End-of-Service Benefits: Alternative Scheme in the UAE for Employers and Employees

November 16, 2023by Amy Denny0
Employees in HR meeting employee end-of-service benefits
Photo by Campaign Creators on Unsplash

Participation in the Scheme is optional for employers, they can adhere to labour law provisions that align with their business needs. SCA will issue licenses to investment service providers or fund managers. Regulatory authorities in the free zones across the UAE will oversee the implementation.

The Voluntary Alternative End-of-Service Benefits Scheme (referred to as the “Scheme”) came into effect in November 2023, following the UAE government’s September 2023 announcement. Cabinet Resolution No. (96) of 2023 introduced this alternative system as a substitute for the original end-of-service gratuity calculation specified in labour law. The Scheme entails establishing Savings and Investment Funds, overseen by the Securities and Commodities Authority (SCA) in collaboration with the Ministry of Human Resources and Emiratization (MoHRE). Employers opting for this Scheme can save and invest employees’ end-of-service gratuities in these funds, choosing from various investment options. Importantly, the Scheme is voluntary for both employees and employers, without a minimum salary requirement for participation. Open to expatriates and UAE citizens alike, it provides an alternative approach to the existing gratuity payment system. 

Scope and Objectives

The primary objective of the Scheme is to streamline business operations and elevate the UAE’s appeal to skilled professionals by providing investment returns on employees’ end-of-service gratuity through approved investment funds by the ministry and SCA. Additionally, the Scheme serves as a safeguard for employees’ gratuity, shielding it from potential financial risks on the employer’s side, including insolvency, bankruptcy, and the impact of rising inflation rates that may affect payouts upon termination. This new initiative empowers employees with the choice to hedge their gratuities and generate returns. Under the Scheme, the SCA will issue licenses to investment service providers or fund managers to operate within its framework. Regulatory authorities in the free zones across the UAE will oversee the creation and implementation of legislation, regulations, and rules pertaining to the scheme for employers and employees within these zones. 

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Employer’s Obligations

Employers choosing to enroll their employees in the new Scheme must fulfill specific obligations, including: 

  • Submitting a request to MoHRE to activate the Scheme, selecting an authorized fund manager for Scheme subscriptions, and entering into an agreement with a licensed fund manager to register employees. 
  • Determining the type of subscriptions (basic and voluntary) under the Scheme, along with the category and number of employees to be enrolled. 
  • Temporarily suspending the application of previous benefit schemes for enrolled employees, with the previous benefits calculated for the period preceding the subscription. However, employees will only receive the gratuity upon termination. 
  • Timely payment of the required monthly subscription premium, without deducting it from the employee’s salary. It’s essential to note that these premium amounts are non-refundable to employers. 
  • Providing all necessary documentation and information concerning beneficiaries upon request from investment fund service providers. 
  • Transferring subscriptions into the investment fund account within 15 days of the first day of the calendar month. 

Employer’s Rights

  • Request any legally owed amount from the worker’s entitlements under the Scheme upon the termination of the employment relationship between the two parties, subject to approval by the ministry or the enforcement of a judicial decision in compliance with applicable laws. 
  • Change the fund manager and transfer all subscription amounts and returns to an alternative investment fund upon receiving approval from the ministry and authority. Factors influencing this decision include the level of service performance and what supports the beneficiaries’ interests. 
  • Withdraw from the Scheme with the approval of the ministry, provided they meet certain criteria. These criteria include a minimum subscription period of one year, the absence of outstanding administrative fines or unresolved labour disputes, and the implementation of measures to ensure that the withdrawal will not impact the rights and gratuities of employees, among other conditions. 

Employees Benefits

  • Employees are entitled to end-of-service benefits that are safeguarded against inflation, default, and bankruptcy. 
  • The Scheme provides employees with access to an investment program, allowing them to save and invest their benefits. 
  • Offering accurate financial planning, the Scheme presents diverse possibilities for obtaining returns on savings. 
  • Following conditions set by the fund manager, employees may withdraw all or a portion of their voluntary contributions or investment returns at any point during their employment, aiding in managing cash flow during challenging financial circumstances. 
  • The Scheme prevents employees from misusing their end-of-service pay entitlements, as the employer consistently contributes and transfers funds. 
  • Functioning as a safeguard, the Scheme ensures employees do not misuse or lose their end-of-service benefits. 
  • Instead of relying on employers to transfer funds upon an employee’s departure, the entity places the money with a licensed financial institution. This institution’s primary responsibility is to protect and manage these funds, eliminating the risk of employers facing bankruptcy or legal disputes. 
  • Employees also have the option to request the withdrawal of part or all of their voluntary contributions and investment returns from the fund administrator. 

