End of Service Gratuity (Gratuity) is a statutory severance pay across most Middle Eastern jurisdictions and one which is conceptually analysed as akin to a retirement savings scheme or pension scheme. This article explores some of the common pitfalls and tricky issues which arise in relation to statutory Gratuity in the United Arab Emirates (UAE) under Federal Law No.8 of 1980 Regarding the Organisation of Labour Relations, as amended (UAE Labour Law). This is, however, a regional issue and many of the points flagged below will apply equally across the Middle East.

Potential Pitfalls when Calculating Gratuity

The UAE Labour Law sets out a prescriptive formula for calculating Gratuity and whilst it does not expressly state that this benefit is payable in relation only to service in the UAE this is certainly the accepted position. However, many employers often inadvertently recognise non-UAE employment service through contractual agreement, for example where an employee is an international transfer from another jurisdiction within the business.  It may be possible to recognise seniority but contractual provisions should be carefully worded so that the Gratuity benefit is not thereby enhanced.  

Another area for consideration is where an employee receives commission or bonus payments during the employment. The UAE Labour Law provides that Gratuity should be calculated on the basis of remuneration excluding all benefits in kind and any type of allowance. This wording leaves the position of commission or bonus payments potentially ambiguous and whether or not such payments should be taken into consideration when calculating Gratuity will very much depend on the particular details of any commission or bonus scheme.

Gratuity as an Inherent Employee Entitlement

Employers new to the Middle East can sometimes be surprised at the inherent nature of the entitlement to Gratuity and that it is, generally speaking, payable regardless of whether the employee resigns (albeit sometimes subject to reductions, explained below) or is dismissed (other than for gross misconduct).

Gratuity may be subject to reductions where an employee resigns from his/her employment depending on the type of contract and the employee's length of service. However, once an employee's service reaches 5 years, they will be entitled to their full Gratuity payment, notwithstanding that they have resigned from their employment.

No Gratuity is payable where an employee's employment is terminated for one of the exhaustive list of gross misconduct reasons set out under Article 120 of the UAE Labour Law. However, this Article is generally reserved for the most serious acts of gross misconduct, often involving a criminal element, and in practice it is extremely difficult to validly terminate on this basis.

More commonly, in cases of poor performance or misconduct, employers will terminate on notice for, what is referred to under the UAE Labour Law as, a "valid" reason. In such circumstances, the employee is entitled to their full Gratuity, notwithstanding that the reason for the termination of their employment is their poor performance or misconduct, for example.

Interaction with Pensions – GCC Nationals

The UAE has in place reciprocal pension arrangements with other GCC countries The aim of this legislation is to ensure that a GCC national receives the same treatment or benefit with regard to state pension as he would have had if he worked in his home country, in accordance with the laws of his home country.

There are minimum and maximum earning levels for such pension contributions to be made and a GCC national is potentially entitled to Gratuity on any basic salary earned in excess of the maximum earnings level for pension contributions. On a contractual basis, employers should take care not to inadvertently grant such GCC employees Gratuity in addition to contributions into the state pension scheme.

Interaction with Pensions - Non GCC Nationals

Under the UAE Labour Law, it is possible for an employer to contribute into a pension scheme for the employee in lieu of the obligation to pay Gratuity. On termination of employment, the employee can choose to receive either pension or Gratuity, whichever is more favourable to him/her.

In our experience, it is often difficult for employers to establish that contributions made into a pension scheme on the employee's behalf validly replace the right to Gratuity, particularly where such contributions are made into an international pension scheme.

The UAE Courts appear to be reluctant to accept that contributions into an international pension scheme are more beneficial to an employee than Gratuity as an employee will generally only receive the pension benefit once he/she reaches the relevant retirement age, whereas Gratuity is payable immediately.

Nonetheless, employers may wish to offer pension benefits as a means of retention or, increasingly, because it is market practice to do so (particularly for senior or C-suite level employees and internationally mobile employees). Where such a benefit is provided, the risk of having to provide both Gratuity and the pension benefit may be mitigated through contractual provisions to ensure a double benefit is not provided; essentially through securing clear employee consent to the pension being in lieu of Gratuity and also agreed claw back of contributions if Gratuity is later claimed by the employee. The rules of any pension scheme or savings scheme should also be reviewed and the administrator or provider of the scheme consulted to ensure that the schedule rules themselves can protect the employer as much as possible.