A key consideration relevant to foreign investors in the UAE is the scope of rights available to all employees upon the termination of their employment contracts. Under UAE Labour Law, every employee has a right to:
- A notice period with full pay (or, if the employer prefers to not have the employee working during the notice period, a payment in lieu of notice)
- A payment in lieu of any accrued and unutilised holidays
- Any repatriation expenses (if the employee is a foreign national and is to leave the UAE)
- End of Service Gratuity (ESG).
ESG is calculated on the basis of the employee’s basic salary, and varies depending on his or her length of service. The employee’s basic salary excludes any payments in kind, housing allowances, transport or travel allowances or any similar benefits. The ESG entitlement is only triggered when the employee has completed one full year of service.
How ESG is calculated
On a basic level, the potential maximum ESG payment that an employee may be entitled to is equivalent to
- 21 days’ pay for each year of the first five years of employment
- 30 days’ pay for each additional year
This gratuity is subject to a cap equal to the aggregate of two years of basic salary. When calculating the potential maximum ESG, it should be noted that any unpaid leave will not be counted towards the length of service.
UAE Labour Law encourages employees to remain in their employment for a reasonable period. Hence the larger entitlement if an employee works for a continuous period of five years or more.
Anyone who resigns within the first five years of employment will only receive a percentage of their potential maximum ESG payment; this is calculated as follows:
- Where the continuous period of service is over one year but under three years, the employee will be entitled to one-third of the potential maximum ESG as calculated above
- Where the continuous period of service is over three years but under five years, the employee will be entitled to two-thirds of the potential maximum ESG as calculated above
- Finally, where the continuous period of service is over five years, the employee will be entitled to the maximum ESG amount as calculated above.
An employer will not be entitled to ESG in the event of dismissal under article 120 of the Labour Law (which includes dismissal for, amongst other things, failure to perform basic duties, breach of confidentiality undertakings, continued absence without reason, inappropriate behaviour (including being under the influence of drugs or alcohol) or if the employee is dismissed during any probationary period).
Source: Norton Rose Fulbright