End-of-service gratuity is a statutory payment an employer owes an employee when their employment ends, and it accrues with each period of continuous service. It is calculated on basic salary alone — not on the total package — so housing, transport and every other allowance in the pay structure sit outside the figure the calculation is built on.
That distinction is the most important point on this page. It catches employers out because they budget against total payroll and under-provision, and it catches employees out because they expect a payment based on what lands in their account each month. Both are working from the wrong base figure.
How the gratuity mechanism works
Gratuity is not a bonus and not discretionary. It is an entitlement set in law, and the mechanism has three moving parts.
A qualifying period of continuous service. Entitlement generally begins only once an employee has completed a minimum period of continuous service with the same employer. Leave before that point and no gratuity is due.
An accrual rate that changes with length of service. Past the qualifying point, gratuity builds for each year of service at a rate set in law. That rate is not flat across a career — the law applies one rate to shorter service and a more generous rate to longer service, so the liability per year increases once someone has been with you for a sustained period. There is also a statutory ceiling on the total, expressed as a multiple of salary.
Adjustments for what interrupted the service. Continuous service is the basis, so unpaid leave is generally excluded from the count, and dismissal for specified categories of serious misconduct can remove entitlement altogether. Partial years are normally pro-rated rather than rounded away.
We do not publish the day counts, rate multiples or ceiling here. They are set in law, they have changed within recent memory, and a stale figure in a settlement creates a dispute. We confirm the current calculation against the employee’s contract and service record.
Is gratuity calculated on basic salary or total salary?
Basic salary — the basic wage stated in the registered employment contract, excluding allowances.
This cuts both ways. A package weighted towards allowances produces a smaller liability than one with the same total but a higher basic. That is lawful. What is not safe is an artificially low basic with the rest dressed up as allowances to suppress the entitlement — that invites challenge, and the registered contract is what will be examined. Decide the split deliberately, apply it consistently, and be able to explain it.
| Element | Counts toward the calculation? | Note |
|---|---|---|
| Basic salary in the registered contract | Yes | The sole base figure |
| Housing allowance | No | Excluded even where it is the largest line in the package |
| Transport, phone, education and other fixed allowances | No | Excluded |
| Commission, bonus and overtime | No | Excluded, even where variable pay routinely exceeds basic |
| Employer-paid insurance and visa costs | No | An employer obligation, not part of the wage |
| Paid annual leave taken | Yes | Counts as continuous service |
| Unpaid leave | No | Generally excluded from the service count |
| Accrued but untaken annual leave | Paid separately | Part of the final settlement, calculated apart from gratuity |
| Service under a previous, cancelled visa with the same employer | Depends | Turns on whether service was genuinely continuous; review case by case |
Does resignation reduce what is owed?
Under the current framework, gratuity is payable whether the employee resigns or is terminated, provided the qualifying service is complete and the exit is not one of the narrow misconduct categories that forfeits entitlement. Older rules treated resignation less favourably, and that outdated understanding is still widespread — it is a frequent source of argument at exit.
What changes between the two is the rest of the settlement: notice, whether it is served or paid in lieu, and any compensation where a termination is found to be arbitrary. Treat gratuity and the rest of the settlement as separate calculations paid together.
What happens on company closure?
Gratuity is a debt of the company, and employee entitlements rank highly among the claims that must be settled before a licence can be cancelled. You cannot close cleanly without it: an unsettled claim stalls the liquidation. This is why under-provisioning is dangerous rather than untidy — a company winding down is short of cash at exactly the moment every employee’s accrued liability crystallises at once, and owners who have not reserved for it end up funding it personally.
How should an employer provision for gratuity?
Treat it as an accruing liability on the balance sheet from the start of employment, not a cost that appears when someone resigns. The accounting position mirrors the legal one: the obligation builds as service is rendered, so it belongs in the period it accrues.
- Recognise the accrual monthly for every qualifying employee on current basic salary, and remeasure when salaries change — a pay rise increases the whole accrued liability, not just future accrual.
- Keep a clean service record per employee: start date, unpaid leave, breaks in service, basic salary history. Reconstructing that from memory years later is how disputes begin.
- Reserve cash against it where a single senior departure would strain your position. Regulated savings schemes are now available as an alternative to holding the liability internally.
- Review it at year end alongside leave accruals, so reported profit is not overstated by an obligation you have not recognised.
Our accounting and bookkeeping service maintains the employee-by-employee accrual as part of monthly close, so the figure in your accounts is the figure you would actually pay, and a resignation becomes an administrative event rather than a cash shock.
What employers and employees get wrong
Budgeting on total salary.
The most common error, in both directions. Employers provisioning on total package over-reserve; employees expecting a payment on total package feel short-changed. The base is basic salary.
Assuming resignation forfeits it.
It generally does not. The belief persists because it reflects rules that no longer apply.
Treating it as a cost of the final month.
It is earned across the whole relationship. A company that has never recognised the accrual carries an undisclosed liability, which matters at audit, at a funding round and at any sale of the business.
Assuming a free zone employee sits outside the regime.
End-of-service entitlement is a feature of employment across UAE jurisdictions. The administering authority differs and some zones run their own savings arrangements, but the obligation is not something a jurisdiction choice removes. Do not pick a free zone structure expecting to avoid it.
What drives the size of the liability
We publish no figures, because gratuity is specific to one contract and one service history. What moves the total:
- Length of continuous service — the dominant factor, and not linear, because the rate improves with longer service.
- Basic salary at exit, rather than the average across the employment, and the basic-to-allowance split behind it.
- Unpaid leave or any break in service.
- The reason for leaving, and the statutory ceiling that caps long senior service.
If you are modelling the cost of employing people as part of a setup decision, the UAE business setup calculator covers the licence, visa and permit side against current authority schedules.
Common questions
Is gratuity calculated on my basic salary or my total package?
Basic salary as stated in the registered contract. Allowances, commission, bonus and overtime are excluded.
Do I lose my gratuity if I resign?
Under the current framework, no — provided the qualifying period of continuous service is complete and the exit does not fall into the misconduct categories that forfeit entitlement.
Can an employer pay gratuity in instalments?
The settlement is due on termination. Instalments are something to agree with the employee, not an employer right, and an unpaid settlement holds up the visa cancellation you need.
If I move between two companies under the same owner, does my service carry over?
It depends on whether service was genuinely continuous with the same legal employer, which is a question about entities and visa records rather than ownership. Groups restructuring across mainland and free zone entities should decide the treatment before moving people, and record it.
Does gratuity apply on a part-time or flexible permit?
Entitlement exists under the alternative work models, calculated proportionately to the actual working arrangement. Document the arrangement properly so the proportion is not disputed later.
Getting the number right
If you are an employer, find out what you have already accrued and whether your accounts reflect it. If an exit is approaching, calculate against the registered contract before anyone commits to a figure. Arrange a consultation and we will confirm the current statutory calculation and apply it to the actual service record.
