Understanding the UAE’s revised gratuity scheme legislation

In the thriving economic landscape of the United Arab Emirates, a new development for employment benefits is on the horizon. With the introduction of Cabinet Resolution No. 96 of 2023, the UAE is taking a bold step forward in redefining the end of service gratuity system.

This move is more than just a policy update; it's a transformative approach to valuing human capital and reinforcing the UAE's position as a nurturing ground for global talent. To find out more we spoke with our Senior Manager in the UAE, John Gray, to answer some frequently asked questions.

Can you tell us about the UAE's latest move in employment reforms?

Absolutely. In November 2023, the UAE’s Ministry of Human Resources and Emiratisation (MoHRE) unveiled a groundbreaking alternative to the traditional end of service legislation with the release of a dedicated Gratuity Scheme framework. This is part of their ongoing mission to align labour laws with international standards and to provide a work environment that's equitable for all employees.

What exactly is new Gratuity Scheme legislation?

The Gratuity Scheme has developed from the existing end of service benefit legislation built into the UAE's employment laws, applicable for non-National employees (excluding the DIFC, and government workers). It's essentially a financial thank-you to employees for their service when they leave a company. Although there is existing end of service benefit legislation, this new regime refines this end-of-service concept by offering a voluntary alternative , in which the gratuity is managed externally to the employer, as opposed to the employer retaining the liability on their own books (alongside all the potential issues which comes with this), which significantly enhances transparency and adds a layer of additional protection.

How does this new scheme differ from the previous one?

The key difference is the shift from an internally managed end of service benefit to one that's handled by an external provider, whilst providing eligible employees the ability to invest within a dedicated savings plan that also forms part of this framework. Employees will have access to risk-based portfolios, a Sharia-compliant investment, and a low-risk guaranteed fund, all funded via salary sacrifice via their employer.

Overall, this change aims to make the gratuity system clearer and more effective for everyone involved and brings the UAE more in line with how we see employee benefit arrangements in the UK, EU and USA, with dedicated providers holding the assets on behalf of the employers, for the benefit of the employees.

What does this mean for Employers in the UAE?

Employers will be able to move the current liability they have been holding within their books, into a dedicated arrangement built specifically for the purpose of housing the liability on their behalf. This for any company CFO will provide ample relief, no doubt!

Alongside the accounting relief, we see significant increases in employee wellbeing with these kinds of arrangements. When staff see that their gratuity is protected in the event of corporate default, which forms one of the main three principles of the new rules, this alone can remove a huge cloud of uncertainty from workers’ minds.

There is also the element of employee savings, which an employer can grant access to their staff, at their discretion. It is important to remember however that staff acceptance into the scheme is purely at the employers discretion – it could be some staff or all who the employer can permit.

Finally, companies can maintain and manage their gratuity liability. Under the new rules, if they opt for these schemes, they are obligated to fund monthly into the arrangement, at either the 5% or 8% monthly contribution rates, depending on years in service by the respective employees.

What does this mean for the workforce in the UAE?

For the workforce, it's a significant step up in terms of security and satisfaction. It ensures that their end-of-service benefits are safeguarded and managed professionally. Plus, it introduces an element of savings (subject to the employer access, as above), which can be a game-changer for many employees.

Why is the UAE making these changes now?

The UAE recognises the importance of evolving with the times. By updating the legislation surrounding the end of service benefit system, they're not only looking after their workforce but also enhancing their appeal as a top business destination. It's about staying competitive and attracting the best talent out there, whilst also providing a system to engage and retain people within the UAE post-work, leading to a prospective increase in retirees remaining within the country.

What should companies and employees do in light of these new rules?­

Companies should consider how they can transition to this new system and understand the benefits it offers. Employees should get informed about how this change impacts them and the new opportunities for savings. Ultimately, it's a win-win for both parties.

Where can we find more information or get assistance with these changes?

For anyone wanting to find out more, our expert team based locally within the UAE are here to help. Just reach out, and we'll guide you through every step.­­­

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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 2023