Understanding End-of-Service Gratuity: Genuine Reward or a Trap?

Scenario:

A candidate receives a job offer and is excited to join the new company.

HR: “Hi, we’re pleased to offer you a position at our company. Congratulations!”

Candidate: “I’m thrilled to be joining your company and am excited about the opportunity!”

HR: - ‘Shares the contract’

Candidate: “Hey, wait a minute—if the basic salary is only 20% and allowances make up 80%, this will significantly impact my gratuity.”

HR: “Unfortunately, this is company policy, and it applies to everyone.”

Candidate: “At my last company, the salary was split into 70% basic salary and 30% allowances. This means I’ll receive a minimal end-of-service benefit with the current structure.”

HR: “Sorry, however, I can't change that; this is our company policy.”

Candidate: “Let me take some time to consider your offer.”

HR: “Okay, but please note that we can only give you a maximum of 5 working days to decide.”

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Breaking Down the Impact of Salary Structure

This scenario is quite common, especially with SMEs in sectors like design and architecture. Understanding how salary structure affects your end-of-service gratuity is crucial when evaluating a job offer.

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Eligibility for End-of-Service Gratuity

In the UAE, employees who have completed at least one year of continuous service with their employer are entitled to receive end-of-service gratuity. The gratuity is calculated based on the basic salary alone, excluding any allowances.

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Gratuity Calculation Example

Let’s consider an employee with a basic salary of AED 10,000 per month:

• Daily Wage Calculation: AED 10,000 ÷ 30 = AED 333.33
• Gratuity for First Five Years: The end-of-service gratuity for the first five years is calculated at 21 days' wage per year. This amounts to AED 7,000 per year (21 days × AED 333.33).
• Total Gratuity for Five Years: AED 7,000 × 5 = AED 35,000
• Gratuity Beyond Five Years: For each additional year beyond five years, the gratuity is calculated at 30 days' wage per year, which would be AED 10,000 per year (30 days × AED 333.33).

Given these calculations, it’s clear that a higher basic salary leads to a more substantial end-of-service gratuity.

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The Importance of Salary Structure

In the UAE, end-of-service gratuity is calculated based solely on the basic salary. While the Ministry of Labour does not specifically regulate the split between basic salary and allowances, employers have the discretion to determine this split. Therefore, it is crucial for employees to carefully evaluate and understand the salary structure and its implications for gratuity before signing a contract.

Statistics and Facts:

• End-of-Service Gratuity: According to UAE Labour Law, the end-of-service gratuity is an essential benefit provided to employees who have completed at least one year of service. The gratuity is calculated based on the last drawn basic salary, excluding any allowances.
• Salary Structure: A common practice among employers in the UAE, especially SMEs, is to offer a lower basic salary with higher allowances. This practice can significantly impact the employee’s gratuity calculation. In contrast, larger corporations may offer a more balanced split, often in the range of 60-70% basic salary and 30-40% allowances.
• Job Market Insights: According to a recent survey by GulfTalent, about 58% of professionals in the UAE are unaware of how their salary structure affects their end-of-service benefits. Additionally, 65% of respondents indicated that they did not fully understand the implications of their contract terms before signing.

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Key Takeaways:

1. Evaluate the Entire Offer: While the total compensation package might look attractive, it’s essential to understand how the basic salary and allowances are split. A higher percentage of basic salary typically results in a better end-of-service gratuity.
2. Understand the Long-Term Impact: The salary structure not only affects your immediate earnings but also has long-term implications, especially concerning end-of-service benefits. Before accepting any offer, consider how the structure will impact you down the line.
3. Have Open Discussions: If you’re unsure about the terms, have an open discussion with your recruiter or employer. Address any concerns you have about the salary structure, and seek clarity on how it might affect your gratuity and overall compensation.

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Conclusion:

No matter how tempting a job offer may seem, it’s crucial to fully understand the contract and the long-term implications of the salary structure. While the offer might be appealing now, the terms can have significant consequences in the future, especially regarding end-of-service gratuity. Always take the time to carefully evaluate the details and have open discussions with your recruiter or employer to ensure you’re making an informed decision.

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