The way in which end of service gratuity is to be handled in the UAE is changing. The UAE cabinet has approved a scheme for the establishment of savings and investment funds for employees primarily in the private sector, including free zones. It means instead of paying out a lump sum gratuity payment on termination of employment, employers will instead make a monthly contribution into a fund on behalf of the employees and it’s something employers will need to plan for.
As the Khaleej Times reports, the scheme is an alternative to the current system of payment of end of service benefits to an employee at the end of employment. Participation in the scheme will be optional for employers but, if employers opt in, they’ll be required to make a monthly contribution to the selected fund. The funds will be supervised by the UAE Securities and Commodities Authority in coordination with the Ministry of Human Resources and Emiratization.
Luke Tapp comments on this for Out-Law saying he think it is a ‘very positive’ development for the region and how it’s important that employers “embrace” the potential of this new scheme. He says: ‘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.’
So, let’s hear more about this development. Earlier Luke joined me by video-link from Dubai to discuss it:
Luke Tapp: “I think it's a really positive development, the introduction of a pension scheme for all employees across the UAE outside of the financial free zones, and I think that's really positive because it will have a really positive impact on employer brand within the UAE, I think it will help to attract talent, help to attract skilled professionals into the region. We've seen that with the introduction of the mandatory pension scheme in the DIFC free zone already over the past few years and I think it will support employers in retaining that talent as well. I think from an employee perspective, it will help financially. So, currently employees are entitled to end of service gratuity on the termination of employment but under the new scheme the contributions will be made on a monthly basis into the pension scheme which will then be invested which, of course, gives the employee opportunity for that investment to grow whilst they remain employed with the organisation and so when they when they do leave the business the value of that saving will have increased. I think in addition to that, it protects and ring fences that saving. So what we have at the moment are situations where, from time to time, local employers will become insolvent, or will have financial difficulties, and at that point employees are just another creditor in relation to access to the end of service gratuity. Of course, this moves the money off the company's books, ring fences in the pension scheme so should that situation arise the money is much more accessible for employees than it is under the current arrangements. So yes, ultimately, I think it's really beneficial for employees and, of course, if you're attracting good employees who are more committed to organisations, more committed to the region, that can only be good news for employers as well.”
Joe Glavina: “The scheme is optional for employers and, as I understand it, employers can choose which categories of employees can benefit from it. What's your advice to employers on how to approach that?”
Luke Tapp: “The way that the announcement has been framed is that the scheme is not mandatory, it’s optional, and it is also optional in relation to which parts of the workforce, which employees, have access to it. I think that is great in some respects because it gives flexibility, it gives some discretion to organisations but, equally, when considering that option companies should bear in mind their obligations under the UAE Labour Law and, of course, the latest version of the UAE Labour Law that was implemented in 2022 introduced concepts such as anti-discrimination provisions, equality, equal pay, and I think companies just have to be really mindful when they're providing access to certain benefits within their organisation to certain groups of employees, and not providing them to other groups of employees, that that can't be deemed, or interpreted, as any form of discrimination or treating one group of employees less favourably than another that could be in breach of the Labour Law.
Joe Glavina: “In your article you say that opting into the scheme might present some immediate cash flow issues and administrative burdens for employers. Why is that?”
Luke Tapp: “A lot of our clients are international organisations with entities within the UAE but we do also represent a lot of regional employers who are headquartered within the Middle East region. Ultimately, this is a totally new scheme, it's a totally new benefit for UAE employing entities, it's a benefit that they've not had access to in the past, and so that will create some administrative obligations on them as employers that have never been applicable to them in the past such as registering onto the pension scheme, creating the correct paperwork for their employees to opt in or opt out of the scheme, ensuring that the correct allocations are being made into the pension contribution scheme. So, all of these administrative obligations will apply to companies which haven't been applicable in the past. I think once companies have established that, and a lot of our international clients will already be making pension contributions outside of this region, it won't be such a major issue and it will become more intuitive and I actually think there'll be some benefits from a cash flow perspective in relation to the scheme because what we have now, from time to time, with organisations is if they're running a large redundancy programme within this region, or if they have a lot of leavers for any particular market-related reason, that happens within a short period of time, that can have cash flow challenges for organisations because there's a large payout of end of service gratuity to multiple employees over the course of a short period of time. That will not be an issue under the new scheme because, of course, the pension contributions will have been made on a monthly basis, a person leaves, they have access to that pension but there's no additional cost to the company arising out of those departures. So, in some respects it will actually ease the cash flow pressure that can arise from time to time within the UAE.”
Joe Glavina: “We don’t know exactly when this is going to come into force, Luke, so in the meantime are there any actions for employers to take now?”
Luke Tapp: “We don't know when it will come into force, there has been no indication from the authorities for a date or a timeline. What we do know is that there's been a lot of consultation over the past year, or two years, in relation to this scheme so the announcement didn't take us by surprise, we were expecting this announcement. Having spoken to my contacts in the industry, I do expect it to move fairly quickly. I would expect more formal legislation to be published at some point within the next six months and I would hope that certainly at some point in 2024, at least, that some pension schemes will be made available for organisations to opt into.”
Luke’s article on this looks at some of those issues in more detail if you would like to read it. That’s ‘Employers offered alternative end of service benefits scheme in the UAE’ and we’ve put a link to it in the transcript of this programme.
LINKS
- Link to Out-Law article: ‘Employers offered alternative end of service benefits scheme in the UAE’
