UAE Cabinet publishes Decision no. 96/2023 Regarding the voluntary alternative scheme for End of Service Gratuity

In the UAE, due to a high expatriate workforce, end of service gratuity is crucial, acting as a form of pension to lure talent. While the UAE labor law mandates this gratuity, specifying its calculation, the Cabinet has the discretion to introduce alternative schemes. On 10th October, the Cabinet introduced a new gratuity scheme as an alternative to the traditional labor law method.

The objectives of this decision are to guarantee that employees’ benefits are adjusted against inflation or the bankruptcy of the employer. Additionally, the Voluntary Alternative scheme for end of service gratuity “the Scheme” would allow employees to invest their savings which will achieve a dual benefit for both employees and the investment entities in the state resulting in the flourishing of the economy ultimately.

We will use the upcoming paragraphs to explain and simplify the Scheme in light of Cabinet Decision no.96/2023 “the Decision.” Taking into consideration that our initial analysis will be subject to further developments once the Ministry issue further decisions on the regulation of the Scheme.

Nature of the Scheme:

The Scheme is introduced as an alternative to the original end of service gratuity calculation as per labor law provisions. Thus, the scheme is optional for employers at the current stage. Employers are not obliged to subscribe to the Scheme.

Subscription to the Scheme

Should an employer choose to subscribe to the Scheme, the process is initiated through a request submitted to MoHRE in accordance with the procedures which shall be issued by the MoHRE.

Obligations of Employers:

Once an employer chooses to subscribe to the Scheme, employers must comply with the following obligations;

• Choose an authorized Fund Manager for the purposes of subscribing to the Scheme and enter into agreement with the designated fund manager.
• Determine the category and number of employees who will be subscribed to the Scheme.
• EOSG will be suspended for employees who subscribed to the Scheme from the date of their joining. EOSG for the period prior to their subscription will be calculated based on their basic salary at the time of joining the Scheme. However, the EoSG for such a period will be paid out to the employee at the termination of their employment.
• Calculate and pay the Principal Premium in accordance with the provisions of the Decision. The Principal Premium shall not be deducted from the salary of the beneficiary.
• Provide the necessary information and documents as requested by the authorized investment fund.

The Principal Premium:

The Principal Premium is the amount contributed monthly by the employer to the Investment Fund for the purposes of the Scheme. The Decision makes the difference between full-time employees and employees subject to a different pattern of employment for the purposes of calculating the Principal Premium.

Full-time employees:
5.83% of the monthly basic salary for employees with a service period less than 5 years.
8.33% of the monthly basic salary for employees with a service period more than 5 years.
Part-time employees:
The same percentages as full-time employees calculated on their basic salary in accordance with Labor law provisions regarding the calculation of Part-time employees.

For the purposes of the Decision, the employer is tasked with calculating the monthly Principal Premium based on the basic salary and transferring the Principal Premium to the account of the investment fund within 15 days from the start of the month. The period of employment for the purpose of the Decision shall be calculated from the commencement of the employment not from the date of subscription to the Scheme.

If the employer does not promptly make the Principal Payment, it may lead to the suspension of their work permits or the imposition of a monthly fine of AED 1,000 for each beneficiary for whom the Principal Premiums were not timely transferred.

The Voluntary Subscription

In addition to the Principal Premium, a beneficiary may choose to contribute to the Scheme a percentage of his Remuneration or a monthly or fixed fee amount through the following means;

• Deducting the Voluntary Subscription contribution by the employer from the salary of the beneficiary in the event of monthly subscriptions.
• Transfer of the Voluntary Contribution to the account of the Investment fund directly in the event of a fixed-fee contribution.

In all events, the percentage of the Voluntary Subscription shall not exceed 25% of the employee’s Remuneration. The Voluntary Subscription shall not be taken into consideration when calculating End of Service benefits.

Investment Options

Skilled Beneficiaries are entitled to choose one of the following investments options;

• Capital Guarantee Portfolio
• Risk-based Portfolio
• Sharia-compliant Portfolio

Should the beneficiary choose an investment option other than the Capital Guarantee Portfolio, he shall be liable for any losses in connection with his investment option. However, the Principal Premiums are not included in such losses and the employee is not entitled to claim such losses from the employer.

Further, the investment fund providers shall not be liable for losses sustained by the beneficiary unless it is established that the service provider acted in bad faith or purposedly breached his obligations or committed gross negligence.

Entitlements of the beneficiary

Upon the termination of the employment relationship, the beneficiary is entitled to the Principal Premiums and its returns during the subscription period within 14 days from the termination of his employment.

The beneficiary, within 14 days of his termination, may instruct the Fund Manager to continue with investing his entitlements upon termination of his employment.

General Provisions

The Scheme is optional for employers but once the employer subscribes to the scheme he will commit to its provisions as illustrated by the Decision. However, the employees chosen for the Scheme are obliged to adhere to the provisions of the Scheme.

The Fund Manager is responsible for providing insurance coverage for the entitlements of the beneficiaries according to the regulations which will be set out by SCA.

It is prohibited to withdraw the Principal Premiums and their returns as per the Scheme prior to the termination of the employment contract. However, the employer may retrieve the Principal Premiums if the employment relationship terminated prior to completion of one year.

The principal premiums paid to the Investment Fund shall not be subject to attachments, liquidation, Bankruptcy or the execution proceedings against the employer.
The Minimum period for subscription in the Scheme is one year and Contributions shall be made only in AED.

MOHRE and SCA shall have jurisdiction over the supervision of the Scheme and any complaints or claims associated with the Scheme and its Investment Service Providers.

Conclusion

The Scheme provides an alternative to End of Service Gratuity Calculation as per Labor law provisions which provides a dual benefit to employers and employees. Employees get a chance to hedge their entitlements against inflations and currency fluctuations by investing their entitlements in Funds.

Further, Employers get a chance to pay less end of service contributions by choosing to invest in the scheme. Assuming an employee is granted a basic salary of AED 80,000 monthly and his period of service is less than 5 years, here is a calculation of his EOSG as per the Scheme compared to the Labor law provisions providing 21 days for his first 5 years of services.

As per the above calculations, the Scheme provides a cost-efficient way to make end of service contributions timely and in a manner which is more beneficial to employers compared to normal End of Service contributions as per labor law.

Ideally, employers would make provision in their financial statements for End of Service Contributions, but realistically speaking, this is not entirely practical. Therefore, the contributions made according to the Scheme would encourage employers to consider adopting the Scheme to save on the premiums allocated to End of service contributions on the conditions that they will be paid monthly instead of awaiting a termination of employment and paying a big chunk of money.

It is prudent to mention that the Scheme is optional for employers who may choose to adopt labor law provisions which may serve their business well. However, this statutory change provides an alternative to employers for End of Service contributions which is worthy of exploring and will help boost the economy and investing opportunities in UAE attracting the best talents to the UAE.

Please don’t hesitate to reach out to our team to provide necessary advice and clarifications regarding the application of the Decision and relevant Labor Law matters.