United Arab Emirates

The rules on severance pay in detail

An employee who has at least one year’s continuous service with an employer is entitled to an end of service gratuity payment (an ‘ESG’) upon termination of their employment. The ESG is calculated with reference to basic salary (excluding any allowances) as follows:

  • 21 calendar days’ basic pay for each year of service for the first five years of service; and
  • 30 calendar days’ basic pay for each year of service above five years of service.

Although ESG is calculated on basic salary, payments such as bonuses or commission may be included, depending on the terms for making such payments and the express provisions of the employment contract. The employer may deduct any amounts owed to the company from the ESG payment. ESG is subject to a cap of two years’ wages. It is not payable in the event that an employee is validly terminated without notice (gross misconduct).

Employees who are entitled to a state pension (UAE nationals and those from GCC countries) are not entitled to any ESG.

Expatriate employees who are provided with a private pension are not entitled to ESG if they have opted to receive a pension in lieu of ESG and that the benefit they receive is equal to or more favourable than their ESG entitlement.

There is a sliding scale of deductions to the ESG when an employee resigns, as follows:

Service Fixed term contract  Indefinite term contract

    1-3 years     

No entitlement to gratuity

Gratuity reduced by two thirds

   3-5 years   

No entitlement to gratuity

Gratuity reduced by one third

 5+ years  

Full gratuity 

Full gratuity

 

Dubai International Financial Centre (‘DIFC’) and Abu Dhabi Global Market (‘ADGM’) are federal financial free zones administered by the governments of Dubai and Abu Dhabi respectively, where different rules apply than those of the UAE. The rules for the DIFC and ADGM are generally the same as the UAE in this respect. However, there is no reduction to the ESG amount when an employee resigns. Further, for the purpose of calculating the ESG, basic salary is calculated differently in the DIFC and ADGM. Therefore, although the overall calculation is the same as in the UAE, the end amount will differ.

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Author: Al Tamimi & Co

Date: December 2019