A UAE gratuity calculation looks simple until salaries change, unpaid leave builds up or an employee passes five years of service. Here is how the rules work, and what your payroll software must store and accrue.
Key takeaways
An employee's final settlement is one of the few payroll runs that everyone checks. The employee knows roughly what they are owed, the law sets a payment deadline, and a mistake surfaces as a complaint rather than a quiet correction. Yet the UAE gratuity calculation is where many payroll setups are weakest, because the formula is simple and the edge cases are not.
This guide explains the private-sector rules under Federal Decree-Law No. 33 of 2021 and its Executive Regulation, Cabinet Resolution No. 1 of 2022, as they stand in August 2025. It then works through an example and sets out what payroll software must store, and accrue, every month.
Not legal advice: this article summarizes published rules for private-sector employers under the federal labor law. Financial free zones such as DIFC and ADGM have their own employment rules, so check individual cases against MoHRE guidance or with a legal adviser.
Article 51 of the labor law sets out the end-of-service benefit for full-time foreign workers, and the UAE government portal summarizes the same rules.
UAE nationals are treated differently: their end-of-service benefits follow the pensions and social security legislation. Part-time and job-sharing workers receive a share of the full-time gratuity in proportion to their contracted hours, and temporary work of less than a year carries no gratuity.
Employers can also opt into the Savings Scheme, a voluntary alternative set up under Cabinet Resolution No. 96 of 2023, in which they pay monthly contributions into an approved investment fund instead of accruing the traditional gratuity. More on that below.
Payroll software should follow the same sequence a careful HR officer would, and show its working at every step.
Take a foreign employee with a last basic wage of AED 6,000 a month and a total package of AED 10,000 including allowances. They joined on 1 January 2018 and their last working day is 30 June 2025, which gives seven and a half years of service with no unpaid absence.
| Step | Calculation | AED |
|---|---|---|
| Daily basic wage | 6,000 / 30 | 200 |
| First five years | 5 x 21 days x 200 | 21,000 |
| Remaining two and a half years | 2.5 x 30 days x 200 | 15,000 |
| Cap check | Two years' wage, far above the total | Not reached |
| Gratuity before deductions | 36,000 |
Two variations show why the inputs matter. If the employee had taken 73 days of unpaid leave, a fifth of a year, the service would drop to 7.3 years and the gratuity to AED 34,800, because only 2.3 years attract the 30-day rate. If payroll had used the AED 10,000 package instead of the basic wage, it would have overpaid by AED 24,000.
The cap rarely bites. Even measured against basic wage alone, it is only reached after about 25 and a half years of service, but long-serving staff are exactly where a system without the rule goes wrong.
Most gratuity errors are data errors: the formula is applied correctly to the wrong dates or the wrong wage. These are the fields to check in any payroll system.
Gratuity is earned month by month, so the cost belongs in each month's accounts rather than in the month someone resigns. The monthly entry debits an end-of-service expense account and credits an end-of-service provision, a liability. When the employee leaves, the payment is charged against the provision.
There are two common ways to calculate the monthly amount.
| Question | Rate method | True-up method |
|---|---|---|
| How it works | A fixed monthly charge: basic wage / 30 x 21 / 12 in the first five years, and x 30 / 12 after | Recalculate each employee's full gratuity at month end and post the change in the provision |
| At AED 6,000 basic | AED 350 a month, then AED 500 after five years | Whatever the recalculated balance requires |
| Pay rises | Under-accrues, because past years are not repriced | Reprices past service in the month of the rise |
| Unpaid leave and the cap | Needs separate manual adjustments | Handled by the recalculation |
| Best suited to | Stable salaries and small teams | Businesses with regular pay reviews or an annual audit |
The difference shows as soon as salaries move. Suppose our employee's basic wage rises from AED 6,000 to AED 7,500 on their fifth anniversary. The gratuity already earned for those five years jumps from AED 21,000 to AED 26,250, because it is always priced at the last basic wage. A true-up posts the AED 5,250 in that month, while a fixed rate leaves it hidden until the employee leaves.
