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End of Service Settlement

December 9, 2019

Disengagement between Employer and Employee often create a lot of mistrust on part of employee when they are not sure if they were paid fair at the end of a Service Benefit as per the applicable laws, they also fail to understand the concept of Limited and Unlimited Contract that they have been employed on and, thus fail to understand the difference in calculation.

It is important for all expatriates to understand that there are 2 kinds of employments contracts that form the basis of the Employer & Employee Relations, it stays at discretion of business to choose either of the contracts of employment based on the nature of business and job role. It stays the right of a candidate to agree or disagree with the contract type at the time of employment.

This Article sets us to give a brief description of both Limited and unlimited contract and how it impacts end of service benefits, it also explains the rights of employer and employee during disengagement:

Limited Contract

A limited-term contract is a fixed-term contract and is normally linked to the duration of the UAE residency visa (i.e. two or three years, depending on the location of the employer). It will automatically terminate at the end of the term unless terminated earlier by either party or renewed by both parties.

Unlimited Contract:

An unlimited term contract is open-ended and may be terminated by either party anytime. The contract has perpetual succession and thus does not mention the end date of the contract.

At the time of employment, an employee may identify the contract type by specifically looking for the term “Limited” or end date.

Now the next step is to understand the components of End of Service Benefits i.e.:

  • Gratuity
  • Accrued Salary
  • Accrued Leave Salary
  • Notice Period Pay
  • Reimbursement of authorized expenses
  • Accrued Commissions and Bonus

Allowable Deductions:

  • Advance/Loans
  • Notice Period Pay
  • Penalties and Fines
  • Advance Leave Salary/Salary/Commission/Bonus paid
  • Loss and Damage recoveries

The following table set out to explain the eligibility of additions and deductions based on contract type:

Component Limited Contract Unlimited Contract 
 Resignation Termination Resignation Termination 
0 – 1 year of Service No Gratuity No Gratuity No Gratuity No Gratuity 
1 – 3 Years of Service No Gratuity @21 days/year @7 days/ year @21 days/year 
3 – 5 Years of Service No Gratuity @21 days/ year @14 days/ year @21 days/year 
5 + years of Service @30 days/ year @30 days/ year Up to 5 years @21 days/year 
balance @30 days/year 
@30 days/year 
Notice Period     
If Served  30 days to 90 days as per contract 30 days to 90 days as per contract 30 days to 90 days as per contract 30 days to 90 days as per contract 
If Unserved Not applicable 30 days to 90 days as per contract Not applicable 30 days to 90 days as per contract 
Accrued Leave Salary Basic + HRA Basic + HRA Basic + HRA Basic + HRA 
Accrued Salary On Gross On Gross On Gross On Gross 
Reimbursement of authorized expenses On Actuals On Actuals On Actuals On Actuals 
Accrued Commission & Bonus As per the terms of Bonus & Commission Pay As per the terms of Bonus & Commission Pay As per the terms of Bonus & Commission Pay As per the terms of Bonus & Commission Pay 

Accrued Leave Salary: As per UAE Labor Law staff is eligible for Basic + Housing Allowance as leave salary, thus the payment of Leave Salary in Gross is the company’s prerogative and not employee’s right unless agreed in writing. It’s been observed in number of End of Service Settlement conflicts, that the staff is expecting the settlement of leave salary on Gross, but the employer has processed it on Basic + HRA. In case where employer provides accommodation, staff shall be eligible for leave salary only on basic.

End of service Benefits accrual: All end of service benefits are accrued till last working day only, thus if the employee agrees to forgo the notice period to be served by an employee or prefers to pay in lieu of notice period, the staff shall accrue gratuity or leave salary till last working day only.

Accrued Commissions and Bonus: Any compensation over and above Gross Salary shall be based on agreed written terms. If an employee can prove that he has received a commission payment every month (fixed amount every month on a fixed date), then this figure shall be considered when calculating the final payment. The point of conflict often identified for work in the progress either related to project or sales. The best practice is to develop a detailed document defining the eligibility criteria and treatment during disengagement.

A classical example for this is staff earning commission based on sales but the recoveries for the same is not completed, the employee may consider himself being eligible for commission on sales since the invoice was raised, though the company considers it as incomplete sales since the recovery for the sales is not received, in absence of written terms and agreement, the conflict may be referred to Labor court, where the judgment shall be on the merit of argument then on actual facts.


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