UK: End Of Service Gratuity: A Recap

Last Updated: 20 June 2013
Article by Sara Khoja

End of service gratuity (Gratuity) is a key benefit for non-national employees working in each of the GCC countries. Both Federal Law No 8 of 1980 on the Regulation of Labour Relations (as amended) (UAE Labour Law) and DIFC Law No 4 of 2005 (as amended by DIFC Law No. 3 of 2012) (DIFC Employment Law) set out a formula for calculating Gratuity and contain specific provisions providing for reduction of the entitlement in certain circumstances. However, how to calculate Gratuity and what rate of accrual should be adopted is often not clear cut. Here, we examine some of the more intricate factors.

Duty to Accrue

Strictly speaking, there is no legal obligation to accrue for Gratuity during an employee's employment. However, it is best practice to do so and the entitlement (calculated on final salary and subject to 12 months' continuous employment) becomes payable on termination of employment.  Under the DIFC Employment Law final entitlements should be paid within 14 days of the employment terminating.  Under Ministerial Resolutions issued by the Ministry of Labour, the 51% shareholder of a limited liability entity whose name is registered with the Ministry of Labour and in whose name the company establishment card is registered can be personally liable for Gratuity payments. When determining the rate of accrual, an employer may wish to take into account that under the UAE Labour Law, Gratuity is reduced if the employee resigns in the first 5 years of employment on a staggered basis. However, under the DIFC Employment Law there is no reduction attributable to employee resignation.

Working days or calendar day? Remuneration or basic salary?

Under Article 8 of the UAE Labour Law, all entitlements under the law are calculated by reference to calendar days, a year being taken to be 365 days and a month 30 days.  Until the amendments to the DIFC Employment Law in December 2012, it was arguably unclear whether Gratuity should be calculated according to calendar days or working days. Following the amendments, it is now clear that Gratuity is calculated under DIFC Employment Law according to calendar days and is also calculated on basic salary only, excluding all allowances, benefits in kind, bonus and commission.

Further clarifications in the Gratuity section of the amended DIFC Employment Law state that the daily figure for an employee's basic salary should be calculated according to the number of days in the year. In other words, the daily salary figure should be arrived at by dividing the annual basic salary as at termination by 365, rather than dividing the monthly basic salary by 30.

Bonus and commission?

The position regarding whether bonus and commission should be taken into account when calculating the Gratuity entitlement is less clear cut under the UAE Labour Law. Article 132 of the UAE Labour Law sets out the formula for calculating Gratuity and refers to 'remuneration'.   Article 134 specifically excludes all allowances and benefits in kind which means that potentially all other payments falling within article 1's definition of 'remuneration' must be taken into account for Gratuity purposes.  Article 1 defines remuneration as 'all payment made to the worker on a yearly, monthly, weekly, daily, hourly, piece of work, or production or commission basis, in return for the work he performs under the contract of employment, whether such payments are made in cash or in kind. Remuneration shall include the cost of living allowance. It shall also include any grant given to the worker as a reward for his honesty or efficiency if such amounts are provided for in the contract of employment or in the internal regulations of the establishment or have been granted by custom or common practice to such an extent that the workers of the establishment regard them as part of their remuneration and not as donations.'

This position means that a bonus may need to be taken into account for Gratuity if it is guaranteed or operates in a similar way to commission, that is it is payable where the employee achieves specific targets. If the employee has a track record of achieving target and being paid bonus he may also be able to establish the integral nature of the bonus payments to his remuneration.

As regards commission, the UAE courts have in the past 3 years issued a number of decisions awarding Gratuity on the basis of basic salary and commission. These decisions have by and large involved claims from employees in sales roles.  The approach adopted has been to work out an average of commission earned per day by taking the total commission and dividing it over a certain number of years. The number of years the courts have taken into account vary according to what it regards as being reasonable (this has ranged to being 6 months, 1 year or even up to 2 to 3 years). 

Pension or Gratuity

Under the DIFC Employment Law, an employer may replace the Gratuity entitlement with a company pension scheme into which pension contributions by an employer are made.  An employee must be given the choice of opting in writing for the pension scheme in lieu of Gratuity.  Under the UAE Labour Law, the position is more complex.  Where an employer offers a pension scheme in lieu of Gratuity, it must not be less beneficial than the Gratuity entitlement and the employee remains entitled to opt for whichever is the more favourable benefit of the two. 

GCC nationals

Finally, a note on the position of GCC nationals; GCC nationals are entitled to membership of state pension schemes and for contributions to be made at the applicable rate (including employer, employee and state contributions).  This pension entitlement is often stated to be in lieu of any Gratuity entitlement and this position is largely true. However, each GCC country's social security legislation sets out an upper earnings limit for pension contributions to be applicable and due.  For any earnings over the specified earnings level, the employee will be entitled to Gratuity.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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