If you employ someone in the UAE and they resign or are terminated, you owe them a lump-sum payment called end-of-service gratuity — and it isn’t optional, negotiable, or waivable by contract. For most UK employers with a single UAE hire, the first time this becomes real is the week the employee gives notice, when finance asks what the final settlement figure is and nobody has an answer ready. This guide gives you the formula, worked examples, and how to treat gratuity as a liability you provision for monthly rather than a surprise you calculate once, on the way out the door.
What End-of-Service Gratuity Is, and Why UK Employers Under-Provision It
Gratuity is a statutory lump-sum entitlement under Federal Decree-Law No. 33 of 2021 (the UAE Labour Law), paid to a private-sector employee who completes at least one year of continuous service, calculated on their basic salary. It applies regardless of whether the employee resigns, is terminated, or their contract simply expires.
Most UK finance teams under-provision for it because they treat it as a one-off leaving cost rather than what it actually is: a liability that accrues every month an employee is on the books, in the same way holiday pay or a pension contribution does. By the time an employee has been with you five years, the gratuity you owe is a real number sitting on your balance sheet whether you’ve recognised it or not — and if you haven’t been setting money aside monthly, a resignation can land as an unbudgeted five-figure cash outflow.
The Gratuity Calculator
This is a calculation best run through a live tool rather than by hand, because small differences in service length, leaving date, and how basic salary is split from allowances all move the final number. A proper calculator takes five inputs — start date, end date, monthly basic salary, monthly total salary, and leaving reason — and returns:
- The gratuity figure
- The service band applied
- The pro-rata part-year adjustment
- A plain-language line stating which rule produced the number, with its source cited
The Statutory Formula, Field by Field
The calculation has four moving parts:
- Qualifying service. The employee must complete at least one full year of continuous service. Anything under 12 months earns zero gratuity, with no exceptions. Continuous service includes probation, annual leave, and sick leave, but excludes unpaid leave — an unpaid sabbatical partway through the employment can push out the qualifying date.
- Daily wage. Calculated as monthly basic salary divided by 30. This is the base unit every other part of the formula multiplies against.
- The 21/30 day formula. For each of the first five years of service, the employee earns 21 days’ pay at the daily wage rate. For every year beyond the fifth, they earn 30 days’ pay at the daily wage rate. Part years are pro-rated proportionally once the one-year qualifying threshold is passed.
- The two-year cap. Total gratuity cannot exceed the equivalent of two years’ wage, regardless of how long the employee has worked for you. This matters mainly for very long-tenured, higher-salary employees; most calculations never come close to it.
Basic Salary vs Total Salary: The Input That Decides Everything
Gratuity is calculated exclusively on basic salary — the fixed contractual wage — and excludes housing allowance, transport allowance, and any other fixed or variable allowance, even where those make up a large share of the total package. This is the single input that moves the final number the most, and it’s a decision made at the contract-drafting stage, not at the leaving date.
Two employees on an identical AED 20,000 total monthly package can have materially different gratuity liabilities depending on how that package is split:
- A 70% basic / 30% allowances structure accrues gratuity on AED 14,000 a month.
- A 50/50 split accrues it on AED 10,000 a month.
Over nine years of service, that difference compounds into a gap of several tens of thousands of dirhams in gratuity liability on otherwise identical pay. This is worth deciding deliberately at the contract-drafting stage rather than defaulting to whatever a template contract happens to use.
Resignation vs Termination — What Changed Under the Post-2022 Fixed-Term Regime
Before February 2022, the UAE ran two separate contract types with different resignation treatment. Under the old “unlimited contract,” an employee who resigned before completing five years of service had their gratuity reduced on a sliding scale:
- Resignation before 1 year of service: no gratuity
- 1 to 3 years of service: roughly one-third of the calculated entitlement
- 3 to 5 years of service: roughly two-thirds of the calculated entitlement
- 5+ years of service, or any employer termination: the full amount
Federal Decree-Law No. 33 of 2021, together with Cabinet Resolution No. 1 of 2022, abolished the unlimited contract entirely. Every UAE employment contract is now fixed-term, and the graduated resignation reduction no longer applies. An employee who resigns after completing one year of continuous service and serves proper notice receives the same full 21/30-day calculation as an employee who is terminated. There is no current statutory reduction for voluntary resignation.
