Difference between Limited and Unlimited Contract Gratuity Calculation

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Gratuity is a type of end-of-service benefit that an employer provides to their employees. As an employee, understanding how your gratuity is calculated can be helpful in planning your finances. Two types of gratuity calculations are limited and unlimited contract gratuity calculation. In this article, we will delve into the differences between the two.

Limited Contract Gratuity Calculation

A limited contract is one that has a specified end date, typically ranging from six months to two years. The gratuity calculation for employees on a limited contract is a bit different from those on an unlimited contract. If an employee completes the full tenure of their limited contract, they are entitled to a gratuity of 21 days’ basic salary for every year of employment. If an employee leaves before completing the full tenure of their contract, they are not entitled to any gratuity.

For example, if an employee completes two years of a limited contract with a basic salary of AED 5000, their gratuity entitlement would be calculated as follows:

Gratuity = (Basic salary/30) x 21 x 2

Gratuity = (5000/30) x 21 x 2

Gratuity = 3,500 x 2

Gratuity = AED 7,000

Unlimited Contract Gratuity Calculation

An unlimited contract is one that does not have a specified end date. Gratuity calculation for employees on an unlimited contract is based on the number of years an employee has worked for the employer. If an employee has worked for less than a year, they are not entitled to any gratuity. If an employee has worked for a year or more, they are entitled to a gratuity of 21 days’ basic salary for each year of employment. If an employee has worked for more than five years, they are entitled to a gratuity of 30 days’ basic salary for each year of employment.

For example, if an employee has worked for seven years on an unlimited contract with a basic salary of AED 5000, their gratuity entitlement would be calculated as follows:

Gratuity = (Basic salary/30) x 30 x 5 + (Basic salary/30) x 21 x 2

Gratuity = (5000/30) x 30 x 5 + (5000/30) x 21 x 2

Gratuity = 5,000 x 5 + 3,500 x 2

Gratuity = AED 32,500

Key Differences between Limited and Unlimited Contract Gratuity Calculation

1. Tenure: Limited contracts have a specified end date, while unlimited contracts do not.

2. Calculation: Limited contract gratuity calculation is based on the number of years an employee has completed, while the unlimited contract gratuity calculation is based on the number of years an employee has worked.

3. Amount: The amount of gratuity entitlement is higher for employees on unlimited contracts who have worked for more than five years.

In conclusion, as an employee, it is essential to understand the type of contract you have and the gratuity calculation formula applicable to you. Knowing this can help you plan your finances better, especially when you decide to leave your current employer.