The UAE’s evolving business environment, coupled with its commitment to fair labor practices, has made end of service benefits a foundational element of employment. For employers and investors seeking business setup in the UAE, understanding these mandatory payments becomes necessary.
Apart from being core legal requirements, end of service benefits reflect the UAE’s broader vision of a secure, equitable workplace for its diverse expatriate and national workforce.
Governed by the UAE Labour Law, these benefits ensure that employees receive financial recognition for their service and that employers uphold transparency and compliance.
This post breaks down everything business owners and HR professionals should know about end of service benefits.
END OF SERVICE BENEFITS IN THE UAE – MAJOR ASPECTS
1. What Are End of Service Benefits?
End of service benefits, commonly referred to as gratuity, are lump-sum payments made to employees upon the conclusion of their employment, provided they have completed at least one year of continuous service. These payments are calculated based on the employee’s basic salary and years of service.
While they are often viewed as a closing obligation at the end of an employment contract, they are also a major factor to consider for any business setup services provider or company formation consultant assisting new entrants in the UAE market.
2. Who Is Eligible?
Eligibility is straightforward but varies slightly depending on nationality and employment contract type. Here are the key points to remember.
- Expatriate employees are entitled to gratuity payments after completing one year of continuous service.
- UAE and GCC nationals are generally enrolled in national pension schemes, such as the GPSSA or ADPF, instead of receiving lump-sum gratuities.
For both limited and unlimited contracts, employees who resign or are terminated after one year of service, qualify for these benefits, provided the termination isn’t due to gross misconduct.
3. Contract Types and Termination Scenarios
There are a few important distinctions based on the nature of the contract.
- Limited Contracts: Employees receive gratuity based on service length. At contract completion, entitlements are calculated per year served.
- Unlimited Contracts: The calculation is similar but allows for more flexibility in termination.
Termination scenarios such as arbitrary dismissal, redundancy, or mutual agreements may also impact the final settlement.
4. What Happens in Special Cases?
The UAE recognizes evolving work patterns, and regulations extend coverage to:
- Part-time and temporary employees
- Flexible contract holders
For these groups, gratuity is calculated proportionally, reflecting actual working hours compared to full-time equivalents. In addition to gratuity, employees are also entitled to payment for unused annual leave, unpaid wages, and any other agreed benefits. All dues must be settled within 14 days of termination.
5. How Are Gratuity Payments Calculated?
The calculation method for end of service benefits is prescribed by law and depends primarily on the employee’s basic salary and duration of service.
For both contract types:
- For the first five years of service: 21 days of basic salary per year
- For years after the fifth: 30 days of basic salary per year
However, total gratuity cannot exceed two years’ worth of the employee’s salary. Importantly, only basic salary is used in this calculation, excluding bonuses, commissions, and allowances.
6. Process and Documentation
Both employers and employees should follow a clear process to ensure a smooth and transparent exit. Here’s what that looks like.
– Review the employment contract: Clarify the terms related to end of service benefits, including specific clauses and calculations.
– Give proper and timely notice: Employees must serve the required notice period as per their contract.
– Maintain accurate records: This includes contract copies, salary slips, and service letters.
– Clarify the Details: Discuss all details related to end-of-service calculations before the final day.
– Seek legal advice if needed: In case of disputes or ambiguities, get professional legal support to ensure fair outcomes.
7. Recent Developments: Savings Scheme Option
In 2022, the UAE introduced a new alternative to the traditional gratuity model: the Voluntary Savings Scheme. This program allows employers to contribute end-of-service funds to a savings plan managed by qualified investment institutions.
– Important Things to Note
For foreign investors eyeing company formation in the UAE, here are a few key things to remember before entering the UAE market.
– The Ministry of Human Resources and Emiratisation (MOHRE) governs labor relations and ensures compliance with end-of-service benefit laws.
– Currently, the UAE does not impose personal income tax, so gratuity payments are not taxed.
– If an employer fails to pay gratuity, employees can file a complaint with the MOHRE. Non-compliance may result in legal penalties, business license suspension, or bans on future hiring.
Whether you’re a new employer navigating your first business setup in the UAE or an established company scaling operations, end of service benefits should be a key part of your compliance and HR strategy.
As UAE labor law continues to evolve in 2025, proactive planning and clear communication remain the best tools for ensuring a fair and lawful employee exit process.
For businesses investing in a new UAE presence, choosing a business setup service provider like Nimbus Consultancy, that understands the nuances of labor law can make the difference between a smooth launch and costly setbacks.