United Arab Emirates

The rules on severance pay in detail

Generally, in the UAE, the applicable law is Law No 8 of 1980 Regulating Labour Relations, as amended (the ‘Labour Law’). However, there are two exceptions:

  • Employees working for a company with a place of business inside the Dubai International Finance Centre (‘DIFC’) and who are based in, or ordinarily work in, the DIFC are subject to the DIFC Employment Law No 4 of 2005, as amended.
  • Employees working for a company with a place of business in the Abu Dhabi Global Market (‘ADGM’) and who are based in, or ordinarily work in, the ADGM are subject to the ADGM Employment Law No 1 of 2014.

In the UAE:

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 (excluding allowances), 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). Such circumstances are narrowly construed.

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 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

 

In the DIFC and ADGM:

The position is the same in both the DIFC and the ADGM, except that there is no reduction to the ESG amount when an employee resigns.

In addition, by contrast to the UAE, ESG calculations do not take into account commissions or bonuses in either the DIFC or ADGM.

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 2018

 

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