Understanding how to calculate basic salary under the UAE labour law is crucial to generating accurate compensation for employees.
Basic salary is not only the foundation of the net salary that employees will receive; it is also essential to the calculation of annual leave and end-of-service gratuity. And given the importance of basic salary in calculating the latter, it is one area you can’t afford to make mistakes.
This is especially important as on February 2nd, 2022, Federal Law No. 33 of 2021 replaced Federal Law No. 8 of 1980 in the UAE Labour Law, meaning that some regulations you may have been previously familiar with have now been replaced by new ones.
In this article, we’ll consider the regulations of the new UAE labour law regarding basic salary in the UAE. We’ll look at:
- What is basic salary?
- Basic salary, allowances, and gross salary
- Deductions and net salary
- Other uses of basic salary
- Is there a minimum wage in the UAE labour law?
- How to pay salary in the UAE
At the end of the article, you’ll have all the information you need to compensate your employees accurately.
[Do you want to pay your employees the correct salary without any added stress? NOW Money is a digital payroll system that allows you to compensate your employees easily, flexibly, cheaply, quickly, and efficiently with a payroll card. Send us a message or first tell us more about your organisation, and we’ll get back to you with the best way to move forward.]
1. What is basic salary?
Basic salary is the contractual amount you have agreed to pay an employee exclusive of allowances, expenses or any other benefits.
Every employee contract must specify the amount the employee can expect as compensation for carrying out his contractual obligations.
In Article 1 of the new Labour Law, basic wage is defined as “the wage stipulated in the employment contract, which is paid to the worker in consideration of his work under the employment contract, on a monthly, weekly, daily, hourly or piecework basis, and which does not include any other allowances or benefits in-kind.”
In this context, basic salary represents the basic compensation stated in an employment contract with allowances excluded.
What about commissions and bonuses?
Both the old and the new law did not specify if commissions and bonuses are part of basic salary (wage). Consequently, inclusion or exclusion will depend on the contract you have signed with your employees.
However, in the case you didn’t specify the treatment of commissions and bonuses, the Dubai Court of Cassation “have made decisions that eliminated all doubts in respect of the commission and bonus being part of the basic salary,” according to Hamdan AlShamsi Lawyers & Legal Consultants, a legal firm operating in the UAE.
“The judgements state that the salary includes everything that is given to the employee for the work performed, whether it is cash or any kind. Following this anything that is given to the employee which is not categorised as an allowance is considered a basic salary notwithstanding any category that the employer terms it, as long as it is related to the work performed.”
Given the above, the best approach is to include treatment of commissions and bonuses in your employment contract.
For companies that pay commissions and bonuses, the importance of this section will be explained more below.
2. Basic salary, allowances, and gross salary
After defining basic wage as seen above, the new labour law goes on to define wage as “the basic wage, in addition to the cash allowances and benefits in-kind allocated to the worker under the employment contract.”
Wage (or Salary) then is the basic wage (salary) plus benefits and allowances payable to the employee.
Some of the most common allowances include housing allowance, phone allowance, transport allowance, communication allowance, children school fees allowance, among others.
Basic salary and allowances in the UAE together constitute what is also referred to as the gross salary.
Like basic salary, allowances applicable must also be clearly stated in the employment contract to avoid disagreements and unnecessary legal complications.
3. Deductions and net salary
The distinction between gross salary (wage) and net salary (wage) arises because of deductions (that is, net salary equals gross salary minus deductions).
These are items that are commonly deducted from the salary (wage) of employees. In the new Labour Law (Article 25), the following are the deductions acceptable in the UAE:
- The recovery of loans granted to the worker, within the maximum limit of the monthly deduction percentage from the worker’s wage stipulated in this Article, after obtaining the worker’s written consent and without any interest;
- The recovery of the amount paid to the worker in excess of his/her entitlements, provided that the amount deducted does not exceed (20%) twenty percent of the wage;
- The amount deducted for the purposes of calculating contributions to schemes, pension plans, and insurance, provided they are pursuant to the legislation in force in the UAE;
- The worker’s contributions to a savings fund, provided such a fund is approved by the Ministry;
- Installments for any social project or any other benefits or services provided by the employer and approved by the Ministry, provided that the worker agrees in writing to participate in the project;
- Amounts deducted from the worker due to violations he/she commits, according to the regulation of penalties in force at the establishment and approved by the Ministry, provided that they shall not exceed (5%) five percent of the wage;
- Debts due to a legal judgment, without exceeding a quarter of the wage payable to the worker, except for the awarded alimony debt, as more than a quarter of the wage may be deducted. In case of several debts, the amounts to be paid shall be distributed as per the privilege categories;
- Amounts necessary to rectify damage(s) caused by the worker, as a result of their mistake or violation of their employer’s instructions, that led to the destruction, demolition or loss of tools, machines, products or materials owned by the employer, provided that the deducted amounts do not exceed the wage of five days per month. It is not permissible to deduct an amount greater than that except with the approval of the competent court.
The law also restricts all deductions to 50% of the gross salary (wage).
