End of Service Gratuity Benefits Scheme

On 1 November 2023, the Ministry of Human Resources and Emiratisation (MoHRE) launched the recent voluntary Alternative End-of-Service Benefits System (the “Scheme”) where end of service benefits of employees are invested into Investment Funds which have  a well-proven record and are approved by the Securities and Commodities Authority. The Scheme is an alternative to the traditional statutory end of service gratuity entitlement under UAE labour law. This initiative aligns with the UAE Government’s efforts to promote a stable and sustainable labour environment, and reflects broader trends in international employment law frameworks and workplace savings schemes. 

This new Scheme also reflects the progressive DIFC Employees Workplace Savings (DEWS) scheme, which has been a standard provision in DIFC in place since 2020, where employers must contribute an amount equivalent to a small percentage of an employee’s basic salary into a qualifying scheme. 

How Employers can Sign up for the Savings Scheme:

1. The employer must submit a request to MoHRE 
2. The employer chooses an approved Investment Fund 
3. The employer nominates the employees whom they wish to register in the Scheme

Employers can register non-citizens in the public and private sector, as well as self-employed individuals with freelance work permits. Employers can also register UAE Nationals onto the Scheme, although this would be rare, as UAE Nationals are mandatorily covered by the national pension scheme, administered by the General Pension and Social Security Authority. The Scheme would therefore serve as an optional ‘add on’ to their existing entitlement and is at the discretion of the employer. This is a shift from the traditional approach under UAE labour law, whereby UAE Nationals generally do not accrue end-of-service gratuity due to their requisite enrollment on the national pension scheme.

What are the approved Investment Funds?

Employers can choose to invest employees’ gratuity in recognised companies such as First Abu Dhabi Bank, Daman Investments and National Bonds. The Scheme supports MoHRE’s efforts in protecting employees, by ensuring employees receive their gratuity and it safeguards worker entitlements from employer insolvency and bankruptcy and the value of gratuity from inflation. 

Employers participating in the Scheme must make monthly contributions of either 5.83% of an employee’s base salary for service under 5 years or 8.33% of an employee’s base salary for service exceeding five years or more to the investment fund. The employee will receive the investment returns (both capital and yield) within 14 days of termination, or the employee may choose to leave the funds invested and voluntarily continue to contribute to the fund post-termination.

What’s in it for Employers? 

While the Scheme provides solid benefits to employees, it also offers key benefits to employers:

1. Improved cash flow: instead of extracting a sizeable lump sum from available cash upon termination of employment, employers can make manageable monthly contributions to the Fund. 
2. Elimination of liability: where an employer implements the new Scheme, traditional End-of-Service Gratuity is no longer payable, eliminating the risks associated with it such as severe fines of up to AED 1 million for late payment, cash flow disruption (particularly where multiple employees leave simultaneously) and tax penalties for improper record-keeping or miscalculation. 
3. Competitiveness: the globally aligned Scheme promotes an organisation as pioneering and employee-centric, improving branding and attracting talent to cultivate a purpose-driven culture, in parallel to businesses also operating under DIFC employment law.

What are the Risks?

1. Operational and administrative burdens: when shifting to the Scheme, employers must update payroll, HR systems and employee documentation, as well as manage ongoing correspondence with the approved investment fund. Improper management of the Scheme can also result in employee disputes.
2. Compliance penalties: inaccurate, late or non-payment of contributions to the investment fund is likely to lead to fines and potential suspension of the ability to obtain new work permits. 
3. Commitment: once an employee is enrolled onto the Scheme, contribution becomes mandatory and potentially difficult to reverse. c

If you are an employer considering participation in the Scheme – payrolls, investment and administrative processes must be followed diligently to ensure compliance with MoHRE guidance. Effective communication must be carried out with employees on options and potential implications of participation under the Scheme to ensure their portfolio matches their risk tolerance and financial goals- and ultimately avoid disputes.If you would like to discuss the implementation of the Scheme in your organisation or have any other Dubai mainland employment related enquiries, please get in touch with James Berry at [email protected]. Alternatively, for DIFC employment-related matters, please get in contact with Nichola Reece Burton at [email protected].