ArcHR
Gratuity Calculation
Definition
Gratuity calculation uses basic salary, years of service, and contract type per UAE or KSA law.
Basis of gratuity calculation in the UAE
Gratuity calculation under Federal Decree-Law No. 33/2021 uses an employee's basic salary — excluding allowances — multiplied by completed years of service according to a tiered formula. Unlimited contracts accrue 21 days' basic wage per year for the first five years and 30 days per year thereafter. Limited contracts apply different treatment depending on whether the employee completes the contract term or terminates early.
Contract type and termination reason
Resignation before five years on an unlimited contract reduces entitlement compared to employer termination. Limited contract completion typically yields full accrued gratuity, while early exit may forfeit or reduce the benefit depending on who initiates termination. SMEs frequently miscalculate by applying the same formula regardless of contract type or exit circumstances.
Continuous accrual for finance teams
Gratuity is a running balance sheet liability, not an exit surprise. HR and finance need monthly accrual visibility per employee so termination approvals include the correct settlement figure before MOHRE final settlement deadlines. Including commission or housing in the calculation base is one of the most common SME overpayment errors.
Example
Harbor View Hospitality, a 55-employee Sharjah hotel operator, calculated gratuity for a ten-year front-desk manager using total monthly package including housing. The employee filed a MOHRE complaint showing contractual basic salary was AED 4,200 against a AED 9,800 package. Recalculating on basic salary alone reduced the settlement by AED 38,000 — matching MOHRE's expected formula and closing the dispute.
Compliance risks
Incorrect gratuity calculation leads to MOHRE employee complaints, mandatory back-payment orders, and fines for late final settlement. Underpayment disputes can escalate to labour court. Overpayment from wrong calculation bases erodes margins silently across high-tenure workforces in retail and hospitality SMEs.
Related terms
· by ArcHR Compliance Team
Frequently asked questions
What is Gratuity Calculation?
Gratuity calculation uses basic salary, years of service, and contract type per UAE or KSA law.
Does UAE gratuity include unused annual leave?
Gratuity and annual leave encashment are separate entitlements under Federal Decree-Law No. 33/2021. Leave balance is paid as encashment alongside — not inside — the gratuity calculation. Final settlement statements should show both line items distinctly for MOHRE compliance.
Ready to replace spreadsheets?
Join teams running people operations on ArcHR. Start your 30-day free trial today.