Employers offered alternative end of service benefits scheme in the UAE

The UAE Cabinet has recently approved a plan to introduce an alternative end of service gratuity system for private sector employees and free zone workers in the country. The new, voluntary scheme involves establishing private sector investment and savings funds supervised by Securities and Commodities Authority in partnership with the Ministry of Human Resources and Emiratisation. Employers can opt to invest and save their employees’ end of service gratuities through these funds on their behalf, according to various investment options.

UAE employment law experts Luke Tapp and Michael Chattle of Pinsent Masons, said the development is “very positive” from both a regulatory and community perspective and it is important that employers “embrace” the potential of this new scheme.

“The UAE is becoming a more sophisticated environment for employers and employees, and this is an important development in that respect. The concept of creating a national savings scheme that is available to all employees in the private sector will be one of the first saving schemes of its kind in the region,” said Tapp.

The other standout employment law jurisdiction within the region that operates a savings type scheme for employees is the Dubai International Financial Centre (DIFC), which is a financial free zone established within the UAE. In 2020, the DIFC replaced its statutory end of service gratuity regime by requiring employers to make contributions into the DIFC Employee Workplace Savings Plan or that of an alternative qualifying scheme.

Under the existing end of service gratuity system in the UAE, employers pay employees a lump sum following the end of their work relationship. It is usually calculated on the basis of the employee’s last basic salary. A worker becomes eligible for this benefit after one year or more in continuous service. Currently, employers account for this lump sum payment in their accounts throughout the employee’s employment. This means that the amounts do not accrue any earnings during this time and are potentially at risk should the employer experience financial difficulties.

As an alterative, employers participating in the new scheme across the UAE will be able to pay a monthly contribution on behalf of each employee to the investment funds. Upon termination of service, the employee beneficiary will receive their savings and accrued returns from the funds. Employers will be permitted to choose the categories of employees to benefit from the scheme.

This scheme will promote long term saving for employees, safeguard employees’ gratuity entitlements and promote responsible investing, Tapp and Chattle said. Although opting into the scheme may present some immediate cash flow issues and administrative burdens for employers, it will be a sought after as a benefit by employees and will be necessary to continue attract the best talent.

“This is a very interesting and positive development for both employers and employees in the UAE and one that is a natural progression given the wider changes that we have seen over the past few years. While it will present some challenges for employers, ultimately it will help safeguard employee entitlements, promote long-term saving and continue to allow employers to attract the top talent to the UAE,” said Chattle.

All employers in the private sector and free zones will be able to take part in the voluntary system, and workers of all occupational levels and work patterns are eligible, according to a government press release.

The scheme will incorporate three main investment options: risk-free investment that maintains the capital amount; risk-based investment where the risk varies between low, medium and high; and a sharia compliant investment option.

It is not yet clear about when the new system will be implemented and further details are awaited, in particular on the approach that will be taken towards employees’ existing end of service gratuity accruals.