Severance Packages in Job Contracts | Calculations, Eligibility, & Employee Rights

This article explains the UAE labor regulations that are connected to severance packages, employee rights, and the addition of such clauses to contracts. Under UAE labour law, all employees who complete at least one year of continuous service are entitled to end-of-service benefits, commonly known as gratuity payments.

This entitlement is stipulated in Federal Decree-Law No. 33 of 2021, which sets out the minimum severance pay requirements for employees upon end of their employment.

How is Severance Pay Calculated in the UAE As per Labour Law

The calculation for end-of-service gratuity is based on the employee’s basic salary, not including allowances or bonuses. The formula is as follows:

• For the first five years of service: 21 days’ basic salary per year.
• For each additional year after five years: 30 days’ basic salary per year.
• The total severance pay is capped at two years’ total salary.

Severance Pay Eligibility and Exclusions

• Workers are required to stay in the company for at least a year to become eligible.
• Misconduct cases for which severance pay can be reduced or forfeited include, but are not limited to; the termination of the contract for a good cause or when the employee resigns without due reason.
• The employer is obliged to make the severance payment within 14 days of the end date of the contract.

Additional-Terms Contractual Severance Provisions

While the law requires a baseline of end-of-service benefits, the UAE labour law does not prevent employers and employees from settling on any additional severance terms. This implies that workers can, upon consent, negotiate for extra severance sums or superior packages as part of their employment contracts.

Key Points on Contractual Severance Packages

Additional severance provisions are not given automatically; they must be clearly stated in the employment contract and mutually agreed upon by the parties involved.

The details of any extra severance package should be clearly outlined in the contract so that possible misinterpretation or disagreement may be avoided.

Importance of Severance Clause in an Employment Contract

Application of severance packages emerges as a safety net, which is added in case of unexpected job losses. 

How to Include a Severance Clause

• Initiate discussions during the job offer or contract negotiation stage.
• Specify the amount, conditions, and method of payment for the severance package.
• Ensure the clause is documented in writing within the employment contract.

Legal Enforceability

Any contractual severance clause must not contradict the minimum standards set by UAE labour law. In case of disputes, the Ministry of Human Resources and Emiratisation (MOHRE) and UAE courts will refer to the written contract.

Severance Packages Employee Rights and Employer Responsibilities in UAE

Employee Rights include:

• Right to statutory end-of-service benefits after one year of service.
• Right to negotiate additional severance terms as part of the employment contract.
• Right to timely payment of severance (within 14 days of contract termination).

Employer Responsibilities:

• Calculate and pay mandatory end-of-service benefits by the law.
• Honor any additional severance clauses agreed upon in the employment contract.
• Ensure all severance-related payments are documented and processed promptly.

Common Scenarios for Severance Pay in the UAE

Scenario	Statutory Severance Pay	Additional Contractual Severance
Employee completes 1+ year, terminated legally	Yes	If included in the contract
Employee resigns without legal cause	Reduced or forfeited	As per contract
Employee dismissed for misconduct	Forfeited	As per contract
Employee negotiates extra severance	Yes (if agreed)	Yes (if agreed)

Conclusion

The UAE labour law ensures all employees a minimum severance pay, known as end-of-service benefits, upon completing at least one year of service. However, employees and employers are free to negotiate and include additional severance packages in job contracts, offering greater security and flexibility. Such clauses must be mutually agreed upon and clearly stated in the employment contract.

Understanding your rights and ensuring all terms are documented is essential for both employers and employees to avoid disputes and ensure a fair employment relationship. To fully determine the end of services benefits in UAE and to ensure compliance with UAE labor laws, contact us today and we shall be glad to assist you. 

FAQs

Q1. Can I ask my employer to add a severance package to my UAE job contract?

Yes, you can request an additional severance package as part of your employment contract. This is subject to mutual agreement between you and your employer and must be documented in the contract.

Q2. Is the statutory end-of-service benefit the same as a severance package?

The statutory end-of-service benefit is a mandatory minimum payment required by UAE law. A severance package may refer to this benefit or any additional compensation agreed upon in the employment contract.

Q3. What happens if my employer refuses to pay the agreed severance package?

If your employer fails to honor the severance terms in your contract, you can file a complaint with the Ministry of Human Resources and Emiratisation (MOHRE). Disputes may be resolved through mediation or, if necessary, through the UAE courts.

Footnotes:

1. According to UAE Labour Law, the end-of-service Gratuity is covered under Federal Decree-Law No. 33 of 2021, Article 51.
2. MOHRE reforms of 2022 were launched in the UAE Ministry of Human Resources and Emiratisation.
3. Ibid.
4. UAE Labour Law, Article 57, Employment contracts and additional benefits.
5. MOHRE FAQs 2023.
6. Legal Advice Middle East–Labour Law.
7. A case study in Gulf News that the tech firms used the severance as a golden handcuff to retain talent in the year 2022.
8. UAE Labour Law Article 53, Deductions from employee wages.
9. UAE Federal Tax Authority Overview of UAE tax legislations.

Bibliography:

1. UAE Labour Law: Federal Decree-Law No. 33 of 2021.
2. Guidelines from MOHRE, Ministry of Human Resources and Emiratisation.
3. Legal Advice Middle East – Labour Law FAQs.
4. UAE Federal Tax Authority – Tax Regulations Resources.