UAE: Mandatory end of service payments - what are employees entitled to on termination?

A recent ruling of the UAE Ministry of Justice has confirmed that it is not lawful for an employer to agree with its employees to avoid the end of service gratuity provided for under the UAE Labour Law.

 Under Article 132 of the Labour Law, upon termination, the employer must pay its employees a severance payment (or "gratuity") of 21 days' salary for each of the first five years of service and 30 days' salary for each additional year of service, provided that the employee has completed at least one year's continuous service.

The salary used in the calculation of the end of service gratuity is the basic final salary, without allowances. Commission payments have been considered by the Dubai Court of Cassation to be included in the calculation as salary, taking an average of the payments over a reasonable period of time in determining the amount of the gratuity. There is no guidance on what the reasonable period should be, so it falls within the discretion of the trial judge on the facts (or for the parties to agree). The maximum amount payable as a gratuity is two years' salary, which is a considerable additional liability for employers.

There are restrictions on the circumstances in which the full gratuity must be paid. The restrictions for employees employed on an indefinite basis (an indefinite term employee) differ to those for fixed term employees.

• For an indefinite term employee, if he has worked for more than one and less than three years for the employer and the termination is at the request of the employee, he is entitled to only one third of the accrued end of service gratuity. If he has served for more than three years and less than five years, the amount to which he is entitled is increased to two thirds of the full amount, and for service of five years or more the full amount is payable.

• For a fixed term employee who leaves his employment before the end of the contract at the employee's request, he is only entitled to be paid an end of service gratuity if he has been employed for at least five years, otherwise nothing is payable. In practice, this means that the employee has completed an initial fixed term contract because fixed term contracts must not have a duration of more than four years at a time.

The difference in the treatment of indefinite term and fixed term employees reflects the fact that there is an expectation that a fixed term contract will be completed and that there is a value to be placed on the certainty of duration for both the employer and employee. It is important to recognise that if a fixed term employee is employed for a fixed term period of less than five years (but more than one year) and completes the contract period but then wishes to move on, the full end of service gratuity is payable without the sliding scale of entitlement which is applied to indefinite term employees who resign within the same period.

In both cases, if the termination is brought about by the employer, the full amount becomes payable to the employee unless the termination is for cause under Article 120 of the Labour Law (which lists circumstances which amount to gross misconduct).

The Labour Law requirement to pay an end of service gratuity is designed to provide an amount in lieu of a pension contribution for expatriate employees. It is possible to structure the gratuity in the form of a monthly payment if the employer operates a corporate pension scheme, at the option of the employee. If the employee leaves in circumstances which mean that he was not entitled to the end of service gratuity, later on, it is unlikely that the employer would be able to claim back the payments made under such a scheme. However, employers should factor in the cash flow issues of making a large lump sum payment on termination when structuring their employment arrangements.

 Other payments which may also be due on termination include, under the Labour Law:

• for an indefinite term employee, payment of salary in lieu of notice;
• for a fixed term employee, payment of salary for the remainder of the contract period or for three months (whichever is the shorter);
• payment for accrued annual leave (unless the employee takes it before termination); and
• the cost of a travel ticket to repatriate an expatriate employee (unless the employee has found alternative employment).

If the termination has been made for arbitrary reasons as specified in the Labour Law (unfair dismissal in effect), then there is a potential payment of three months' salary plus benefits. If accommodation is provided, as part of employment, the employee is also allowed a grace period within which he must leave the property of 30 days from the date of termination.