Overview of End-of-Service Benefit Processing

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. Your company to be able to pay the required amounts on employee dismissal or resignation needs to gradually accumulate the appropriate funds, that is, maintain provisions.

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

Generally, an employee is entitled to a specific number of paid days for each year of service depending on the contract type and the type of employment termination. For each employee, the length of service is calculated from the date when this employee had been hired. Particular numbers of paid days are determined by End-of-Service Benefit (EoSB) Rates.

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 Provision 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. Alternatively, you can manually enter the rates or edit the downloaded rates.

Actually, for each combination of contract and termination types, the EoSB rates are defined as rate breakdown: for each interval of service length (in months) a special rate (in paid days per year) is specified with greater number of paid days granted for greater number of months of service.

Also, you can define rates for accumulation of funds (provisions) which would be used on resignation or dismissal of employees. For this purpose, you might need one rate breakdown for unlimited contracts and another one rate breakdown for limited-term contracts.

The selected Use for Provision Calculation Only option indicates that the rate breakdown must be used only for accumulation of corresponding funds (provisions).

How the EoSB rates will be used for calculation of the provision and gratuity amounts depends on the Use Interval-Specific Rates for Intervals option as follows:

• If the option is not selected, the number of earned paid days is calculated as the rate (R) from the interval that matches the current service length, divided by 12 months per year, and multiplied by service length in months (S), that is, R*S/12.
• If the option is selected, the current service length S is divided into appropriate intervals S1, S2,... SN, and for each interval its interval-specific rate (R1, R2,... or RN) is used. Thus, the total number of earned paid days with the service length in the N-the interval, might be calculated as: ((S1*R1 + (S2-S1)*R2 + ...+ (S-SN)*RN))/12.

For particular examples, refer to Adding an End-of-Service Provision Rate.

Notice that with length of service less than 1 year, an employee currently is not entitled to end-of-service benefit no matter whether employment contract is a limited-term contract or unlimited contract. If you do not want to accumulate funds for new employees during their first year (or other number of months), you can specify this number of months in the Start Calculation After (Months) field. If the employment continues beyond this number of months, in the next month the application will add the missing amount for the specified number of months to the benefit provision.

Daily Salary

The EoSB amount for accumulation and for actual payment to the employee is calculated based on the employee's current daily salary. Daily salary is calculated as the earnings of all basic types during the preceding month divided by 30.

In FirstBIT ERP, on the HR and Payroll > Master Data > Accrual and Deduction Types form, you can mark specific earnings (accruals) and deductions as the basic earning types for the EoSB calculation by selecting the End-of-Service Benefit Calculation check box for these earnings (accruals) and deductions. As a rule, basic types of employee earnings include salary, paid vacations, sick leaves, permanent bonuses, and so forth. Overtime and benefits are generally not included.

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.

Funds Accumulation Using the Month-End Closing Service Tool

According to the matching rule of accrual-based accounting, the company must set aside specific amount of EOSB monthly and recognize as expenses the same amount monthly although the actual payment might take place multiple months later.

You can use the Month-End Closing operation to generate all the related transactions if you select the Calculate End-of-Service Benefit option on the Accounting > Service Tools > Month-End Closing form before you run the operation. Then, the Month-End Closing operation creates a document of the End-of-Service Benefit Calculation type which lists the employees with the accumulated amounts of benefit, and the benefit and expense amounts of the current month.

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

Table 2. Accrual of EoSB Amounts at month end

For details on calculation of current ESB amounts, refer to End-of-Service Benefit Calculations.

Also, documents of the End-of-Service Benefit 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 Benefit 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 for the same month, each time 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 HR and Payroll > Human Resources Documents > Terminations form. For details, refer to Terminations.

Check with the current UAE legislation, whether the available rates are still applicable and if there are any limitations to the final pay.

For calculation of final EoSB payments, the application uses the EoSB rates for which the Use for Provision Calculation Only check boxes are cleared.

For employees with limited-term contract, the application calculates the final EoSB gratuity depending on the employee's termination type and contract length. Generally, if the employee quits voluntarily before the end of the employment contract, such employee is not entitled to any gratuity amount.

For employees with unlimited-term contract, the application calculates the final EoSB gratuity depending on the employee's termination type and employment length. Generally, if the employee quits voluntarily, the gratuity is significantly less than in case when the employee is fired.

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 gratuity amounts. To calculate this additional amount, the number of days (Nd) is multiplied by the average daily salary (A) and rate per day, where the rate per day is the rate R from the last interval divided by 360, that is, Nd* A*R/360.

Note. In accordance with the current UAE legislation, the application checks whether the calculated amount of the benefit for the employee exceeds this employee's earnings during the last two years and selects as the benefit final pay the amount which is less of the two.

GL Journal Entries

Once the final pay is defined 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 accumulation

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

Table 6.Recording additional expenses

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

Table 7. Table 6. Recording additional income