New savings schemes are changing how end-of-service benefits are structured, but most workers still rely on outdated assumptions. Here’s what the law says and what to do next.
Under Federal Decree Law No. 33 of 2021, end-of-service gratuity in the UAE is calculated based on the employee’s last basic salary and length of service, excluding allowances. For full-time employees under unlimited contracts who have completed one year of continuous service, gratuity is typically calculated as:
- 21 days of basic salary per year for the first five years
- 30 days of basic salary per year thereafter
The maximum gratuity payable cannot exceed the equivalent of two years’ salary. Employees terminated for gross misconduct are not entitled to gratuity, and resignation may affect payout depending on circumstances and contract terms.
For part-time and flexible workers, proportional entitlements are outlined under Cabinet Resolution No. 1 of 2022.
How resignation and termination impact gratuity
If an employee resigns, gratuity remains payable as long as they have completed at least one full year of service. However, early resignation may affect the amount if stipulated by the contract.
If an employee is terminated without cause, full gratuity is payable.
However, termination for cause (as defined under Article 44) could lead to forfeiture.
Employees under fixed-term contracts are entitled to gratuity unless the termination falls under Article 44 or if they leave before completing one year.
The shift to investment-based schemes
The traditional model, where employers pay gratuity from operational cash flow, is evolving.
According to Milad Azar, Market Analyst at XTB MENA: “The UAE’s traditional end-of-service gratuity, a lump-sum payment calculated on an employee’s final basic salary and service length, is evolving with the introduction of voluntary, investment-based schemes.”
The DIFC’s DEWS scheme and similar models supervised by MOHRE now provide defined contribution alternatives. Here, employers fund employee accounts monthly, usually 5.83% or 8.33% of basic salary based on tenure.
“Historically, gratuity was paid as a lump sum by employers at the end of an employee’s tenure.” said Wilson Varghese, Senior Executive Officer at Zurich Workplace Solutions (ZWS). “With the introduction of regulated and well-governed schemes like DEWS, we’re seeing a positive policy shift.”
These schemes mitigate the risk of employer insolvency, which is notable given that 70% of companies in the GCC do not pre-fund gratuity obligations, based on a 2023 WTW survey.
Employees under these new schemes gain access to professionally managed funds with transparency and investment options. However, payouts are market-dependent and subject to fund performance and fees.
“For expatriates, this transition means the potential for higher returns but also bearing investment risks,” Azar noted.
Gaps in coverage and adequacy
Despite improvements, both experts raised concerns about adequacy, especially for middle-income earners.
“Current gratuity payout formulas, which are based solely on an employee’s basic salary and capped at two years’ total salary, face challenges in aligning with rising living costs,” Azar explained.
Varghese echoed his sentiments: “A gratuity is not designed to be a pension, and this alone will not be enough to meet retirement needs.”
One core issue is the disconnect between basic salary and total compensation. Since gratuity is calculated on basic salary, high allowance structures can undercut end-of-service benefits.
Suggested reforms include calculating gratuity based on total fixed pay and mandating participation in funded, regulated schemes with capped fees.
How to integrate gratuity into your financial plan
Both Azar and Varghese stress that gratuity should be actively integrated into financial planning and not treated as a bonus or windfall.
Know your entitlement: Review your employment contract and UAE labour law to understand the exact gratuity for which you are eligible.
Understand your scheme (if applicable): Review the investment structure if your employer has enrolled you in a savings plan (like DEWS). These plans often allow voluntary contributions and post-resignation investment continuity.
Diversify beyond gratuity: Gratuity alone will not meet retirement needs. Consider additional long-term investment vehicles, including mutual funds, ETFs, or structured pension plans.
Plan for resignation or layoffs: If leaving the UAE or switching jobs, factor in how gratuity will be paid (in cash or fund value) and whether it will be subject to local taxes or forex loss upon repatriation.
Consult a professional: If unsure about investment strategies or fund options, seek financial advice. Ensure you understand the risk levels and performance history of your employer’s selected fund managers.
Start early: Varghese advises, “The best time to begin would have been when you started earning if you haven’t – the second-best time is now.”
The UAE continues developing policy frameworks to make gratuity systems more transparent, portable, and equitable. While new schemes are gaining traction in DIFC and among large corporates, adoption on the broader mainland labour market is still limited.
“Making participation in improved, well-regulated investment-based schemes mandatory, coupled with strict caps on management fees (TERs) to prevent erosion of savings, would be beneficial,” noted Azar.
The country’s shift from a pay-as-you-go model to a structured savings approach is a signal to employers and employees alike.
