Severance Pay

What is Severance Pay?

Severance pay refers to the financial compensation provided to an employee upon termination of employment. It is designed to support employees as they transition out of a company and is often linked to length of service, employment contract, and UAE Labour Law.

In the UAE, severance pay is closely related to the end-of-service gratuity, which is the primary statutory entitlement for employees leaving a job, whether due to resignation, redundancy, or termination. Understanding severance pay ensures both employers and employees are aware of their rights and obligations during employment termination.

Why Severance Pay Matters

Severance pay serves multiple purposes:

1. Employee Support

   • Provides financial assistance to employees while they seek new employment.

   • Offers security and stability during the transition period.

2. Legal Compliance

   • Ensures organizations follow UAE Labour Law regarding end-of-service benefits.

   • Reduces the risk of disputes, fines, or legal action.

3. Employer Reputation

   • Fair severance practices enhance employer credibility and trust in the UAE labor market.

4. Workforce Management

   • Helps manage layoffs, redundancy, or restructuring fairly and transparently.

Severance Pay Under UAE Labour Law

In the UAE, severance pay is typically calculated based on the end-of-service gratuity, which is determined by:

• Length of service

• Basic salary

• Type of termination (resignation, redundancy, or dismissal)

Calculation Rules

1. Less than 1 Year of Service

   • Employees are generally not entitled to gratuity unless specified in the employment contract.

2. 1 to 5 Years of Service

   • Employees are entitled to 21 days’ basic salary for each year of service.

3. More than 5 Years of Service

   • Employees receive 30 days’ basic salary for each additional year of service beyond five years, with a maximum of two years’ salary.

4. Resignation vs Termination

   • If an employee resigns after more than five years of service, they still receive full gratuity.

   • If an employee resigns before completing one year, gratuity is typically not applicable.

Situations Affecting Severance Pay

• Termination for Cause

  • Employees dismissed for gross misconduct may lose entitlement to severance.

• Redundancy or Layoffs

  • Severance is often mandatory under UAE Labour Law, with the end-of-service gratuity forming the base.

• Contractual Agreements

  • Some companies offer additional severance packages beyond legal requirements as part of company policy or employment agreements.

Best Practices for Employers in the UAE

1. Transparent Policies

   • Clearly outline severance and end-of-service benefits in employment contracts and HR policies.

2. Timely Payment

   • Settle gratuity and severance pay promptly upon termination to comply with the law and maintain trust.

3. Accurate Calculation

   • Use correct formulas based on service duration and salary to avoid disputes.

4. Documentation

   • Provide a formal termination letter detailing severance entitlements, ensuring legal clarity for both parties.

Best Practices for Employees

1. Understand Your Rights

   • Familiarize yourself with your employment contract and UAE Labour Law regarding gratuity and severance.

2. Check Your Records

   • Ensure your service duration, salary records, and benefits are accurately documented.

3. Plan Financially

   • Consider severance pay as part of your post-employment financial planning.

Conclusion

Severance pay in the UAE is a critical component of fair and lawful employment practices. It primarily takes the form of end-of-service gratuity, providing employees with financial support during transitions and ensuring compliance with UAE Labour Law.

For employers, offering fair severance practices enhances reputation, reduces legal risk, and strengthens employee trust. For employees, understanding severance entitlements ensures financial security and clarity during career transitions.

A well-managed severance process benefits both parties and reinforces professionalism in the UAE’s dynamic labor market.