4. Other uses of basic salary
Basic salary in the UAE labour law is important, as seen above, because it is the foundation of the worker’s take-home pay (net salary). But it is also important because it is the foundation for the calculation of an employee’s annual leave and end-of-service gratuity. Let’s consider them in turn:
Full-time employees who have worked for a year in your company are eligible for 30 days paid annual leave while those who have worked for only six months are entitled to 2 days leave per month until they have worked for a year.
According to the UAE Labour Law (Article 26), annual leave must be calculated on the last full wage (gross salary) the employee received: basic salary and allowances.
[For more on annual leave calculation, read, “How to Handle Leave Salary Calculation in the UAE”]
End-of-service gratuity (also called end-of-service benefit)
The end-of-service gratuity (defined in Article 31 of the new labour law) is calculated based on basic salary in the UAE, without the addition of allowances (unlike in the case of annual leave).
Employees who have worked for five years and above are entitled to 21 working days of basic salary for each year of service (up to the fifth year of service). For years of service beyond the fifth year, they are entitled to 30 days of basic salary.
Let’s consider Mr. A who has worked in Company A for 10 years and earned AED 3,673 as his last basic salary. First, we have to convert the monthly basic salary to a daily salary. In this case, that is AED 3,673 divided by 30, which is AED 122.4.
For the first five years, he will be entitled to 21 working days of basic salary, which is AED 2,570.4 (AED 122.4 multiplied by 21). Also, for the next five years, he will be entitled to 30 working days of basic salary, which is AED 3,672 (AED 122.4 multiplied by 30). Total gratuity payable to Mr. A is AED 6,242.4.
This is one area where commissions and bonuses are important. If they are part of basic salary, then they must be used to calculate end-of-service gratuity provided they are part of the last salary the employee received. On the other hand, if they are part of gross salary rather than basic salary, they cannot be used for such calculation.
Again, this is why it is important to ensure you specify how you treat commission and bonuses in the employee contract.
The new labour law also includes certain provisions for end-of-service gratuity:
- Partial years will be prorated. If an employee worked for nine-and-a-half years, the last six months will be prorated (15 days of basic salary instead of 30 days)
- The end-of-service gratuity cannot be lost or reduced if an employee resigns or is laid-off without notice.
- The total gratuity payable is limited to two years’ worth of the employee’s full salary.
- If a worker dies, the gratuity is payable to his family within 10 days.
5. Is there a minimum wage in the UAE labour law?
Currently, there is no UAE minimum wage. Also, there is no basic salary percentage in the UAE Labour Law; meaning the law does not require that the basic salary be a certain percentage of the gross salary.
Nevertheless, common practice is for basic salary to be 60% of the gross salary and for allowances to be 40%. Again, this is not etched in stone; it might be different for your company.
While there is currently no UAE minimum wage, the UAE labour law insists that wages must be sufficient to meet the basic needs of employees.
However, Article 27 of the new law says that “the Cabinet may, upon the proposal of the Minister and in coordination with the concerned authorities, issue a resolution to determine the minimum wage for workers or any category thereof.”
This provision means that a minimum wage legislation is quite possible in the future.
6. How to pay salary in the UAE
According to the Ministerial Decree No. 788 issued 2009 and the Ministerial Decree No. 739 of 2016, all private companies in the UAE and Jebel Ali Free Zone (JAFZA) must pay salaries through the Wage Protection System (WPS).
This requires that you complete and submit a Salary Information File (SIF) to a WPS agent who will confirm the details therein with the Ministry of Human Resources and Emiratisation (MOHRE).
Every salary must be paid through this WPS system, which is designed to ensure that you are paying your workers the right amount at the right time.
[For more on the wage protection system, read, “What is WPS in the UAE: All You Need To Know About The Wage Protection System (2022)”]
Just take a look at our payroll dashboard below.
Our system is able to be cost-effective because WPS payments are charged only AED 0.50 per employee record on the SIF, and the SIF file is free to upload.
This is much lower than some well-established GCC banks, which charge up to AED 200 for every SIF you upload and up to AED 3.15 for every record inside a SIF.
Our platform is flexible because the frequency of your payments (daily, weekly, monthly) does not affect the amount you end up paying. NOW Money also provides salary-linked mobile bank accounts for your employees, which is important especially for those who don’t meet the standard requirements to open a bank account with UAE banks.
Payments are made quickly (even on holidays) and the platform provides you complete employee visibility from a central platform. You can easily monitor each employee and ensure you are paying them their due – salary, annual leave, commissions, bonuses, end-of-service gratuity, among others.
Sign up at NOW Money to start compensating your employees in the most effective and efficient way possible.
Are you still wondering if NOW Money is right for your company? Tell us more about your organisation and we’ll let you know the best way to move forward.
- Basic salary is the compensation that an employee receives based on his or her employment contract, exclusive of allowances and other benefits in kind.
- Understanding basic salary in the UAE labour law is important because it is the foundation of the take-home pay of your employees.
- It is also the foundation for determining annual leave and end-of-service gratuity.
- The inclusion or exclusion of commissions and bonuses in basic salary depends on the employer.
- While there is no UAE minimum wage, that might change in the future and in the meantime, employers must pay their employees an amount sufficient to meet their basic needs.