Other points to be noted under the Scheme

  • In the event of the termination of the employment contract, employees have the option to either receive financial benefits or continue investing in the Scheme. 
  • Should an employee choose to continue, a new employer can seamlessly take over from the previous one and continue paying the subscription to the same fund after entering into a contract. Alternatively, the new employer may register the worker with another fund manager and fulfill the basic subscription amounts. 
  • The Scheme extends voluntary participation to additional categories, offering self-employed individuals, those with freelance work permits, non-citizen employees in government entities or their affiliated establishments and subsidiaries, as well as UAE nationals working in both government and the private sector, the opportunity to enrol in the Scheme. This enrolment involves additional voluntary contributions, with the goal of safeguarding, investing, and growing their savings, ultimately receiving them as an end-of-service gratuity. 
  • Workers who were not selected by their employer to register in the Scheme cannot apply for the Scheme themselves. 

Subscription Premium

Employers choosing to enrol in the new Scheme are obligated to make monthly contributions to the fund. The contribution amount is calculated as a percentage of the employee’s monthly basic salary, contingent upon the years of service. This percentage remains consistent, irrespective of whether the employee is classified as full-time or part-time. For employees with up to five years of service, the monthly contribution is 5.85% of the monthly basic salary; for employees with more than five years of service, 8.33% of the monthly basic salary. 

Employment Type  Years of Service (1-5 years)  Years of Service (5+ years) 
Full-time/other types of Employment  5.85% of the monthly basic salary  8.33% of the monthly basic salary 

Penalties

  • Employers who have joined the Scheme and fail to pay the subscription fees may incur penalties and fines. 
  • In the event of non-payment for two consecutive months, if the employer neglects the basic subscription payment of the overdue amount, the MoHRE will cease issuing new work permits and may take additional administrative actions, as stipulated by the applicable regulations. 
  • If the employer continues to neglect the basic subscription payment for four consecutive months, a penalty of AED 1,000 per beneficiary per month will be imposed by the MoHRE on the employer.  

General Provisions

  • Employers have the option to voluntarily subscribe to the new Scheme, but once subscribed, employees are obligated to adhere to its terms. 
  • The paid premium is safeguarded against liquidation, bankruptcy, or execution proceedings against the employer. 
  • The authority responsible for regulating the new Scheme is the SCA, in collaboration with MoHRE, and is empowered to issue the necessary licenses/authorizations for the establishment of funds. 
  • Providers of fund services will be required to comply with Anti-Money Laundering (AML) requirements and procedures. 
  • The fund manager is tasked with providing insurance coverage for the entitlements of the beneficiaries, following the regulations established by the SCA. 
  • The minimum subscription period for the Scheme is one year, and contributions must be made solely in UAE dirhams. 
  • MOHRE and SCA have jurisdiction over the supervision of the Scheme and any complaints or claims associated with it. 

The Scheme offers an alternative to the conventional End of Service Gratuity Calculation outlined in labour law provisions, providing a dual benefit for both employers and employees. Employees have the opportunity to safeguard their entitlements against inflation and currency fluctuations by investing in Funds. Additionally, the Scheme presents a cost-efficient method for employers to make timely end-of-service contributions, proving more advantageous compared to regular contributions as per labour law.  

Furthermore, employers can opt for reduced end-of-service contributions by choosing to invest in the Scheme. It is essential to note that participation in the Scheme is optional for employers, allowing them the flexibility to adhere to labour law provisions that align with their business needs. However, this statutory change offers an alternative for end-of-service contributions that merit exploration, contributing to the economic boost and increased investment opportunities in the UAE, thereby attracting top talents to the region. 

About ATB Legal

ATB Legal is a full-service legal consultancy in the UAE providing services in dispute resolution (DIFC Courts, ADGM Courts, mainland litigation management and Arbitrations), corporate and commercial matters, IP, business set up and UAE taxation. We also have a personal law department providing advice on marriage, divorce and wills & estate planning for expats. Please feel free to reach out to us at office@atblegal.com for a non-obligatory initial consultation.

by Amy Denny

Amy is a legal consultant at ATB Legal, with a unique blend of skills for corporate, commercial and litigation matters. She is a law graduate and certified in Intellectual Property from the World Intellectual Property Organization.

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