Your Money blog: A guide to the UAE’s end of service gratuity

The end of service gratuity has always been a talking point in the UAE. While it is handed to employees when they leave a company - almost like a bonus payment - many believe it is a substitution for a pension plan.

In the money lead story this weekend, we looked at how many UAE residents do not invest their gratuity wisely. According to a recent survey by the insurer Zurich, only 22 per cent of those polled plan to use the payment for their retirement. Instead they intend to use it for a deposit on a property, to pay off debt or to book a holiday.

With that in mind, we asked two UAE-based experts to answer a series of questions on the end of service benefit. Here Samer Kader, head of SEI Investments, Middle East, a company which sets up schemes for companies to safeguard gratuity payments by separating them from the balance sheet, and Sara Khoja, partner, Middle East at the law firm Clyde & Co offer their insights:

1. How does the end of service benefit in the UAE work?

Answered by Sara Khoja: “The benefit is conditional on the employee accruing 12 months’ continuous service. It is then calculated according to the following formula:

• 21 days remuneration for each complete year of service for the first five years;

• 30 days remuneration for each complete year of service for each complete year of service over five years;

• Capped at two years remuneration (an employee needs to be employed for approximately 26 years to accrue this maximum benefit);

• Pro rated benefit for part years worked;

• Remuneration for the purposes of this benefit is the remuneration payable on termination of employment excluding all allowances and benefits in kind but including commission if this is an integral element of remuneration;

- If an employee resigns an unlimited term contract before accruing five years continuous service, the benefit is reduced (by 2/3 if service is 1-3 years, and by 1/3 if service is 3-5 years);

- If an employee resigns a limited term contract before completion of the term, then he forfeits the benefit unless he has accrued 5 years continuous service.”

2. Is the end of service gratuity calculated on the basic salary on termination or when an employee joins?

Sara Khoja: “The benefit is calculated according to the final remuneration payable at the time of termination, excluding all allowances and benefits in kind.”

3. So, if an employee has been working for a company for 10 years, earning a basic salary of Dh8,000, how much is the benefit?

Answered by Samer Kader: “The total minimum amount of gratuity owed is Dh68,000:

• For years one to five of service, the amount of gratuity owed is 21 days salary for every year of service, which translates to Dh8,000 x (21/30) x 5 = 28,000

• For years five to 10 of service, the amount of gratuity owed is one month salary for every year of service, which translated to Dh8,000 x 5 = 40,000.”

4. Can an employer offer any less than what is stipulated in UAE labour law?

Sara Khoja: “No, the UAE labour law has mandatory application across the UAE (apart from the DIFC) and entitles an employee to a minimum floor of employment rights, including the entitlement to end of service gratuity in accordance with the labour law provisions. It is not possible to contract out of these provisions.”

5. In turn, can an employer offer any more?

Samer Kader: “The stipulations cover the minimum gratuity levels. However, companies do have the option of paying over and above the levels stipulated by the UAE labour law. In fact, there has been a growing trend in the UAE of companies offering enhancements to end of service benefit gratuities as part of their total reward structure. These arrangements act as a deferred bonus payment in the form of additional contributions to the gratuity which accumulates as the employee’s length of service increases. Enhancements to end of service benefits are offered to encourage employee engagement and tenure, especially with regards to highly skilled staff. This can also help distinguish companies as ‘preferred employers’ from a recruitment perspective.”

6. How does a company determine what constitutes a basic salary?

Samer Kader: “It is at the company’s discretion how much of an employee’s total compensation is in the form of a basic salary and how much is classified as an allowance. However, it is prudent for companies to insure that the split between basic and allowances can be justified. Companies should be wary of artificially reducing basic salaries as a way of decreasing their gratuity payments as the number of cases of employees challenging companies on this issue is on the rise.”

Sara Khoja: “The market ratio is 60 per cent basic salary to 40 per cent allowances. If the basic salary is less than 50 per cent of the remuneration then it will be open to a Labour Court to decide that the structure is a mechanism to avoid end of service liability and it could award gratuity on the entire remuneration.”

7. When I leave my job, when can I expect to receive my gratuity?

Sara Khoja: “ The end of service gratuity is immediately payable on termination of employment unless the employee has been terminated under article 120 of the labour law for gross misconduct.”

8. Who do I turn to if my company pays me less than I am due or refuses to pay me at all?

Sara Khoja: “An employee can raise a complaint to the Labour Office and then to a Labour Court.”

arayer@thenational.ae

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