If you’re working from any pre-2022 source, checklist, or contract template that references the one-third/two-thirds resignation scale, that provision is no longer good law and should be updated.
Worked Examples: 18 Months, 4 Years and 9 Years of Service
All three examples use a monthly basic salary of AED 10,000, giving a daily wage of AED 333.33.
- 18 months of service: 1.5 years falls entirely within the first five-year band, calculated at 21 days per year. 1.5 × 21 = 31.5 days. 31.5 × AED 333.33 = AED 10,500 gratuity.
- 4 years of service: Still entirely within the 21-day band. 4 × 21 = 84 days. 84 × AED 333.33 = AED 28,000 gratuity.
- 9 years of service: The first five years are calculated at 21 days per year (5 × 21 = 105 days = AED 35,000). The remaining four years are calculated at 30 days per year (4 × 30 = 120 days = AED 40,000). Total gratuity = AED 75,000. This sits well within the two-year cap (AED 240,000 on this salary), so the cap has no effect here.
Accruing Gratuity Monthly — How to Provision It on a UK Balance Sheet
Gratuity should be treated as a monthly accruing liability from the employee’s start date, not calculated for the first time when they hand in notice.
- Take the annualised gratuity days the employee would be owed at their current service band (21 or 30 days per year)
- Convert to a daily accrual rate
- Post that amount to a provision account each month
By month 13, you should already have roughly one year’s worth of gratuity provisioned; by year six, the provision rate steps up as the employee crosses into the 30-day band. A downloadable month-by-month accrual table running from month 13 through year 10 is the natural companion asset here, so a finance manager can drop the schedule straight into a provisioning model rather than building one from scratch.
Who Legally Owes Gratuity When You Have No UAE Entity
- Your own mainland or free zone entity: You accrue and pay the liability directly. It sits on your books, and if it isn’t funded, the risk is entirely yours — unpaid gratuity is a labour court matter and can hold up an employee’s final settlement and visa cancellation.
- An Employer of Record (EOR) or PEO arrangement: The EOR is the legal employer of record in the UAE, so the EOR accrues and pays the gratuity, typically recovering the cost from you through the ongoing service fee or a specific end-of-service reserve. You carry the cost commercially, but not the direct legal or administrative liability.
- An independent contractor engagement: A genuine contractor relationship does not attract gratuity, because gratuity is an employment entitlement, not a commercial one. The risk here isn’t gratuity — it’s misclassification. If the working relationship in practice looks like employment (fixed hours, direction and control, exclusivity), UAE authorities can reclassify it, and a backdated gratuity liability becomes the least of the problems that follow.
DIFC and ADGM free zones sit slightly outside the standard regime: DIFC uses the DEWS end-of-service savings scheme instead of the standard gratuity calculation, and ADGM offers employees a choice between the standard gratuity model and a savings-scheme alternative.
FAQ
Does an employee get gratuity if they resign in the UAE?
es. Under the current law, an employee who resigns after completing at least one year of continuous service and serving proper notice receives the same full gratuity calculation as an employee who is terminated. The graduated reduction for resignation under the old unlimited-contract system no longer applies.
Is gratuity calculated on basic salary or total salary?
Basic salary only. Housing allowance, transport allowance, and other fixed or variable allowances are excluded from the calculation, even if they make up a large share of the total package.
Is there a cap on how much gratuity an employee can receive?
Yes. Total gratuity cannot exceed the equivalent of two years’ wage, regardless of length of service. In practice, this cap rarely affects standard salary and tenure combinations and mainly becomes relevant for very long-serving, higher-salary employees.
What happens to gratuity if I hire through an EOR rather than my own UAE entity?
The EOR is the legal employer and is responsible for accruing and paying the statutory gratuity. You typically fund this through the ongoing service arrangement rather than carrying the direct legal obligation yourself.
SOURCE AUTHORITIES
- Federal Decree-Law No. 33 of 2021 (UAE Labour Law) and its Executive Regulations
- Cabinet Resolution No. 1 of 2022
- MOHRE — Ministry of Human Resources and Emiratisation (mohre.gov.ae), including the official MOHRE gratuity calculator
- The u.ae federal government portal
- DIFC Employment Law and the DIFC Authority (for the DEWS reference only)
- ADGM Employment Regulations
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