employees to statutory gratuity payments at the end of their employment service. The provisions governing the gratuity laws are wide-reaching and apply to all companies operating in the UAE, including those registered in a Free Zone.
The requirement to pay gratuity arises as a matter of law and cannot be excluded by contract (although an employee can agree to take part in a retirement or similar scheme instead of receiving a gratuity). On the other hand, an employee will be entitled to the benefits contained in an employment contract if these exceed their entitlements under the law. It is important to note that this only applies to expatriate staff. UAE and other GCC nationals are not eligible to receive a Gratuity payment at the end of their service and employers must enrol them into the state pension scheme instead.
What are the rules?
An employer is required to pay an end of service gratuity to any employee on an unlimited term contract who has completed one or more years of continuous service. Provided an employee has completed at least one year’s service, they will be entitled to pro-rated gratuity for any part of a year worked. The employer is also entitled to deduct any amounts owing to it from the employee from the gratuity payment.
The law provides that an employee receives a total of 21 days’ basic wage for each year of the first five years of service, and 30 days wage for each additional year of service provided the total gratuity amount does not exceed the wages of two years’ service. Any period of unpaid leave will not be included when calculating the period of service.
Employers must be aware that the entire gratuity payment is calculated on the basis of an employee’s last salary payment. Accordingly, employer’s need to ensure that they take account of their increased liability for gratuity payments after each round of pay reviews.
As the gratuity calculation does not take into account an employee’s allowances for housing, travel or children’s education it is important that employers clearly specify the breakdown between an employee’s basic salary and any allowances.
Calculation of the gratuity payment does not generally include overtime, however a recent Court decision held that this rule does not necessarily apply in all circumstances. The rule may not apply to remuneration over and above the basic wage that is paid on a regular and continuous basis, regardless of how such remuneration is described. Therefore calculation of gratuity for those employees working on a commission basis could be subject to this decision in certain circumstances.
An employee will lose their right to a gratuity if there employment is terminated on the basis of one of the grounds set out in the labour law.
What does all this mean for my business?
Losing a valued employee is always difficult for a small business but this becomes even more of a problem if the business does not have sufficient funds set aside to make the required gratuity payment.
This can be avoided if business owners understand the gratuity laws and budget for the payments they will be required to make if (or when) an employee leaves.
If you would like to discuss how the gratuity laws affect you and how you can plan for your business please contact Nathan Banks or Andrew Morris at Banks Legal.