Does gratuity include allowances or only basic salary?

[jerrelljaeschke]

Under the UAE Labour Law (Federal Decree Law No. 33 of 2021), end-of-service gratuity is calculated only on the employee’s basic salary, not on allowances, bonuses, or other benefits.


Key Points:

1. Basic Salary Only
   • The basic salary is the fixed amount agreed upon in the employment contract for the employee’s role.
   • It excludes variable components such as housing allowance, transportation allowance, telephone allowance, or performance bonuses.
2. Why Allowances Are Excluded
   • Allowances are considered additional benefits rather than a core component of salary.
   • The law ensures consistency in gratuity calculation across all employees, regardless of the allowances their employers may provide.
3. Example:
   Suppose an employee earns:
   • Basic Salary: AED 10,000/month
   • Housing Allowance: AED 3,000/month
   • Transport Allowance: AED 1,000/month
   For gratuity calculation, only the AED 10,000 basic salary is considered. The allowances (AED 4,000 total) are excluded.
4. Implications for Employers and Employees
   • Employers cannot legally include allowances in the gratuity calculation.
   • Employees should verify their final settlement to ensure gratuity is calculated correctly based on basic salary alone.
5. Exceptions
   • If an employment contract explicitly states that certain allowances are considered part of the basic salary for gratuity purposes, then they may be included—but this is rare and must be documented.
6. Best Practice
   • Employers typically provide a final settlement breakdown, showing basic salary, allowances, and gratuity separately.
   • Employees can calculate their expected gratuity by taking basic salary × years of service × applicable days per year.