How to Compute Gratuity in UAE - 2025 Guide

Tidyhire Team -

When an employee hands in their resignation or their contract ends, what happens next financially is more than just a formality—it’s a legal obligation that can impact your company’s credibility. Are you confident your team is correctly applying the latest gratuity rule in UAE? What if a slight oversight in the calculation ends up in a costly legal dispute or affects your employer brand?

Whether you're a recruitment professional drafting offer letters, an HR manager finalizing exit paperwork, or a business owner ensuring payroll compliance, understanding how to compute gratuity accurately in 2025 is a non-negotiable skill.

This guide breaks down exactly what’s changed, what stays the same, and how you can avoid common mistakes. You’ll learn who qualifies, how to calculate the amount, and which tools can simplify the process. 

By the end, you'll not only protect your organisation but also handle gratuity payouts with confidence and clarity.

Let’s first clarify who qualifies for gratuity under the latest UAE labour regulations.

Who Is Entitled to Gratuity in 2025?

Eligibility rules remain largely unchanged, but clarity is essential.

You must pay end-of-service gratuity if:

  • The employee has completed one year of continuous service.
  • The contract type is either limited or unlimited.
  • The termination is not due to gross misconduct (per Article 120 of the UAE Labour Law).

Additional clarifications:

  • Gratuity applies to full-time, part-time, and temporary employees.
  • Unpaid leave doesn’t count toward total service duration.
  • Gratuity must be paid even if the employee resigns—rules vary by contract type.

Understanding these terms ensures legal compliance and avoids disputes.

What About Part-Time or Temporary Workers?

Yes, even part-time employees qualify—but on a pro-rated basis.

Calculation: 

Gratuity = (Total hours worked ÷ Full-time equivalent hours) × Full-time employee’s gratuity

This approach ensures fair treatment across various employment types, aligned with 2025 legal updates.

Also Read: Upcoming Public Holidays in UAE for 2025

Now that you know who’s eligible, here’s how to calculate gratuity precisely and fairly.

How to Calculate Gratuity Accurately?

Accurately calculating gratuity is essential to comply with labour laws, avoid penalties, and maintain positive employee relations. Mistakes can lead to legal issues or dissatisfaction among staff, impacting your organisation’s reputation.

Step-by-step calculation

Find the daily wage:

  • The daily wage is calculated by dividing the basic salary by 30. Note that the basic salary is the fixed monthly amount excluding allowances, and it is different from the daily wage, which is a derived figure used for gratuity calculation.

Calculate annual gratuity:

  • For the first 5 years of service: multiply 21 days’ wage by the number of years worked.
  • For any years beyond 5: multiply 30 days’ wage by the additional years.

Total gratuity:

  • Add the gratuity for the first 5 years and the gratuity for the remaining years:

Total gratuity = (21 days’ wage × years up to 5) + (30 days’ wage × years beyond 5)

This method ensures your calculations are precise and fair, reflecting the employee’s tenure and entitlements correctly.

Example Calculation:

  • Basic Salary: AED 8,000
  • Daily Wage: AED 8,000 ÷ 30 = AED 266.67
  • Gratuity for 3 Years: 266.67 × 21 days × 3 years = AED 16,800

Important Note: The total gratuity amount cannot exceed the equivalent of two years’ salary, regardless of tenure. This cap ensures compliance with UAE labour laws and protects both employer and employee interests.

Next, understand how your contract type impacts the gratuity amount you receive or pay.

How Contract Type Affects Gratuity?

In the UAE, the type of employment contract—limited or unlimited—plays a significant role in determining an employee's gratuity entitlement. Understanding these distinctions is crucial for employers and employees to ensure compliance with labour laws and manage expectations around end-of-service benefits.

1. For Limited Contracts

  • If an employee resigns before completing 5 years of service, they are not entitled to any gratuity. This reflects the fixed-term nature of the contract and encourages commitment for the agreed period.
  • If the employee resigns after completing 5 years, they are entitled to the full gratuity amount as mandated by law.
  • In cases where the employer terminates the contract, the employee receives full gratuity regardless of how long they have worked, provided the termination is not due to gross misconduct.

