The new gratuity law in UAE introduced important clarifications that every employer and adviser should treat as operational priorities. Employers, payroll teams and external advisers need to understand the legal basis, the calculation method, the payment timeline and the accounting and tax consequences. SSCO GLOBAL believes the best approach is to interpret the law, rework payroll and accounting templates, and update client reporting so every final settlement is correct, timely and auditable.
The core changes under the new gratuity law in UAE
The law underlines that a worker who completes at least one year of continuous service is eligible for end-of-service gratuity. For the first five years of service, the gratuity is calculated at 21 days of the employee’s basic wage for each year, and for each year beyond five years the gratuity equals 30 days of the basic wage. The overall gratuity cannot exceed two years’ total remuneration. Employers are required to pay wages and all end-of-service entitlements within fourteen days from the end of the contract. These points are the legal anchors that determine how employers should compute and settle every final payment.
Those provisions mean employers must update their payroll and human resources processes. The gratuity law in UAE now connects directly to contract design, notice periods and payroll cut-offs. Where contracts are fixed-term, the employer’s obligations at termination are clear and finite; where disputes arise, the ministry’s rules on dispute resolution and interim salary obligations can affect the final settlement and cash flow. Employers and advisers should not treat gratuity as a residual calculation; it is a predictable liability that must appear in the balance sheet and in cash flow forecasts.
How the calculation works?
The calculation uses the employee’s last basic salary. For employees with less than five years of service the formula uses 21 days per completed year, and for service beyond five years it uses 30 days per completed year. Fractions of a year are treated on a pro rata basis. Importantly, the law excludes housing, transport and other allowances from the base for gratuity calculations unless the employment contract expressly defines them as part of the basic wage. The limit that a gratuity cannot exceed two years’ total salary caps the employer’s worst-case exposure. Employers must therefore calculate the liability per employee, book a provision in the accounts and disclose the policy in the notes consistent with accounting standards.
From the perspective of accounting and tax services, these calculation rules change how provisions are modelled and tested. When firms prepare financial statements, a consistent method for computing gratuity liabilities is required. That includes documenting the wage basis used, explaining any variations for employees under special contracts, and confirming the dates used for completed years. For audit and tax purposes, having an auditable trail that links the payroll system to the provisioning entries and the bank settlement is essential.
Timing, compliance and employer obligations under the new law
One of the most operationally significant changes is the deadline for payment. The law requires employers to settle final wages and end-of-service benefits within fourteen days after contract termination. That deadline is a strict compliance trigger that directly affects cash management and payroll scheduling. Employers must ensure payroll cut-offs and final payslips align with that statutory deadline. If disputes delay the final settlement, employers should be aware of the ministry’s processes and any interim salary obligations that might apply. The gratuity law in UAE makes fast, documented action the default expectation; silence or delay risks fines, enforcement and reputational damage.
For accounting teams and external accounting and tax services advisers, the 14-day rule means final / off-cycle payroll runs must be anticipated and workflows should be stress-tested. Firms should rebuild their checklist for employee exits so the legal deadline is baked into the service level agreement offered to clients.
The cash flow and balance-sheet impact with an example
Practical examples help remove ambiguity. If an employee’s basic salary is AED 10,000 and the employee served six full years, the gratuity for the first five years is 21 days per year and for the sixth year it is 30 days. Converting days to monthly terms, the first five years equal 105 days and the sixth year equals 30 days, which combined represent 135 days. With a daily wage derived from a 30-day month, the employer would calculate the total amount and check it against the two-year salary cap. When multiplied by the monthly basic salary and expressed in AED, the employer gets a single final figure to pay within fourteen days. This kind of worked example should be part of every client memorandum prepared by accounting and tax services teams.
From a reporting perspective, employers must move from ad hoc estimations to regular provisioning. If a company has 1,000 employees with an average tenure of three years and an average basic salary of AED 8,000, estimating the aggregate gratuity exposure becomes a material figure that must influence liquidity planning and tax provisioning. That is why the gratuity law in UAE needs to be an input to rolling cash forecasts and board reporting.
What employers and accounting teams should change today
Every employer and every provider of accounting and tax services should do three things immediately. First, reconcile employment contracts to ensure the definition of basic salary is consistent with how gratuity will be calculated. Second, reconfigure payroll and HR systems to compute and store the gratuity liability per employee, with clear audit trails from HR records to accounting entries. Third, test exit procedures so the final bank transfer, payslip and statutory filings are completed within the fourteen-day deadline. These procedural changes reduce the risk of errors and ensure compliance with the gratuity law in UAE.
For outsourced providers of accounting and tax services, this is also a client-education opportunity. Advisers should proactively supply clients with updated policies, example calculations and cash-flow scenarios that show the real, immediate impact of the law on monthly and annual budgets.
Tax and reporting interactions you cannot ignore
The gratuity itself is an employment benefit and historically has tax and accounting implications depending on the jurisdiction and the company’s tax residence. In the UAE, corporate tax and social security rules interact with the way employers account for liabilities. Employers must ensure that the expense recognition aligns with accounting standards and that any tax adjustments required by the corporate tax framework are properly recorded. Providers of accounting and tax services should document the accounting policy, the tax basis and any differences between the two to avoid surprises on filing and audit. The gratuity law in UAE imposes clear timing and measurement rules that should be mirrored in both accounting and tax workpapers.
Practical controls and documentation that reduce risk
Documentation is the simplest, highest-return control. Employers should retain signed employment contracts that state the basic wage used for gratuity, maintain time records that prove continuous service, and keep electronic audit trails that show the calculation logic and sign-off. When payroll is outsourced, service agreements with the provider should include a clause requiring delivery of final payslips and bank confirmations within the statutory fourteen days. Firms that provide accounting and tax services must ensure those controls are verified during internal reviews and client audits so the gratuity law in UAE obligations are demonstrably met.
Final perspective
The gratuity law in UAE reshapes exit practices, cash planning and disclosure. Accounting teams, HR and external accounting and tax services providers must move from manual, episodic calculations to systematic, repeatable processes that are auditable and timely. When employers make these changes, they reduce legal risk, preserve cash discipline and free management to focus on strategy rather than settlements. SS &Co recommends a disciplined rollout that means aligning contracts, reconfigure payroll, update accounting entries, and document every settlement.
