Alternative voluntary end of service gratuity system takes effect in the UAE

Employers in the UAE can now choose to invest and save their employees’ end of service gratuities by paying a monthly contribution to licensed investment funds on their behalf. The new, voluntary scheme is available to private sector employers in the UAE, including free zones, and their employees.

Employers who voluntarily subscribe to the alternative method have various obligations, such as choosing an investment fund, selecting the categories of workers to include in the system, calculating and paying the basic subscription amount monthly, and providing information to the investment fund service providers.

The monthly contribution, which is labelled as the ‘basic subscription amount’, is calculated based on the beneficiary's service period on the date of commencement of employment and transferred to the investment fund account at various rates. Staff who have been working for less than five years will get 5.93% of their monthly basic wage, while the rate is 8.33% for staff with over five years of service.

Dubai-based employment law expert Lujain Assaf of Pinsent Masons said: “It appears that the monthly contributions by the employer into this alternative system will lead to the accrual of an amount which is approximately equal to the amount that should be paid to the employee on termination of employment under the existing system.”

The newly introduced scheme is set to promote long-term saving for employees, safeguard employees’ gratuity entitlements and promote responsible investing, according to the UAE government.

Luke Tapp, Middle East employment law expert, said: “This is an extremely positive development for UAE employers and employees. It creates a pension type option for employers, which is similar to the DEWS pension scheme that has been operating successfully within the DIFC jurisdiction for the past few years. This latest development will modernise the employee benefits available within the UAE and support regional employers in attracting and retaining the most talented employees available”.

However, there are a few things employers and staff should take note of, Assaf said.

Under the alternative scheme, investment fund managers must provide various investment options, including risk-free investment that maintains the capital amount and risk-based options that carry varying degrees of financial risk in proportion to the expected returns.

If opting for risk-based investment, the beneficiary will be responsible for any consequences or losses incurred as a result.

“Beneficiaries shall bear the investment losses, so long as such losses do not include the basic subscription amounts made by the employer, the beneficiary is not entitled to file any claim against the employer for those losses, and the investment fund service providers are not liable for the beneficiary losses,” said Assaf.

Employers that fail to pay the basic subscription amount on time will receive warnings and administrative fines. For example, after two months have passed from the payment date, the supervising authority will stop issuing new work permits to the employer until all subscription amounts due are paid. After four months have passed from the date of failure to pay, the regulator will impose an AED1,000 (approx. US$222) administrative fine per month for each beneficiary on the employer.

Nevertheless, the alternative system is expected to provide more flexibility around investment and savings to employees. Beneficiaries can contribute an additional amount to their savings, and they have the option to withdraw part or all of their voluntary subscription amounts during their service. They are entitled to the basic subscription amounts and their returns upon the end of their employment or in case of their death, but they can also choose to continue investing their funds at the end of employment.

Employers can withdraw from the system under certain conditions, while beneficiaries retain their rights. They may demand deduction from the worker’s funds of any amounts legally due on termination of the employment relationship with regulatory approval or in response to a judicial ruling.