In UAE, employees who have worked for the company at least one year are entitled to end-of-service gratuity payments on termination of their employment.

The payment amount is calculated depending on the type of employment contract and length of employment, and it also depends on whether the employee has been fired or resigned voluntarily.

The functionality is available only if the Enable End-of-Service Benefit Calculation option is selected on the Administration > Settings > HR and Payroll form.

The End-of-Service Benefit Rates

FirstBIT ERP allows you to define the end-of-service benefit rates for different employment lengths, contract types, and termination types. With length of service less than 1 year, an employee is not entitled to end-of-service benefit no matter whether employment contract is a limited-term contract or not.

To define the EoSB rates, use the HR and Payroll > Master Data > End-of-Service Provision Rates form. For details, refer to Adding an End-of-Service Benefit Rate.

You can load the ready-to-use EoSB rates that comply with the UAE legislation when you click the Load button on the toolbar of the End-of-Service Provision Rates form.

Base for calculation

The EoSB amount for the employee is calculated based on basic types of employee earnings, such as salary, paid vacations, sick leaves, permanent bonuses, and so forth. Overtime and benefits are generally not included.

In FirstBIT ERP, on the HR and Payroll > Master Data > Accrual and Deduction Types form, you can include specific accruals and deductions in the base for this benefit calculation by selecting the End-of-Service Benefit Calculation check box for these accruals and deductions.

Month-End Closing Calculation

According to the matching rule of accounting, the expenses associated with the end-of-service benefit must be recognized monthly, although the actual payment might take place multiple months later. Also, the company must set aside the same amount monthly to be able to pay the benefit later.

For each employee, the length of service is calculated from the date when this employee had been hired. Because the termination conditions are not known for working employees at any month end, the following rates are used for an employee with  A as average daily earnings:

Table 1. The Monthly EoSB amounts

Note that to calculate the monthly amount for accrual, the rate from the current interval of the length of service should be applied to a month, that is divided by 12.

Daily salary is calculated as the earnings of all basic types during the preceding month divided by 30.

If, by any reason, there is no data on the actual earnings of the previous month, the salary and other base accruals from the employment contract and its changes are used for calculation. Only accruals for which the Use for End-of-Service Benefit Calculation option are used for calculation.

You can use the Month-End Closing operation to make all the related transactions if you select the Calculate End-of-Service Benefit option. Then, the Month-End Closing operation will create a document of the End-of-Service Calculation type which lists the employees with the accrued amount of the benefit, and the benefit and expense amounts to be added for the current month.

The Month-End Closing process creates the following journal entries:

Table 2. Accrual of EoSB Amounts at month end

Also, documents of the End-of-Service Calculations type can be created manually by users and can include one or multiple employees with their benefit amounts. For manually created documents, the Manual Processing check box must be selected. The End-of-Service Calculations are dated by the last date of the month and list all the employees of an entity for which there are no any End-of-Service Calculation documents which are created manually (have the Manual Processing check box selected).

For each month, there can be only one automatically created document. If the process is run repeatedly, the automatically created document will be overwritten. The employees listed in any of the manually created documents are not included in the automatically created document and the manually created documents are not affected by the Month-End-Closing operation. 

EOSB Final Payment

The end-of-service benefit is included in the final pay only if the Pay the End-of-Service Benefit check box is selected on the Employment Termination form.

On termination of the employment with the limited-term contract, the application calculates the final EoSB gratuity as follows with N as length of service in months and A as daily salary:

Table3. EoSB Rates for limited-term contracts

Note that daily salary is calculated as the employee's earnings during the previous month divided by 30. If the earning by any reason was zero, then the salary from the employments contract and the last changes to it is used.

On termination of the employment with the unlimited-term contract, the application calculates the final EoSB gratuity as follows with N as length of service in months and A as daily salary:

Table 4. EoSB Rates for unlimited-term contracts

Because, most probably, the length of service also includes a certain number of days in addition to a number of full months, the benefit amount prorated for these days should be added to the benefit amounts in each case; it is calculated as follows: A* Nd *R/12/30 (where Nd - is the length of service in days; R - the rate from the last interval).

The application checks whether the accrued amount of the benefit for the employee exceeds this employee's earnings during the last two years and specified as the benefit final amount the amount which is less of the two.

GL Journal Entries

Once the final pay is calculated and the calculation details are verified, you need to post the Employment Termination document. FirstBIT ERP generates the following journal entries on posting:

Table 5. Cancellation of EoSB accruing

If the accrued amount is less than the final pay for the benefit, then the following GL entries are generated:

Table 6. Recording additional expenses

If the accrued amount is greater than the final pay, then the following GL entries are generated:

Table 7. Table 6. Recording additional income