2. For Unlimited Contracts

  • Employees with less than 1 year of service are generally not entitled to gratuity.
  • For service between 1 and 3 years, gratuity is calculated at one-third of the full 21-day wage per year of service.
  • For service between 3 and 5 years, gratuity rises to two-thirds of the 21-day wage per year.
  • After 5 years of continuous service, employees receive the full gratuity entitlement.

3. Termination by Employer

In both limited and unlimited contracts, if the employer terminates the contract without cause (not related to misconduct), the employee is entitled to full gratuity regardless of tenure or contract type. This provision safeguards employee rights and encourages fair treatment.

Also Read: Understanding Working Hours and Leave Policy in UAE Labour Law

Knowing your gratuity rights is essential before discussing the timing and method of payment.

When and How Should You Pay Gratuity?

In the UAE, timely payment of end-of-service gratuity is not just a legal obligation—it’s a key factor in maintaining good employer-employee relations and avoiding costly penalties. Employers must settle gratuity within a strict deadline to comply with labour laws and uphold their reputation.

Deadline

Gratuity must be paid within 14 calendar days from the employee’s last working day. This short window leaves little room for delay, so employers should prepare the final settlement promptly to avoid complications.

Consequences of Delay

Failing to meet this deadline can trigger penalties ranging from AED 5,000 up to AED 50,000, depending on the severity and recurrence of the offence. Repeated delays or outright non-compliance may escalate fines and could result in labour ban sanctions against the company or responsible individuals.

Best Practices

To ensure compliance, companies should integrate gratuity payments into their offboarding process and payroll system. Clear communication with departing employees about their entitlement and payment timeline helps prevent disputes and fosters trust.

To avoid fines and disputes, it’s critical to watch out for common gratuity calculation mistakes.

Costly Errors You Should Avoid

 Getting gratuity wrong can cause big problems for your business. Watch out for these common mistakes:      

  • Using total salary instead of basic salary: Gratuity is based only on the basic salary, so don’t include allowances.
  • Counting unpaid leaves as service: Time off without pay shouldn’t add to the length of service.
  • Not considering contract type: Whether the contract is limited or unlimited changes how gratuity is calculated, especially if the employee resigns.
  • Ignoring partial years: If the final year isn’t complete, make sure to calculate gratuity proportionally, not as a full year.

Avoiding these helps keep your calculations accurate and prevents disputes or penalties down the line.

Let’s clear up some misconceptions that often lead to incorrect gratuity handling.

Common Myths About the UAE Gratuity Rule

Despite its importance, the gratuity rule in UAE is often misunderstood—leading to confusion, disputes, or even non-compliance. Let’s clear up some of the most common myths.

Myth 1: Gratuity includes all salary components.

❌ Incorrect. Gratuity is calculated only on the basic salary, not on the total package or allowances.

Myth 2: Employees must complete five years to be eligible.

❌ Not true. Eligibility starts from one full year of continuous service, not five.

Myth 3: Resigned employees automatically forfeit gratuity.

❌ Wrong. Employees who resign can still receive gratuity—amounts depend on the contract type and duration.

Myth 4: Part-time staff are not entitled to gratuity.

❌ They are. Under the latest law, part-time and temporary employees receive gratuity on a pro-rata basis.

Myth 5: Employers can delay gratuity for months.

❌ Delays beyond 14 days can result in legal action and penalties. Timely payment is mandatory.

Myth 6: Gratuity isn’t required if an employee is on probation.

✅ This one’s actually true. Employees terminated during probation are not eligible for gratuity.

Myth 7: All terminations result in full gratuity.

❌ Not always. In cases of gross misconduct, gratuity can be fully or partially withheld.

Myth 8: There’s no need to document gratuity payment.

❌ Always document it. A signed record protects both employer and employee, especially in legal disputes.

Also Read: Work Permit and Visa Cancellation Procedures in UAE

Dispelling myths is easier when you use reliable tools designed for accurate gratuity calculation.

