Penalty for ending a contract tied to basic salary

How is a salary penalty determined when breaking a limited-term employment contract?

I work in a special school and am on a two-year contract. I have completed one year of employment and have tendered my resignation with the stipulated notice period of two months. But since I am breaking my contract, I have to compensate the employer with half of three months' remuneration. I want to clarify whether this will be based on my basic salary or my salary with allowances. The contract just says that the termination compensation will be in accordance to the UAE Labour Law. KV, Abu Dhabi

As KV states, he will be breaking the terms of his contract of employment so he will be liable to pay a penalty to his employer in accordance with Article 116 of UAE Labour Law which states: “should the contract be rescinded by the worker … the worker shall be bound to compensate the employer for the loss incurred thereto by reason of the rescission of the contract, provided that the amount of compensation does not exceed the wage of half a month for the period of three months, or for the remaining period of the contract, whichever is shorter, unless otherwise stipulated in the contract.”

An individual’s wage is their basic salary. It is usual for many employees to have their income split into a basic wage, plus allowances such as for housing or schooling, but it is the basic salary that is used when calculating benefits and penalties under the UAE Labour Law. Just as an employer uses only the basic salary when calculating an end of service gratuity, the same basic salary is to be used when calculating a penalty for breaking a contract. Note however, that in this particular base a gratuity is not payable as KV forfeits this for leaving as per Article 138 which says: “should the worker bound by an employment contract with determined term leave his work by his own choice before the expiry of the contract, he shall not be entitled to an end of service gratuity unless the duration of the service period exceeds five years.”

Keren Bobker is an independent financial adviser and senior partner with Holborn Assets in Dubai, with over 20 years’ experience. Contact her at [e-mail]. Follow her on Twitter at @FinancialUAE

The advice provided in our columns does not constitute legal advice and is provided for information only

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