An Overview of the New Voluntary Alternative to End of Service Gratuity

The United Arab Emirates (“UAE”) Cabinet has issued Cabinet Resolution No. (96) of 2023 and Ministerial Resolution No.668 of 2023 (the “Resolutions”) introducing an optional alternative voluntary end of service system for private sector employers and employees in the UAE, including those incorporated within free zones (the “Scheme”). The Scheme aims to offer employees with diverse options to maximise returns on savings depending upon risk appetite, while providing employers with a means to financially plan more effectively with respect of employment liabilities. Employees enrolled into the scheme will have the possibility of benefiting from higher returns and the associated protection from inflation. In addition, the option of the Scheme insulates employees in respect of the risks related to company insolvency or bankruptcy.

The Resolutions allow employers to choose one of the licensed investment funds for the purposes of implementing the Scheme, and to select the categories and professional levels of employees that they would like to include in the alternative system. It is important to note that the Scheme is voluntary for employers, but mandatory for employees who have been chosen by their employer to participate. Put another way, the employer retains the choice of continuing with the current end of service gratuity (“ESG”) model or the Scheme but if it elects for the former, the employees will be enrolled to participate without having a choice in the matter.

What will happen to the end of service gratuity (“ESG”) accrued up to the changeover date?

Employers who choose to enroll in the Scheme will need to calculate the ESG due to employees up until the date of changeover from the existing participation in ESG system over to the new Scheme (the “Changeover Date”). This amount will be calculated as at the Changeover Date and will remain on the employer’s balance sheet whereupon it will be paid out to the employees on the eventual termination of their employment. The ESG amount due under the previous system will be calculated in accordance with the employee’s basic salary as at the Changeover Date and not the salary paid on termination.

What are the mandatory subscription amounts?

Employers opting into the Scheme must commit to a minimum subscription period of one year, and pay a monthly subscription to the investment fund, based on a percentage of the employee’s basic wage. For the avoidance of any doubt, whilst the payment is calculated with reference to the basic wage, no deduction is made from the employee’s wage (i.e. this is a standalone employer obligation in addition to the basic wage that the employee receives). For full time employees, the monthly subscription will be 5.83% of the employee’s monthly basic salary if the period of service does not exceed (5) years; and 8.33% of the employee’s monthly basic salary if the service period exceeds (5) years. The employee is entitled to all the subscription amounts paid by the employer and any returns generated from them upon the termination of the employment relationship.

Can employees make voluntary contributions into the Scheme?

The employee may also contribute a voluntary subscription from their own wage (the “Employee Contributions”), which they can withdraw partially or fully during their service period. The Employee Contributions may either be made directly by the employee into the investment fund account as a lump sum, or alternatively the Employee Contributions may be made by the employer on their behalf by deducting it from the employee’s monthly wage (up to a maximum of 25% of the employee’s total monthly wage).

What will happen to the amounts provided in the fund accounts?

The Scheme provides various investment options for employees, including a capital guarantee portfolio, which is a risk-free option that guarantees the preservation of capital, and a risk-based investment option, which includes various investment portfolios that carry varying degrees of financial risk in proportion to the expected returns. Employees of the “skilled labour” category may choose any type of investment option, while employees of the “unskilled labour” category must adhere to the capital guarantee option. The employee is responsible for any losses incurred from their choice of investment option, unless it is proven that the service provider acted in bad faith, intentionally breached any of their obligations, or was grossly negligent in carrying out their obligations.

Do employers have the ability to switch between the fund managers?

The employer may change the fund manager and transfer all the subscription amounts and returns to an alternative investment fund, based on reasons related to the level of service performance and insupport of the interests of the employees, after obtaining the approval of the Ministry of Human Resources and Emiratisation (“MOHRE”) and the Securities and Commodities Authority (the “SCA”). The employer may also withdraw from the Scheme subject to certain conditions and the approval of MOHRE.

Who is administering the Scheme?

The Scheme is supervised and controlled by MOHRE and the SCA, which may take all necessary measures for monitoring, inspecting and settling complaints related to the Scheme, which will be subject to the same legal procedures as general labour complaints. The Resolutions also impose certain standards and obligations on the investment fund service providers, such as the fund manager, the administrative services provider, and the custodian, which are licensed by the SCA and must comply with the anti-money laundering provisions, procedures and requirements.

How does a company sign up for the Scheme?

MOHRE has confirmed that the Scheme is now available for enrolment. In order to sign up to the Scheme, a representative of the employer (such as a PRO) should call MOHRE to commence an application. During the call, they will need to provide key details about the company, such as the company name, establishment ID number, and the current number of employees.  We are awaiting further details with respect to the enrolment procedure for freezone companies and, importantly, the optionality around investment/fund managers and administrators.

How can we help?

If you require any support or would like to know any more details about joining the alternative end of service scheme, please do not hesitate to reach out to us. We will continue to share any developments in due course.