Formula to calculate gratuity Pay
One should know the calculation of Gratuity in his/her salary structure, it has a vital role in your present CTC & your future plans.

Calculation of gratuity is very important. It helps you to identity if any mistake is made by your Employer. Gratuity pay is calculated based on your basic wage/salary, paid into your account. Additional allowances or bonuses aren’t included in the calculations. The formula to calculate your gratuity pay depends on your contracts and repair period.

Different Contract types:

Fixed Term Contract: Where the worker sanctioned to remain with the company for a specific number of years with a particular end date. If he/she resigns before the end of this period that could mean one or all of these; a black listing of the Employee, limiting your labour rights or perhaps payment of compensation to the employer.

Unlimited Contract: Where no such period clause or number of years, and therefore, has no end date. However, a notice period of 1 to 3 months is applicable for termination of contract from either side.

According to Article 139 of the Labour Law:

“The employee is still entitled to gratuity pay if they are terminated from their job, without breaking the rules”. 

According to Article 134 of the Labour law:

"The wage used as a basis for calculating the gratuity shall not include payments made to the worker in reimbursements, housing, transport and travel allowance, overtime pay, representation allowance, cashier’s allowances, children education allowance, allowances for recreational and social services, and the other bonuses or allowances”.

Gratuity Unpaid:

The employee shall be empty of his/her end of service gratuity under following two circumstances:

1. If he or she is dismissed from services, for any of the explanation mention in Article 120 or if he or she quits employment, visible of avoiding the dismissal in accordance with the article. (This article deals with dismissal during or at the end of probation, or due to charges of material loss, failure to perform basic duties even after a warning, interrogation, crime etc.)

2. If he or she resigns abruptly just in cases aside from those set in  Article 121 (if an employer breaches the contract or in case of assault of any kind), and such with regards to unlimited contracts, or prior to the completion of five years of continuous service in limited contracts.

Formula for Calculating Gratuity:

1. Basic salary ÷ 30 = Daily wage
2. Daily wage x 21 = 1 year gratuity figure (Or x30 if applicable)
3. 1 year gratuity figure x years of service = Total gratuity owed 

Only Continue for Unlimited Contract calculation

4. Total gratuity owed ÷ 3 = One third (1/3) of total gratuity
5. Either take this figure (between 1 and 3 years) or multiply it by two (between 3 and 5 years)
6. For over 5 years, total gratuity owed will be payable.

Fixed-Term Contract Gratuity Calculation

Less than 1 year of service

If an employee leaves their job within one year, they are not eligible for a gratuity payment.

Between 1 year and 5 years of service

For service spanning 1 to 5 years, employees are entitled to gratuity based on 21 days of salary for each year worked.

5 or more years of service

If an employee completes 5 or more years of service, they receive gratuity equivalent to 21 days of salary for the first 5 years, along with an additional 30 days of salary for each year beyond the initial 5 years of service.

Let's take an example to make this concept clearer:

Assume that an employee's basic salary is AED 12,000.

So, their daily wage would be calculated as 12,000/30 = AED 400.

To determine the gratuity amount for the employee, we need to multiply the daily wage by either 21 or 30, depending on the length of their service with the company. For instance, if the employee is entitled to 21 days of salary, the calculation would be 400 * 21, resulting in AED 8,400. This gratuity amount is what the employee will receive for each year of their service.

Unlimited Term Contract Gratuity Calculation

Less than 1 year of service

Leaving work before completing one (1) year of service means that you are not entitled to any gratuity pay.

Between 1 year and 3 years of service

Employee is entitled to one third (1/3) of the 21-days gratuity pay.

Between 3 years and 5 years of service

Employee is entitled to two thirds (2/3) of the 21-days gratuity pay.

5 or more years of service

In this scenario, the employee is eligible for 21 days of their basic salary for the initial 5 years of service, with an additional 30 days of basic salary for every subsequent year. 

To illustrate this concept, let's consider an example:

Imagine an employee with a basic salary of AED 18,000.

To find the employee's daily wage, we divide the monthly salary by 30, resulting in a daily wage of AED 600.

Now, for a contract with unlimited term, the gratuity calculation varies based on the employee's years of service. If an employee serves the company for 1 to 3 years, they are entitled to one-third of their 21-day salary, which in this case is 4,200 AED. 

If they have completed 5 years or more, they are entitled to the full 21 days of salary for the initial 5 years, amounting to 12,600 AED, and an additional 30 days of salary for each year beyond 5 years.

Let's recalculate the gratuity for 7 years of service under an unlimited contract:

For the first 5 years, the gratuity is calculated as 12,600 AED (21 days of salary).

For the additional 2 years, at a rate of 30 days of salary per year:

2 years x 30 days/year x 600 AED/day = 36,000 AED

So, for 7 years of service under an unlimited contract, the total gratuity would be:

12,600 AED (first 5 years) + 36,000 AED (2 additional years) = 48,600 AED.