How to Handle Employee End-of-Service Gratuity in a UAE Tech Company

What Is End-of-Service Gratuity?

End-of-service gratuity is a lump sum payment that UAE employers are legally required to make to employees when their employment ends, provided the employee has completed at least one year of continuous service. It is governed by the UAE Labour Law and applies to employees on UAE work visas, regardless of nationality.

How Is It Calculated?

The calculation depends on the length of service and the reason for termination.

For employees who have completed between one and five years of service, the gratuity is calculated at 21 days of basic salary for each year of service.

For employees who have completed more than five years of service, the gratuity is calculated at 30 days of basic salary for each year of service beyond five years, with the first five years still calculated at 21 days per year.

The calculation is based on the employee's basic salary only — it excludes allowances such as housing, transport, and other benefits.

The Accounting Treatment

From an accounting perspective, gratuity is an accrued liability. Best practice is to accrue for gratuity on a monthly basis in the company's accounts, so that the financial statements accurately reflect the obligation.

Failing to accrue for gratuity means that the company's balance sheet understates its liabilities, and the profit and loss account overstates profit. This is particularly relevant for companies preparing financial statements for Corporate Tax purposes, as the gratuity accrual is a deductible expense when it is properly accounted for.

The DEWS Scheme

In 2020, the UAE introduced the DIFC Employee Workplace Savings (DEWS) scheme for companies in the DIFC. This scheme replaces the traditional end-of-service gratuity model with a monthly contribution to a savings fund managed on behalf of the employee. Some other free zones have introduced similar schemes.

Practical Steps for Tech Founders

Maintain a gratuity schedule for each employee, updated monthly, showing the accrued liability based on their current basic salary and length of service. Review this schedule whenever an employee receives a salary increase.

Conclusion

Gratuity is a straightforward obligation once you understand the rules, but it requires consistent attention throughout the employment relationship. Maintaining accurate accruals protects your company's financial statements.

Need help setting up gratuity accounting for your UAE tech company? Contact Khizr UAE.

WhatsApp: 050 428 3999

Email: info@khizruae.com