Issue: An employee resigned from the job after working for 5 years, and signs a letter addressed to the employer that he wants his gratuity to be paid only after his customer pays the employer. Therefore, has the employer defaulted for End of Service (EOS) payment under the UAE Labour Law?
Under the UAE Labour Law, end of service gratuity is calculated as follows.
Severance pay/Gratuity – If Terminated by the Employer
As per Article (132) of the UAE Labour Law, the employee who has completed one year or more in the continuous service is entitled to the end of service remuneration at the end of his service. Days of absence from work without pay are not included in computing the period of service, and the remuneration is to be calculated as follows:
- 21 days’ remuneration for each year of the first 5 years of service;
- 30 days’ remuneration for each additional year of service, provided that the aggregate amount of severance pay shall not exceed 2 years’ remuneration.
Severance pay/Gratuity – Resignation by the Employee
As per Article (137) of the UAE Labour Law:
- Where an employee who is bound by a contract of unlimited duration leaves the work at his own accord after continuous service of not less than one year and not more than three years, he shall be entitled to one-third of the severance pay provided for as per Article 132;
- Where the continuous period of service exceeds three years but does not exceed five years, he shall be entitled to two-thirds of such severance pay;
- Where the continuous period of service exceeds five years, he shall be entitled to the full severance pay.
Under the UAE labour law, all employees must be paid their full salary and benefits for the duration of the contractual notice period until their termination date (payable on the last working day). Gratuity is an entitlement of the employee under the UAE labour law.
The employment relation is direct between the Company and the employee for gratuity. While for the debt, the relation is between the debtor and the company, i.e. the privity of contract is between the employer and the customer which does not entitle a third party to claim or be sued. The employee is the agent of the principal (Employer) and is a third party to the business transaction.
Even if the employee is responsible to arrange the collection of the same, it cannot be settled or set-off with his gratuity or his gratuity payment cannot be placed on hold. Thereby even if the employee signed a letter to be paid later, i.e. when the customer pays the Company, the Court will view it as purely as duress and order the employer to pay the end of service entitlement immediately.