The new end-of-service gratuity system: amendments to the payment of leaving indemnity to non-Bahrainis in the private sector

The Crown Prince and Prime Minister, HRH Prince Salman bin Hamad Al Khalifa, has recently announced an update with respect to the payment of leaving indemnity to non-Bahrainis as per Resolution (109) of 2023 (the “Leaving Indemnity Resolution”).

The most fundamental change to the payment of leaving indemnity is the requirement that employers remit to the to the Social Insurance Organisation (“SIO”) the end of service entitlements for all relevant employees on a monthly basis.  Upon termination of or resignation by a relevant employee, the employee would then apply to the SIO for their end of service entitlements, in contrast to the current system whereby employers pay leaving indemnity to the relevant employee upon termination/resignation.

The Leaving Indemnity Resolution introduces the following provisions in relation to the end of service gratuity system for non-Bahrainis:

1. From 1 March 2024, being the date of the publication of the decision in the Official Gazette (“Effective Date”), employers will have a grace period of one month to submit all required data on wages for all insured workers, including non-Bahraini employees, to the SIO.
2. Failure to submit such data within the required time period shall result in contributions being calculated on the same wage basis used for the employee contributions for work injuries.
3. The Leaving Indemnity Resolution provides that employers shall continue to bear the cost of the employees’ end of service contributions in the event of temporary secondment to another establishment owned by another employee.
4. The calculations of the gratuity shall remain the same, at a rate of 4.2% of the employee’s annual salary for each of the first three years (3) of employment, and 8.4% of the employee’s annual salary for subsequent years until termination. In the event that the employee has been employed for over three years prior to the Effective Date, then the employers’ contributions shall automatically be set at 8.4% and the provisions of the Labour Law (whereby the employer pays the leaving indemnity) shall apply to the indemnity for the duration of the period of service prior to the Effective Date.
5. Employers shall be required to pay the relevant contributions into the system within the first fifteen days of the month. Failure to pay within that period shall result in interest being accrued at the rate of 5% of the applicable monthly contributions. Failure to make the required leaving indemnity contributions in any given time shall result in employers being required to pay an additional amount equivalent to 20% of the contributions which have not been paid.
6. Employers who fail to comply with the Leaving Indemnity Resolution may be subject to a penalty of BHD 100-500, which shall be doubled if the offence is repeated. In addition, providing false or inaccurate information for the purpose of obtaining an unentitled benefit may result in the imposition of sanctions. .
7. The Implementing Regulations shall be issued by the Minister of Finance and National Economy. It is these Regulations which will provide much of the procedural detail relevant to the We would be in a position to provide you with more information upon the issuance of the regulations.

Based on our experience, we understood that many employers, as a matter of good accounting practice, set aside monthly accruals on an internal basis, categorising the accruals as a contingent liability for the purposes of paying out end of service entitlements without jeopardising the company’s financials (in the event, for example, of several resignations/terminations within the same period). However, the changes in the law will mean that employers no longer accrue internally, given that the SIO shall now require employers’ to make contributions (for the non-Bahraini employees’ leaving indemnity) to the SIO fund on a monthly basis.

The changes also have the effect of protecting employees against the risk of employers, without lawful excuse, failing to pay to out end of service entitlements upon termination / resignation.  In doing so, the leadership of the Kingdom of Bahrain is once again demonstrating its full commitment to fostering a world leading business environment attractive both to employers and employees.

What should you do next?

• Submit up to date and accurate details of the salaries of your non-Bahraini employees with the SIO by the end of February 2024.
• Ensure that their financial positions allow them to provide the SIO with the monthly contributions to avoid any interests applying.
• Ensure payment of the leaving indemnity for the duration prior to the Effective Date is satisfied upon resignation/termination (noting that this remains the responsibility of the employer despite the passing of this Resolution.
• Register for our informative webinar to find out more (see below)

Timeline for implementation

The Resolution shall come into effect on the Effective Date. We would therefore recommend complying with the Resolution and submitting the relevant wages by the end of February 2024 at the latest.

How can we help?

As a leading law firm in the region, Al Tamimi & Company is well placed to assist you with assessing the impact of the Resolution on non-Bahraini employees and their leaving indemnity in Bahrain.  If you would like to further discuss the contents of this update, please contact one of our key contacts below.

Al Tamimi & Company will be hosting a webinar on the ‘next steps’ for employers to take upon the issuance of the Implementing Regulations.  Please click here and submit your details to register for the event.