UAE’s Game-Changing End-of-Service Benefits Scheme and Its Impact on You!
Nov 28, 2023 / Haroon Juma / HR & Payroll Blogs
What is the current end-of-service scheme?
The end-of-service benefits, also known as gratuity or severance pay, is an important financial benefit mandated by UAE labor law which provides financial security to employees who have completed a certain period of service with their employer and is provided upon their departure from a job.
The presence of a gratuity system makes the UAE companies more attractive to potential talent, as it not only helps the government stabilize financial well-being of its workforce and residents, but also provides a legal framework for employee rights, which is an important employee protection and safety net in cases of unforeseen loss of employment.
Gratuity Calculation in the UAE
Under the present end-of-service gratuity system in the country, employers are ordered to pay employees a lump sum following the end of their work relationship. Gratuity is calculated based on the worker’s basic salary, not including allowances such as housing, conveyance, utilities, furniture etc. and years of service to their employer as follows:
- Less than one year: not entitled to any gratuity pay;
- One to five years: 21 days of basic salary for each year of work;
- More than five years: full gratuity of 30 days’ salary for each year of work.
In all cases, the total gratuity shall not exceed the wage of two years and all entitlements must be paid within 14 days from the employee’s end date.
The UAE has been making various changes and updates to its labor laws and employment-related regulations to improve the rights and benefits of workers in the country. As part of these efforts, a new end-of-service investment scheme was launched, offering a more rewarding payment alternative to the current system of delivering gratuities.
New end-of-service investment scheme launched in the UAE
On Wednesday, 1 November 2023, the Ministry of Human Resources and Emiratisation (MoHRE) and the Securities and Commodities Authority (SCA) announced the implementation of the new savings scheme benefits for employees working in public and private sectors, as well as free zones.
According to Cabinet Resolution No. (96) of 2023 ‘Regarding the Voluntary Alternative End-of-Service Benefits Scheme for Private Sector Workers’, “…the scheme ensures that employees receive their end-of-service benefits, protect them from inflation, default, or bankruptcy, and provides them with an investment programme that allows them to save and invest their benefits.”
What is the scheme?
The new scheme is a voluntary program through which the end-of-service benefits of employees are invested in well-proven investment funds with good track records.
Through the innovative system, companies participate in setting up savings and investment funds on behalf of their employees by making monthly contributions as part of the program. At the end of service, employee will receive savings built up plus the returns made from the investment.
How many types of schemes are there?
There are two types of subscriptions – basic and voluntary. The basic subscription is mandatory for unskilled laborers and voluntary for skilled workers, who possess greater expertise and have the flexibility to allocate their funds to assets with varying levels of risk, including low, medium, and high-risk options.
Skilled labourers are those professional workers whose monthly salary is at least Dh4,000 or equivalent as per the approved labour classification system.
Who can partake in the new programme?
Employers have the option to choose whether they want to participate in this scheme. It is available to UAE citizens, employees across public and private sectors and free zones companies, and workers of all occupational levels and work patterns.
Subscribing employers can include all employees, a specific number of workers or specific categories or professional levels. Once the employer decided which employee categories and levels should be included in the programme and submitted an application, the subscription then becomes mandatory for these workers. On the other hand, employees who were not chosen to register in the scheme by the employer cannot participate.
How to sign up for the scheme?
The employer submits a request to the (MoHRE) and follow a few keys steps:
- Select and contract with an SCA approved investment fund.
- Decide which employees, categories and levels will be included in the scheme.
- Discontinue the use of the current end-of-service gratuity for employees who are selected to participate in the new end service scheme.
- Calculate and pay the initial subscription payment in accordance with the resolution’s stipulations.
- Provide documentation and information to the investment fund service providers related to the beneficiaries.
What are investment options are currently offered?
Variety of investment options are provided to beneficiaries which include but are not limited to:
1. Capital guaranteed portfolio: This option offers risk-free and guarantees the preservation of capital. It is mandatory for unskilled workers, without the option to choose other investment options.
2. Risk-based investment options: These options carry different degrees of risk such as low, medium and high. Skilled workers have the freedom to select their investment choices.
3. The third option is investing in Islamic Sharia-compliant funds.
Skilled workers can choose high-return investment portfolios or by making additional contributions if they want to can increase their end-of-service benefits. If the skilled worker doesn’t specify any option, then he/she is referred to the low-risk guaranteed investments.
What is the monthly subscription fee for employers interested in joining the system?
The basic subscription rate is determined by the chosen employee’s continuous service period, which begins with the date of employment, not the date of subscription.
According to MOHRE, employers pay the fees based on the employee’s basic salary:
- 5.83% of the employee’s monthly basic salary, if service duration is less than five years.
- 8.33% of the employee’s monthly basic salary, if service duration is more than five years.
This cannot be deducted from the employee’s salary and these amounts are not refundable to employers.
Can workers increase their contribution?
