New EOSB regulations in the UAE provide alternative benefits

In November 2023, a new system was introduced in the UAE that provides private sector employers with an alternative to awarding gratuity - also known as end of service benefits (EOSBs) - to their employees from the long-standing gratuity rules found in the Federal Law.

Employers who want to attract and retain a committed workforce with flexible incentive arrangements are now taking steps to establish appropriate plans and become employers of choice. 

In recent years, we have seen two significant changes that provide alternatives to the Federal Law that has been in place since the late 1980s. The first change was the introduction of DEWS, which initially only applied to expat employees of companies in the DIFC. This was the first move towards the UAE permitting employers to participate in defined contribution (DC) schemes as an alternative to the defined benefit rules under the Federal Law. DEWS is not classified as a pension as no retirement age is attached, but there is a mandatory funding obligation on employers within the DIFC. This gives the underlying employees options on how their end of service benefit funds are invested from an approved range of investments.

The second change came in late 2023 when the Ministry of Human Resources & Emiratisation (MoHRE) introduced similar legislation that permits onshore private sector employers to fund a DC scheme instead of paying benefits under the existing Law. Any manager of such a scheme must apply to become MoHRE-approved. Employers who opt into funding an approved scheme freeze their accrued gratuity liability at the point they commence funding. The employer will select the investments available to the employees it is enrolling and make monthly contributions of between 5.93% and 8.33%, depending on that employee’s length of service. Employees can also contribute up to 25% of their salary to the scheme.  

The Securities & Commodities Authority (SCA) has established various requirements for the underlying investments to provide a selective range of investment options for the participating employees.

Today, UAE employers outside the DIFC can pay employees a terminal gratuity linked to the traditional Laws or opt into the new style of DC scheme. Those who decide to remain under the traditional legislation can continue to pay departing employees from cash flow. Alternatively, they can fund a purpose-built benefit plan to ring-fence and fund against their gratuity liability.

These developments further demonstrate the UAE’s alignment with standards seen in other developed countries. They also provide greater security for employees in the region as they claim more control over how their financial future will look.

Time for action on EOSBs 

The needs of the expat population in the UAE are ever evolving, with more people looking for financial stability and wellbeing. This is highlighted by the successful introduction of Golden Visas, which enable expats to remain in the country for more extended periods than a traditional employment visa, and Retirement Visas, which indicate expats are looking to stay in the country for longer periods of time.

Employers should consider all the available options and take decisive action. By not doing anything, they remain subject to the incumbent Laws, which means their gratuity liability will grow in excess of 8% of monthly payroll for all employees who have provided more than five years of continued service. Therefore, with new schemes and legislation being introduced by the Federal authorities and the increasing availability of plans, employers should seek advice and act before their employees become disenchanted and look to take their careers forward with employers who offer comprehensive benefit plans.

Praxis in the UAE

Praxis has established offices in Dubai and Abu Dhabi and was the first licensed trust company in the Abu Dhabi Global Market (ADGM). We provide a bespoke range of tailored employee benefit trusts that enable companies to fund a purpose-built trust for their gratuity liabilities or to offer employees an employment-linked savings plan. We also provide a range of product solutions, providing a more cost-sensitive solution.

Our clients include the UAE’s National Health Insurance Company - Daman, a subsidiary of PureHealth, the largest integrated healthcare platform in the Middle East. Our joint venture with Daman of a ground-breaking digital platform enables companies in the region to manage their end of service liability for expatriate employees along with optional personal savings plans for all employees.

As part of the Praxis Group, we also provide a range of private wealth and corporate services to clients throughout the GCC, as well as regulated fund administration services to local and international funds.

Click through to learn more about our employer solutions services. 

This article first appeared in UAE-UK Partnership of the Future 2024/5, published by the UAE-UK Business Council in February 2024.

Please note that this article is intended to provide a general overview of the matters to which it relates. It is not intended as professional advice and should not be relied upon as such. Any engagement in respect of our professional services is subject to our standard terms and conditions of business and the provision of all necessary due diligence. © Praxis 2024