What Are End of Service Benefits (Gratuity)?
Gratuity is a statutory lump-sum payment owed to employees upon the termination of employment, provided they have completed at least one year of continuous service. It acts as financial recognition for their service and contribution. The 2025 legal landscape, governed primarily by Federal Decree-Law No. 33 of 2021 and its amendments, outlines precise conditions for eligibility, contract classification, and payout formulas.
UAE Employment Contracts: Limited vs Unlimited
🔹 Limited Contracts (Post-2022 Standard)
- Definition: Fixed-term contracts with a start and end date.
- Common Uses: Project-based roles, seasonal jobs, short-term employment.
- Termination Before Completion: May result in gratuity forfeiture or reduced entitlements unless justified by employer breach.
🔹 Unlimited Contracts (Pre-2022 Legacy)
- Definition: Open-ended contracts with no end date.
- Common Uses: Previously standard employment type.
- Current Relevance: Though new hires cannot enter unlimited contracts, many legacy employees still operate under them or transitional terms that affect gratuity.
⚠️ Important Note:
As of February 2022, all new contracts must be limited, per the UAE Labour Law. However, historical unlimited contracts and their gratuity rules remain legally significant for service periods prior to conversion.
Legal Foundation: UAE Labour Law (Federal Decree-Law No. 33 of 2021)
Employee Eligibility for Gratuity:
- Minimum 1 Year of Continuous Service
- Not Terminated for Gross Misconduct (as defined in Article 44)
- Gratuity is Calculated on Last Basic Salary Only – Allowances such as housing, transport, and utilities are excluded.
Gratuity Calculation Breakdown
🧮 For Limited Contracts (Post-2022)
| Service Duration | Gratuity Entitlement |
|---|---|
| 1–5 years | 21 days’ basic salary per year |
| 5+ years | 30 days’ basic salary for each year beyond 5 |
| Cap | 2 years’ basic salary maximum |
✔️ If Contract is Completed:
Employee is entitled to full gratuity based on years of service.
❌ If Resigned Before Completion:
- May lose gratuity
- Penalties may apply unless resignation is due to employer’s legal breach.
⚖️ If Employer Terminates (Non-Misconduct):
- Full gratuity is payable.
- May also owe early termination compensation (based on contract terms).
🧮 For Unlimited Contracts (Pre-2022)
| Service Duration | Resignation Entitlement | Employer Termination |
|---|---|---|
| < 1 year | No gratuity | No gratuity |
| 1–3 years | 1/3 of full gratuity | Full gratuity |
| 3–5 years | 2/3 of full gratuity | Full gratuity |
| 5+ years | Full gratuity | Full gratuity |
✔️ Resignation:
Reduces gratuity based on service length (1/3, 2/3, or full).
❌ Termination by Employer (Non-Misconduct):
Employee is entitled to full gratuity, regardless of resignation type, once minimum one-year service is met.
Real-World Examples
Example 1: Limited Contract – Completed
- Basic Salary: AED 10,000
- Service: 4 years
- Gratuity Calculation:
4 years×21 days/year=84 days4 \text{ years} \times 21 \text{ days/year} = 84 \text{ days}4 years×21 days/year=84 days
84×10,00030=AED 28,000\frac{84 \times 10,000}{30} = \textbf{AED 28,000}3084×10,000=AED 28,000
Example 2: Unlimited Contract – Resigned at 4 Years
- Basic Salary: AED 10,000
- Service: 4 years
- Gratuity Entitlement: 2/3 of AED 28,000
23×28,000=AED 18,666.67\frac{2}{3} \times 28,000 = \textbf{AED 18,666.67}32×28,000=AED 18,666.67
Transitioning from Unlimited to Limited Contracts
The new legal requirement is for all contracts to be limited, with a max initial duration of 3 years (renewable). Employers were provided a transitional window to convert unlimited contracts.
Transitional Gratuity Tip:
- Service under the old unlimited contract should be calculated separately.
- Employers and employees must agree in writing how past service gratuity will be settled.
- If in doubt, request documentation or legal clarification.
Myths & Misunderstandings Debunked
- ❌ Myth: Resignation = No Gratuity
✔️ Not always true. Unlimited contracts and even limited ones (in certain cases) still grant partial or full gratuity based on tenure or breach. - ❌ Myth: Gratuity includes all pay
✔️ Only basic salary is used—allowances are excluded. - ❌ Myth: Unlimited contracts no longer exist
✔️ Legally phased out, but legacy contracts are still operational and recognized for historical service.
Best Practices
📌 For Employees
- Retain Contract Copies – including any amendments or renewals.
- Track Basic Salary Separately from total compensation.
- Know Your Tenure – Keep detailed records of start dates and contract conversions.
- Use Trusted Calculators like UAE Ministry of Human Resources & Emiratisation (MOHRE)’s official tool.
📌 For Employers
- Review & Update All Contracts in line with post-2022 reforms.
- Train HR Teams on transitional gratuity calculations.
- Provide Clear Final Settlements with itemized gratuity breakdown.
Final Thoughts
The UAE’s labor law reforms represent a significant step toward transparency and protection for both workers and employers. By understanding how gratuity is calculated—especially the nuances between legacy unlimited and current limited contracts—you can avoid disputes and ensure lawful, fair end-of-service practices.
Whether you’re an expat planning to move jobs, an HR professional managing terminations, or a business owner striving for compliance, staying informed is essential. Always consult MOHRE or a labor lawyer for complex cases.