While the subscription fee for the scheme will be paid for by the employer, additionally, workers subscribed to the fund can voluntarily contribute up to 25% their total salary to increase investment returns.
Is employer accountable for losses if the employee switches to high-risk investment?
If a beneficiary is registered in an option that does not include a capital guarantee and decides to resort to high-risk investments, he or she is liable for any consequences incurred as a result, doesn’t have the right to lay responsibility on the employer in case of losses.
Providers of investment fund services are also not responsible for the beneficiaries’ losses, except in cases where the provider has acted in bad faith.
What happens to a worker’s current gratuity?
The existing end-of-service gratuity system will be suspended for employees selected to participate in the new scheme, and the financial entitlements they have accrued are calculated based on their years of service, up to the date they join the new scheme.
Employers must ensure that the employee’s end-of-service entitlements from the previous period are preserved and paid when the employee leaves the company.
When should employer transfer the funds?
Within 15 days of the beginning of the calendar month, subscriptions are transferred into the investment fund account.
How can the beneficiary withdraw the contribution?
Generally, it is prohibited to withdraw the basic subscription amount, as well as any profits or returns derived from the investment fund before an employee leaves the company, but employees can withdraw part or all of the voluntary contributions and investment returns.
The employee is also entitled to all basic subscription amounts paid by the employer under the alternative system and any investment returns gained during the subscription period within 14 days after the termination of employment, the ministry said.
What happens upon employment termination?
In case of termination of employment contract, employee is entitled to all basic subscription amounts paid by the employer under the alternative system and any investment returns gained during the subscription period within 14 days.
The worker may also choose to either receive the financial benefits or to continue investing in the scheme. If an employee wishes to continue, a new employer will take over from the previous one and continue paying the subscription to the same fund, after contracting with it. The new employer may also register the worker with another fund manager and pay the basic subscription amounts.
In case of ceasation of the employment relationship within one year of the start date, the employer has the right to recover the basic subscription amounts transferred to the scheme.
Can employer withdraw from the scheme?
Employers have the right to withdraw from the scheme with the approval of the MoHRE provided they meet certain criteria, including:
- subscription duration of at least one year,
- the absence of outstanding administrative fines or unresolved labour disputes, and
- having measures in place to ensure the withdrawal will not affect rights and gratuities of employees.
Can employer suspend the payments?
Employers can temporarily suspend payments of the basic subscription under the alternative scheme for a period subject to the approval of the Ministry, in the following circumstances:
- Provision of evidence of the establishment’s financial failure
- Beneficiary is absent from work without a valid reason
- In case of subscriber imprisonment or detention pursuant to a court order and his/her salary is suspended.
- When a business is undergoing restructuring, transferring ownership, merging, acquiring or dividing the establishment.
- If beneficiary fails to return from his/her annual leave
- If unpaid leave is granted to the beneficiary
What if employer fails to make a basic subscription payment?
The fund manager must notify the employer in writing within 30 days of the payment date that he/she will be required to pay the amount within 5 business days after receiving the notification.
The fund manager is also required to notify the ministry of any non-payment of the basic subscription within 15 days of sending the payment notification.
In the event that an employer neglects to make payment for the outstanding subscription amount for a period of two months, the ministry will will cease issuing new work permits to the company and may take other administrative actions.
The ministry can will fine employers of Dh1,000 for each beneficiary every month, if the subscription payments remain unpaid for more than four months.
How end-of-service benefits will be calculated in case of suspension of payment?
The benefits will be calculated in accordance with the provisions of Federal Decree Law No. (33) of 2021 and its executive regulations.
If the contractual relationship concludes during the payment suspension period, end-of-service benefits will be calculated from the date of suspension of payments
Can the employer to deduct funds from the worker’s entitlement?
Subject to approval by the Ministry or the enforcement of a judicial decision in compliance with the applicable laws, the employer may request any amounts legally owed to him from the worker’s entitlements under the alternative system upon the termination of the employment relationship between the two parties.
Can employer change the fund manager?
Upon obtaining the approval from MOHRE, the employer may change the fund manager and transfer all subscription amounts and returns to an alternative investment fund, based on factors such as the level of service performance and what supports the beneficiaries’ interests. No payment is obligatory for transfers from employers or beneficiaries.
What are the responsibilities of a fund manager?
The SCA will grant licences to investment service providers or fund managers for conducting activities of the new scheme. Fund managers play a crucial role in the scheme and are responsible for:
- offering investors with a basic option for investment with capital guaranteed;
- making available Shariah-compliant investment options;
- the fund manager must manage a minimum of Dh1 billion worth of funds and assets;
- the fund manager should possess a minimum of three years of experience in managing investment funds;
- provide employers and beneficiaries with semi-annual account statements.
How does the scheme work for free zone employees?
Authorities responsible for the regulation of financial free zones in the UAE will oversee the drafting and implementing of legislation, regulations, and rules for the scheme for the employees and employees working in the free zones.
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