UAE gives life to new federal employee end-of-service savings scheme
In November 2023, the UAE introduced a statutory voluntary alternative end-of-service benefits scheme for private sector employers and employees that provides a structured approach to end-of-service benefits, offering employees capital protection and potential returns plus a framework for employers to manage accruing liabilities (Alternative EOSB Scheme).
In July 2024, Lunate and Daman Investments were announced as the first two investment funds to be approved and authorised to offer the Alternative EOSB Scheme, opening the way for employers to enrol staff.
The Alternative EOSB Scheme represents an evolution in the management of end-of-service benefits, aligning with the direction of travel seen with the introduction and expansion of the similar (but mandatory) employee workplace savings scheme in the Dubai International Financial Centre (DIFC) in 2020, known as DEWS.
In this update, we outline the main features and benefits of the scheme.
What has changed?
Historically, end-of-service gratuity (ESG) has been a mandatory statutory benefit for employees, which crystallises and is paid when their employment terminates, subject to having completed at least one year of continuous service. According to the UAE Labour Law, ESG is calculated based on the employee's tenure and last basic salary.
Employers seeking to provide their employees with a greater sense of financial security could implement bespoke severance schemes enhancing ESG by, for example, calculating it based on an employee's gross salary rather than their basic salary, or by offering a uniform rate of 30 days' pay per year of service irrespective of tenure, which is more generous than the standard ESG calculation for employees with less than five years of service. Such enhanced schemes are entirely contractual and provide a way for employers to differentiate themselves and offer more attractive terms to their workforce. Employers who wish to continue offering such enhanced benefits can still do so, even if they opt into the new statutory Alternative EOSB Scheme.
How does the Alternative EOSB Scheme work?
The Scheme is optional for employers, but mandatory for the categories of employees selected by their employer to participate. Under the Alternative EOSB Scheme, employers must, within the first 15 days of each month, pay into the investment fund account a basic contribution for each enrolled employee, calculated as a percentage of the employee's monthly basic salary. These amounts are not refundable to employers unless the employment relationship is terminated within one year.
The basic contribution for full-time employment is:
- 5.83% in the first five years of continuous service; and
- 8.33% in subsequent years of continuous service.
Employers who fail to pay the basic contributions on time may face penalties such as administrative fines and the suspension of their ability to obtain new work permits.
Employees can also make voluntary contributions to the Alternative EOSB Scheme, of up to 25% of their gross salary (i.e. basic salary plus allowances and benefits-in-kind), either monthly or annually. Voluntary contributions can be withdrawn or invested at any time during employment, and they do not count towards the end-of-service benefits to be paid out when the employment ends.
What are the investment options?
Employees can choose from various investment options depending on their risk appetite and preferences, including but not limited to:
- risk free, capital guarantee portfolios;
- low, medium, or high-risk portfolios; and
- Sharia-complaint investment funds.
Skilled workers (those with a monthly salary of at least AED 4,000) may choose any investment option and are responsible for any losses on the investment but not on the basic contributions.
What happens to the funds on termination of employment?
Upon termination of employment, employees are entitled to receive all their basic contributions and returns within 14 days. Alternatively, employees can also choose to continue investing in the scheme and withdraw their funds at a later stage. Employers may claim any amounts legally due to them from the employee's entitlements.
Employers must still honour any accrued ESG entitlements earned prior to enrolment in the Alternative EOSB Scheme. New recruits employed after enrolment will not be entitled to ESG.
What are the benefits for employers?
The Alternative EOSB Scheme can help employers reduce their liabilities and cash flow issues related to ESG, as they can pay a fixed monthly amount instead of a lump sum at the end of employment under the existing ESG system.
The Alternative EOSB Scheme can also enhance employers' competitiveness and attractiveness in the labour market, as they can offer employees greater choice for savings, opportunities to benefit from investment returns, as well as more security for their end-of-service benefits as they are ringfenced and protected from inflation, default, or insolvency procedures.
What are the next steps for employers?
If an employer wishes to participate in the Alternative EOSB Scheme, they must submit a request to the Ministry of Human Resources and Emiratisation (MOHRE). If approved, they can contact one of the approved licensed investment funds (currently Lunate or Daman Investments) and select which employees they wish to enrol.
There are several points to consider before employers take steps to enrol in the new Alternative EOSB Scheme, including the following:
- the potential benefits for existing and future employees;
- the monthly costs of opting into the Alternative EOSB Scheme;
- the choice between the available investment funds and fund managers;
- how to calculate and transfer basic contributions;
- the conditions and consequences of withdrawal from the Alternative EOSB Scheme; and
- their ability to comply with the requirements.
If they decide to join the Alternative EOSB Scheme and secure the necessary approval, employers should communicate the benefits and incentives of the scheme to employees and consider how best to support them in understanding the mechanics, entitlements, dispute resolution mechanisms and employee options under it (such as the voluntary contributions, investment choices, and the withdrawal and continuation of funds).
Governance of the Alternative EOSB Scheme
Cabinet Decision No. 96/2023 and Ministerial Resolution No. 668/2023, which (with reference to the UAE Labour Law) outline the legal framework for the Alternative EOSB Scheme in accordance with which the MOHRE and the Securities and Commodities Authority formed a joint committee to oversee and implement the Alternative EOSB Scheme, and to assess and approve requests from companies interested in enrolling.
As the Alternative EOSB Scheme falls within the purview of the MOHRE, it is not expected to be available to employers and employees in the financial free zone areas of the DIFC and the Abu Dhabi Global Market where the UAE Labour Law does not apply.
Contact us
If you have any questions, please do not hesitate to contact your usual contact in the Middle East employment team at Stephenson Harwood.
Authors
Emily Aryeetey
Lauren Palmer
