Understanding the Gratuity Contract Under the New UAE Labour Law

Did you know that over 90% of UAE employees are entitled to gratuity payments, yet many are unaware of the recent changes that have simplified how these benefits are calculated? The UAE’s labour law guarantees end-of-service gratuity for most employees, and under Federal Decree-Law No. 33 of 2021, the calculation and eligibility are now standardized for all employees. There are countless employees that might still operate under old assumptions, potentially miscalculating their rightful benefits.

Today we will discuss the new, unified system for gratuity in detail.

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Limited Term Contract in UAE

Under the new law passed, all employment contracts in the UAE are now limited-term. A limited-term contract is an employment agreement with a specific end date. While previously capped at three years, amendments now allow these contracts to be for any agreed-upon period, and they can be renewed upon expiry. These contracts automatically terminate at the specified date unless agreed otherwise between the employer and employee.

Characteristics

• Definite Duration: The contract has a specified start and end date, which can be for any period agreed upon by both parties.
• Automatic Termination: Employment ends automatically at the end of a specified term unless both parties agree to renew or extend the contract.
• Renewal by Consent: Parties may renew a limited contract for a similar or shorter period; there is no limit on the number of renewals.
• Early Termination Compensation: If an employer or employee terminates the contract before its expiry without a lawful reason, they may be liable to compensate the other party. The compensation is typically equal to the wages for the notice period or the remaining period of the contract, whichever is shorter.

The Phasing Out of Unlimited Contracts in UAE

Unlimited contracts have been officially eliminated under the new UAE labour law. All employees, including those previously on unlimited contracts, were required to be transitioned to limited-term contracts by February 1, 2023. Therefore, the principles and calculations previously applied to unlimited contracts are no longer relevant for current gratuity calculations. These old contracts provided employment security without predetermined end dates but created confusion regarding end-of-service benefits, especially in cases of resignation. The new law was introduced to create a more stable, clear, and consistent system for all employees in the private sector.

The New Unified Gratuity Calculation

The fundamental difference in gratuity calculation between limited and unlimited contracts has been completely removed. Under the new law, there is a single, standardized method for calculating gratuity for all employees on limited-term contracts, regardless of whether they resign or are terminated by their employer (provided they have completed at least one year of service).

The previous system, which penalized employees on unlimited contracts for resigning, is now obsolete. Your end-of-service gratuity is calculated based solely on your length of service and your last basic salary.

The Standard Calculation Formula

The gratuity calculation is now straightforward for all employees who have completed one year or more of continuous service:

Impact of Employment Termination Reasons on Gratuity Payments

Under the new law, the reason for the termination of the employment contract no longer impacts the amount of gratuity an employee receives, with one major exception. Whether you resign or your employer terminates your contract, your gratuity is calculated using the same unified formula mentioned above.

This is a significant change from the old system where resigning from an unlimited contract resulted in a reduced gratuity payment.

The only scenario where an employee might forfeit their right to gratuity is in the case of a summary dismissal for gross misconduct, as outlined under Article 44 of the new UAE Labour Law. In all other standard termination and resignation scenarios (with proper notice), the employee is entitled to their full calculated gratuity after one year of service.

Minimum Service Requirements

The minimum service requirement for gratuity eligibility remains one full year of continuous service. After completing one year, an employee is entitled to their full gratuity based on their service period, regardless of whether they resign or are terminated.

The key distinction from the old law is that there are no longer any gratuity reductions or penalties for resigning.

Conclusion

Understanding the unified gratuity calculation under the new UAE labour law is crucial for every employee in the Emirates. The move to standardized limited-term contracts and a single gratuity formula has removed the complexity and uncertainty of the past. The calculation methods, eligibility requirements, and potential payouts are now clear and consistent for everyone.