The UAE Cabinet recently announced a change to the end-of-service gratuity scheme applicable for non-GCC national employees. With effect from 10 October 2023, Cabinet Decision No. 96 of 2023 (New Cabinet Decision) introduces significant changes to the end-of-service gratuity scheme and establishes a voluntary alternative scheme (New Scheme) for non-GCC national employees based onshore UAE and within certain UAE free zones (excluding the DIFC). It has yet to be confirmed as to whether the New Scheme shall be adopted by the ADGM.
The New Scheme allows employers to offer their employees the opportunity to opt in to a voluntary end-of-service benefits scheme, as an alternative to the existing one-off end-of-service gratuity payment regulated by Federal Decree Law No.33 of 2021 (Labour Law). The New Scheme operates on the basis of monthly contributions made by employers to an investment fund, through a subscription.
The primary objective of the New Scheme is to ensure that employees receive their end-of-service benefits by safeguarding employees from economic instabilities such as inflation and employer insolvency. The authorities also expect the New Scheme to create opportunities for savings and investments, thereby enhancing the appeal and flexibility of the labour market for employees. For example, under the New Scheme, employees will have the option to choose investment options based on their risk appetite (low, medium and high risk, as well as a Sharia-compliant investment option).
Employers interested in participating in the New Scheme must formally request a subscription through the Ministry of Human Resources and Emiratisation (MoHRE). We outline below a non-exhaustive summary of the key practical points that employers should be mindful of if considering adopting the New Scheme:
Employers are required to enrol themselves and select the corresponding investment funds licensed for the New Scheme.
Employers that decided to enrol for the New Scheme must (1) choose employee categories for participation, (2) facilitate payment of existing end-of-service gratuity for eligible employees (or facilitate transition arrangements to the New Scheme, if the UAE Cabinet permits such transition), and (3) ensure the calculation and payment of the basic contribution into the New Scheme. Please note, the New Cabinet Decision is silent with regards to how existing end-of-service gratuity accruals shall be dealt with under the New Scheme. It is possible that the UAE Cabinet may provide employees with the option to “roll in” any accrued end-of-service gratuity to the New Scheme and invest the funds (which would be similar to the approach adopted by the DIFC, whereby an employee savings scheme was introduced to replace the provision of end of service gratuity payments). We will update you accordingly if and when further details of this aspect of the New Scheme are confirmed.
Employers are required to make basic contribution payments, with the specified amount being 5.83% of a full-time employee’s monthly basic salary if their service period does not exceed five years, and 8.33% if their service period exceeds five years. Employees may not withdraw the contributions made by their employer during the course of their employment.
Employers have the option to allow employees to make voluntary contributions, either as a percentage of their gross salary or an additional amount. Unlike the basic contribution payments made by the employer, these voluntary contributions can be withdrawn by the employee during the course of their employment.
Employers are obliged to make subscription payments within a period not exceeding 14 days from the end of the employee’s employment relationship, or within a period not exceeding 10 working days from the date of their death. This requirement aligns with the timelines under the Labour Law. Employers enrolled into the New Scheme will need to account for regular monthly payments as part of their corresponding administrative functions, such as payroll, as well as from a cash-flow perspective, and ensure that payments can be facilitated consistently on a month-to-month basis.
The New Cabinet Decision provides that the MoHRE shall be responsible for receiving Labour complaints related to the New Scheme. It remains to be seen how the governance around this will operate in practice, particularly if an employee transitioning over to a New Scheme were to issue a complaint relating to their accrued end-of-service gratuity, which would typically be adjudicated by the UAE Labour Courts.
Please get in touch with our Middle East Labour & Employment Practice if you have any questions around adoption of the New Scheme and require further advice relating to its implementation.