When you buy a UAE company, its employees’ years of service come with it. Their contracts stay in force, and the gratuity they’ve already earned becomes yours to pay when they leave. On a 12-person Dubai restaurant open for eight years, that can pass AED 140,000.
- Work it out from payroll before you agree a price.
- Then deduct it, hold back part of the price, or have the seller fund it.
Why the seller’s staff liability becomes yours
Article 48 of Federal Decree-Law 33 of 2021 keeps employment contracts valid when a company changes its form or legal status. The new employer becomes responsible from the date the company’s records are amended, and service counts as continuous from each employee’s original start date. A new owner can’t reset the clock by issuing new contracts.
Many articles still quote a six-month joint-liability rule between old and new owner. That was Article 126 of the 1980 labour law, which Decree-Law 33 repealed and replaced from 2 February 2022. The current Article 48 is worded around the new employer’s responsibility. Don’t build your protection on the seller being jointly liable; write it into the sale agreement.
How gratuity is calculated
That last point matters for buyers. Under the old law, staff who resigned early got a fraction. Today, almost everyone who leaves after a year gets the full amount. Treat accrued gratuity as a debt, not a maybe.
Worked example: a Dubai restaurant, 12 staff, open since 2018
| Role | Staff | Basic salary / month | Service | Gratuity owed today |
|---|---|---|---|---|
| Head chef | 1 | AED 9,000 | 8 years | AED 58,500 |
| Sous chef | 1 | AED 6,000 | 6 years | AED 27,000 |
| Manager | 1 | AED 8,000 | 4 years | AED 22,400 |
| Waiters | 4 | AED 2,500 | 3 years | AED 21,000 (5,250 each) |
| Kitchen helpers | 3 | AED 1,800 | 5 years | AED 18,900 (6,300 each) |
| Cashiers | 2 | AED 3,000 | 9 months | AED 0 today; starts counting once they pass one year |
| Total | 12 | AED 147,800 |
The head chef line, for example: (5 × 21 + 3 × 30) days × AED 300 a day = AED 58,500.
If the asking price is AED 600,000, that’s a quarter of it. And it keeps growing: if nobody leaves, this team adds roughly AED 40,000 more each year.
Two traps hide in the numbers:
01Low basic, high allowances
Many SMEs set basic salary low and pay the rest as allowances. Since gratuity uses basic salary, that lowers the bill, but only if the contracts on file say so.
Check the contracts registered with MOHRE (or the free zone authority for free zone staff), not payslip totals or what the seller remembers.
02The accounts don’t show it
Small companies often carry no gratuity provision, or one that’s years out of date.
Rebuild it yourself from the staff list.
Do it in a spreadsheet
Put each employee on a row with years of service in column B (decimals for part-years: 3 years 6 months = 3.5) and monthly basic salary in column C. Then in column D:
=IF(B2<1, 0, MIN(C2/30*(21*MIN(B2,5) + 30*MAX(B2-5,0)), C2*24))
Sum column D for the company’s total. The cap in the formula uses 24 months of basic salary as a simple stand-in for the two-year limit; it only comes into play after about 25 years of service.
Four ways to handle it in the deal
| Approach | How it works | Watch out for |
|---|---|---|
| Price deduction | Treat accrued gratuity as debt and cut the price AED for AED | Agree the calculation date and method in writing |
| Holdback or escrow | Keep part of the price for 6 to 12 months against staff claims | Size it to the gratuity schedule, not a round number |
| Warranty and indemnity | Seller confirms the staff list and dues are complete, and covers pre-sale claims | Only as good as your ability to reach the seller later |
| Settle and re-hire | Each employee agrees in writing to end their contract; the seller pays their gratuity; the buyer issues new contracts | Needs each employee’s agreement; staff may take the cash and leave |
A common combination is a price deduction plus a holdback: the deduction covers what’s owed today, the holdback covers anything the schedule missed.
Settle and re-hire gives a clean start, but only do it by mutual agreement. An employer that ends contracts without a valid reason risks a claim under Article 47, with compensation of up to three months’ wages on top of notice pay and gratuity. Courts read that article narrowly (Al Tamimi), but it’s not a risk worth taking to save on gratuity. Get HR and legal advice before you use this route.
The savings-scheme exception
Some employers have moved staff onto the voluntary alternative scheme. Under Cabinet Resolution 96 of 2023, employers can pay monthly contributions into an approved investment fund instead of a lump sum at the end. If the company you’re buying joined, part of the liability is already funded.
But employers must preserve what staff accrued before joining, so the years before the switch can still be owed. Ask for the enrolment records and the cut-over date. MOHRE lists the approved funds on its scheme page (Arabic).
What to ask for in due diligence
- The official staff list (MOHRE, or the free zone authority) and every employment contract, for basic salary and start date
- 12 months of WPS payroll records
- Annual leave balances, which are another cash liability
- Any open labour complaints
- The gratuity provision in the latest accounts
- Savings-scheme enrolment records and cut-over date, if any
More in our buyer due diligence guide.
A gratuity schedule template
| Employee | Role | Start date | Basic salary / month (AED) | Years of service | Gratuity accrued (AED) | Leave days owed | On savings scheme? |
|---|---|---|---|---|---|---|---|
| Example: A. Khan | Head chef | 1 Oct 2018 | 9,000 | 8.0 | 58,500 | 12 | No |
Common questions
Does gratuity reset when a company is sold?
Not in a share sale. Contracts continue, and service counts from each employee’s original start date.
Who pays gratuity after a change of ownership?
The new owner, when each employee leaves. Agree with the seller how the pre-sale portion is covered in the price.
Is gratuity calculated on basic or total salary?
Basic salary, excluding allowances.
Do employees who resign get full gratuity?
Under the current law, yes, once they’ve completed one year of service.
Can the seller pay out gratuity before the sale to reset the clock?
Only by ending each employee’s contract. Do it by written mutual agreement; ending contracts without a valid reason can lead to compensation claims of up to three months’ wages.
Does this apply in free zones and DIFC?
Free zone employers generally follow the federal labour law. DIFC and ADGM have their own employment rules, and DIFC uses its own savings scheme, DEWS. Check which regime the employer falls under.
- 01Gulf News: Article 48 and change of ownership
- 02Gulf News: The old Article 126 rule
- 03Morgan Lewis: UAE federal labour law update
- 04Topsource Worldwide: Employer guide to UAE gratuity
- 05Gulf News: Article 47 and unfair dismissal
- 06Al Tamimi: Termination compensation under the new labour law
- 07EY: Voluntary alternative end-of-service scheme
- 08Lockton: New option for end-of-service benefits
- 09MOHRE: Alternative end-of-service savings scheme (Arabic)
- 10Pinsent Masons (Out-Law), guide to UAE corporate acquisitions
This article is general information, not legal advice. Check your deal with a UAE-qualified employment lawyer.