Tools for Accurate Gratuity Computation

To calculate gratuity correctly, rely on official tools tailored to your free zone or emirate:

All these calculators are regularly updated to match the latest 2025 labour regulations, helping you avoid costly errors.

Finally, streamline your hiring process with TidyHire to manage recruitment and gratuity effortlessly.

Bonus Tip: Automate Hiring, So Gratuity Isn’t the Only Thing You Get Right

Staying compliant with the gratuity rule in UAE is one thing—scaling your hiring process efficiently is another. If your team is still stuck juggling spreadsheets, bulk emails, and endless follow-ups, it might be time to upgrade.

That’s where TidyHire can help. It’s an AI-powered recruitment platform built for fast-moving hiring teams. Whether you're a recruiter sourcing at scale or an HR manager handling multiple roles, TidyHire simplifies outbound hiring from start to finish.

Here’s how it supports your recruitment strategy:

  • Automated sourcing from 700M+ global profiles across 30+ databases—verified contact info included.
  • Hyper-personalised communication via LinkedIn, email, SMS, and WhatsApp—powered by generative AI.
  • Seamless integration with your team’s existing tools—Slack, Microsoft Teams, and more.
  • Smart dashboards that offer daily reports, campaign insights, and performance metrics.
  • Recruitment experts on demand through its Xceptional Recruiters service—ideal for high-volume or specialised roles.

By automating repetitive tasks and streamlining candidate engagement, TidyHire frees up your recruiters to focus on what matters—relationship building and strategic hiring. And yes, that also means fewer manual errors, better candidate experiences, and faster time-to-hire.

So while you stay compliant with UAE labour laws, TidyHire helps you stay competitive in today’s hiring market.

Final Thoughts: Stay Compliant, Hire Smarter

Understanding the gratuity rule in UAE is essential—but it’s just one part of a bigger HR puzzle. The real win comes when your hiring and exit processes are efficient, compliant, and scalable.

That’s where TidyHire adds real value. It doesn’t just automate outbound hiring—it empowers your HR and recruitment teams with AI-driven sourcing, personalised communication, and clear insights. You’ll spend less time on admin and more time building a team that stays.

And when it’s time to offboard employees? You’ll already have the right documentation, timelines, and processes in place—because hiring smarter means exiting smarter too.

Take a free demo tour of TidyHire and see how AI can transform your recruitment from reactive to strategic.

Frequently Asked Questions (FAQs) About Gratuity in UAE – 2025

1. Is gratuity calculated on basic salary or total salary?

Only the basic salary is used in gratuity calculation. Allowances like housing, transport, and commissions are excluded.

2. Can an employee be denied gratuity if they resign?

Not always. Employees who resign are still eligible under certain conditions. Eligibility and amount depend on contract type and years of service.

3. What’s the minimum service period to receive gratuity?

A minimum of one year of continuous service is required under the UAE Labour Law to qualify.

4. Does unpaid leave affect gratuity?

Yes. Unpaid leave is excluded from the total service period used in gratuity calculations.

5. Is there a cap on the maximum gratuity payout?

Yes. The total gratuity cannot exceed two years’ worth of the employee’s basic salary.

6. Are part-time employees eligible for gratuity in the UAE?

Yes. Part-time and temporary workers qualify based on a pro-rata formula reflecting actual work hours.

7. When should gratuity be paid after termination or resignation?

It must be paid within 14 days of the employee’s final working day. Delays may lead to fines.

8. What happens to gratuity if the employee is terminated for misconduct?

Employees dismissed for gross misconduct (as per Article 120) forfeit gratuity under UAE law.

9. Are employers required to use official gratuity calculators?

It's not mandatory, but using tools like the MOHRE Gratuity Calculator helps ensure compliance and accuracy.

10. How can TidyHire support HR teams with gratuity and exits?

While TidyHire doesn’t calculate gratuity, it automates outbound hiring, candidate engagement, and reporting. That means fewer manual errors, better tracking, and a smoother employee lifecycle from hire to exit.