The End of Service Gratuity according to UAE Labor La w: is it the beginning of the end?
End of service gratuity ("ESG") is a topic that is currently stirring much debate. In particular, it was recently reported that after conducting a study into the ESG system, the World Bank recommended the establishment of a pension fund for expatriate employees to replace or supplement ESGs.
The ESG explained
ESG is a sum of money that an employer is lawfully required to pay an employee upon the termination of the employment relationship, subject to the employee satisfying certain conditions that are set out in the UAE Labour Law. The ESG scheme was introduced 40 years ago to ensure that when employment relationships were terminated, employees without pension benefits received a lump sum payment to assist them during the period following termination or for them to put towards their savings.
The payment is based on the employee's basic salary and length of service, although it may be reduced depending on the circumstances of the termination of employment and where the employee was working (see "reduced amount" section below). The calculation does not take into account payments that are additional to basic salary, such as housing and car allowance. However, where an employee receives a guaranteed or regular commission payment, this may be included within the calculation of basic salary for the purposes of the ESG calculation.
Employees with at least 12 months service are entitled to 21 calendar days' salary for each year of service in the first five years of employment and 30 calendar days' salary for each year of service worked beyond five years. The ESG payment is calculated on a pro-rata basis and therefore employees receive credit for the entire period of service. Importantly, the calculation is applied to the employee's salary at the time of termination, which can result in the ESG being substantial for long serving employees. The maximum ESG entitlement cannot however exceed two years salary.
Where individuals are employed in onshore organisations within the UAE (and some of its free zones), reductions may be applied to their ESG entitlement should they resign from their roles. In particular, where an employee on a limited term contract with less than five years service resigns prior to the expiry of the fixed term, the employee is not entitled to an ESG payment whatsoever. In the case of an employee on an unlimited term contract, having been employed for more than one year but less than three years, he will receive one third of the full ESG entitlement. Where the period of continuous service is more than three years but less than five years the departing employee will be entitled to two thirds of the full ESG. Once an employee has accrued five years service, either on a limited or unlimited term contract, there will be no reduction pursuant to a resignation.