End-of-service gratuity is a statutory entitlement for employees in the UAE, and managing it correctly is an important part of running a compliant tech business. Many founders — particularly those who have not previously employed staff in the UAE — are unfamiliar with how gratuity works and how it should be accounted for.
How to Handle Employee End-of-Service Gratuity in a UAE Tech Company
End-of-service gratuity is a statutory entitlement for employees in the UAE, and managing it correctly is an important part of running a compliant tech business. Many founders — particularly those who have not previously employed staff in the UAE — are unfamiliar with how gratuity works and how it should be accounted for.
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. This means that as each month passes and an employee accumulates service, the company is building up a liability that will eventually need to be paid. 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. If your company operates in one of these zones, you should check whether a savings scheme applies to your employees.
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, as the gratuity calculation is based on the final basic salary at the time of termination, not the salary at the time of accrual.
When an employee leaves, calculate the final gratuity entitlement carefully, taking into account the reason for termination and the exact length of service.
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 and ensures you are never caught short when an employee departs.
Need help setting up gratuity accounting for your UAE tech company? Contact Khizr UAE for professional support.
WhatsApp: 050 428 3999
Email: info@khizruae.com