For the financial statements, agree the method with your auditor. Companies reporting under full IFRS often measure the obligation under IAS 19, sometimes with an actuarial valuation, while many smaller businesses book the amount they would owe if every employee left at the reporting date. It is also one of the provisions to post before the year-end close in our Corporate Tax bookkeeping checklist.
Before go-live, and after every change to payroll rules, run these cases through the system and compare the results with a manual calculation:
For Savings Scheme members, the employer contribution for full-time employees is 5.83% of the monthly basic wage for those with under five years of service and 8.33% for those with more, transferred to the fund within 15 days of the start of each month. Payroll then needs to calculate the contribution and track its payment date, rather than accrue a gratuity.
Odoo's UAE payroll localization is part of Odoo Enterprise Payroll. In Odoo 18, it includes an end-of-service salary rule that applies the 21-day and 30-day rates, and an end-of-service provision rule that sets aside a monthly amount without showing it on the payslip printout or changing net pay. By default, the daily wage is the monthly basic wage divided by 30, and you can set an actual daily salary on the contract instead. The UAE chart of accounts includes an End of Service Provision liability account and an End of Service Indemnity expense account for the postings.
Odoo's provision rule follows the rate method, so plan a periodic true-up journal, or an adjusted rule, if salaries change during the year. As with any system, test the end-of-service rule against the edge cases above before relying on it.
In StarBiz, our AI-driven ERP, the HR and payroll module covers salary structures, allowances and deductions, payslips and end-of-service inputs, and a payroll run produces both the payslips and the accounting entry in one step. Visa, contract and certificate expiries raise reminders weeks in advance, which helps keep employee records complete.
We implement payroll on StarBiz and on Odoo Enterprise for UAE employers. A typical project includes:
Through OdooStar, our Odoo practice, we also support existing Odoo databases. Talk to us through the contact page, call +971 55 973 4524 or email [email protected].
Star Bit Solutions is a software company in Ajman, UAE, founded in 2014. We implement and customize Odoo Enterprise and Odoo Community, and build StarBiz (AI-driven ERP), StarHub (life super app), StarBot (conversational AI), StarLearn (adaptive learning) and StarSense (AI and IoT platform). About us
HR, attendance and payroll with salary structures, end-of-service inputs and payroll entries that post to accounting in one step.
Learn MoreUAE payroll is part of Odoo Enterprise Payroll. We configure contracts, salary rules and accounting entries around your policies.
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On basic salary. Article 51 of the labor law calculates the gratuity on the last basic wage the employee was entitled to, so allowances such as housing, transport, utilities and furniture are excluded. Payroll software should store the basic wage separately from allowances, with its full history.
Within 14 days of the end of the employment contract. Article 53 of the labor law requires the employer to pay the worker's wages and all other entitlements, including the gratuity, within that period, so the calculation should be ready before the last working day.
Yes, indirectly. Days of unpaid absence are not counted in the service period, so they shorten the service used in the calculation. In our example, 73 days of unpaid leave reduce the gratuity for seven and a half years of service on a basic wage of AED 6,000 from AED 36,000 to AED 34,800.
Under Article 30 of the Executive Regulation, divide the contracted working hours per year by the full-time hours per year to get a percentage, then apply it to the gratuity a full-time employee would receive. Temporary work that lasts less than one year carries no gratuity.
A voluntary alternative launched by MoHRE, in which employers pay monthly contributions into an approved investment fund instead of accruing the traditional gratuity: 5.83% of basic wage for employees with under five years of service and 8.33% after that. Employees are entitled to the contributions and any returns within 14 days after their employment ends.
We configure end-of-service rules, salary history and monthly provisions in StarBiz or Odoo Enterprise Payroll, then test them against your own cases.