What Happens to Unused Annual Leave When an Employee Leaves a UAE Company?

When an employee leaves a UAE private-sector company, any eligible unused annual leave balance must be considered as part of the employee's final employment entitlements. Under Article 29 of UAE Federal Decree-Law No. 33 of 2021, employees are entitled to payment for accrued annual leave that they have not used when their employment ends, including the applicable proportion for part of the final year. The statutory cash compensation is calculated based on the basic wage.

Employers should therefore calculate the employee's leave balance carefully before completing the final settlement.

1. Calculate the Employee's Accrued Leave

The first step is to determine how much annual leave the employee has earned up to the final employment date.

For employees covered by the UAE Labour Law, the statutory entitlement is generally:

• 30 days for each completed year of service
• 2 days for each month where service exceeds six months but is less than one year
• Proportionate leave for the applicable part of the final year when employment ends.

The employer should use the employee's actual service dates when calculating the entitlement.

2. Deduct Leave Already Taken

After determining the accrued entitlement, HR should deduct annual leave that the employee has already used.

For example:

Accrued annual leave: 25 days
Annual leave already taken: 15 days
Unused balance: 10 days

The remaining eligible balance should then be considered during the final settlement.

3. Include Eligible Carried-Forward Leave

An employee may, subject to employer approval and the applicable establishment rules, carry annual leave or part of it into the following year. The Labour Law also states that an employer generally cannot prevent an employee from benefiting from accrued annual leave for more than two years unless the employee wishes to carry it forward or receive cash compensation in accordance with the applicable rules.

HR should therefore maintain a separate record of carried-forward balances and verify which amounts remain legally payable when employment ends.

4. Calculate the Final Year's Proportionate Leave

An employee does not necessarily need to complete a full year to have a leave entitlement for the relevant part of the final year.

For example, if an employee has a 30-day annual entitlement and completes six months of the relevant year:

30 ÷ 12 × 6 = 15 days

The exact calculation should take account of the employee's service dates, previous leave usage, and applicable UAE rules.

5. Calculate Cash Compensation Using Basic Wage

For statutory unused annual leave payable when employment ends, Article 29 provides that the leave wage is calculated according to the basic wage. The implementing regulation also provides that, upon termination, cash compensation for the legally due annual leave balance is based on basic wage.

For example:

Basic monthly wage: AED 6,000
Unused eligible leave: 10 days

If the company's applicable daily calculation uses a 30-day month:

AED 6,000 ÷ 30 × 10 = AED 2,000

The employer should apply the legally applicable calculation method and the employee's actual circumstances rather than relying on a generic formula in every case.

6. Do Not Automatically Use Gross Salary

Employers should distinguish between basic wage and total salary when calculating the statutory cash compensation for unused annual leave at termination.

An employee may receive:

• Basic salary
• Housing allowance
• Transport allowance
• Other allowances

However, the statutory termination payment for accrued annual leave is calculated based on the basic wage, subject to the applicable legal provisions.

A contract or company policy may provide a more favourable benefit, so HR should review the applicable terms before finalizing the calculation.

7. Include the Balance in the Final Settlement

Unused annual leave should be included in the employee's final settlement where legally payable.

The final settlement may contain several components, such as:

• Outstanding salary
• Unused annual leave compensation
• End-of-service benefits, where applicable
• Other contractual entitlements
• Approved deductions

Each component should be calculated separately and supported by appropriate records.

8. Maintain the Employee's Leave History

HR should maintain a clear history showing:

• Annual entitlement
• Opening balance
• Accrued leave
• Leave taken
• Carry-forward
• Cancelled leave
• Adjustments
• Remaining balance
• Final settlement amount

This makes it easier to explain how the final leave payment was calculated.

9. Reconcile Leave With Attendance

Before completing the final settlement, HR should reconcile the employee's leave records with attendance.

For example:

Leave system → Attendance records → Approved leave → Remaining balance → Final settlement

This helps prevent situations where leave taken shortly before the employee's last working day is accidentally counted twice or omitted.

10. Handle Leave During Notice Period

An employee may request to take annual leave during the notice period, subject to the employer's approval and applicable rules.

HR should update the leave balance when such leave is approved and actually taken.

For example:

Unused balance before notice: 15 days
Annual leave taken during notice: 5 days
Remaining balance: 10 days

Only the eligible remaining balance should then be considered for cash compensation.

11. Maintain Approval Records

All leave adjustments made during the exit process should have supporting documentation.

The record should identify:

• Employee
• Leave period
• Number of days
• Approval
• Person approving
• Date
• Updated balance

This provides an audit trail if the employee later questions the final settlement.

12. Use Payroll Software for Final Calculations

A payroll system can automate the calculation workflow.

For example:

Employee exit date → Accrued leave → Leave taken → Carry-forward → Remaining balance → Basic wage → Leave compensation

This reduces spreadsheet calculations and helps HR teams process final settlements consistently.

13. Provide Employees With a Settlement Breakdown

Employers can improve transparency by providing employees with a breakdown of their final settlement.

For annual leave, the statement can show:

Item	Example
Accrued leave	25 days
Leave taken	15 days
Eligible balance	10 days
Basic monthly wage	AED 6,000
Leave compensation	AED 2,000*

*Illustrative calculation using a 30-day monthly basis; the applicable calculation should be determined according to current UAE requirements and the employee's circumstances.

14. Keep Records for Payroll and Compliance Reviews

Employers should retain supporting records for final settlements, including:

• Employment dates
• Leave records
• Attendance
• Salary records
• Basic wage
• Leave approvals
• Final settlement calculation
• Payment evidence

Maintaining these records helps HR respond to employee queries and demonstrate how the final payment was determined.

Conclusion

When an employee leaves a UAE private-sector company, eligible unused annual leave does not simply disappear. Article 29 of the UAE Labour Law provides that an employee who leaves before using accrued annual leave is entitled to the applicable leave wage, including the proportionate entitlement for the relevant part of the final year. The statutory compensation is calculated using the basic wage.

Employers should therefore reconcile leave entitlement, leave taken, carried-forward balances, attendance, and the employee's basic wage before including unused-leave compensation in the final settlement. An integrated HR and payroll system can automate these calculations, maintain an audit trail, and provide employees with a clear settlement breakdown.

At exit, InnBuilt leave and payroll workflows can surface unused balance and approval history for UAE HR teams, supporting a reviewed final settlement rather than an estimate from scattered files.