Plan for your End of Service Gratuity Requirements in the UAE

Companies in the United Arab Emirates (UAE) are required under the UAE Labour Law to pay an End of Service Gratuity (EOSG) to employees at the end of their employment where the employment exceeds one year. This gratuity is payable as a lump sum and is based on the employee’s salary and length of service.

Planning for EOSG liabilities is essential because, if unfunded, they can represent a significant financial risk for both UAE employers and employees. Businesses may be liable for large sums of money at unexpected times or through unforeseen circumstances.

Competitive employee benefit packages are essential to attract and retain staff. While there is no direct statutory obligation on employers to accrue EOSG liabilities in their accounts or to hold funds securely off the balance sheet, a failure to securely fund EOSG entitlements could seriously damage an employee’s confidence in the protection of their EOS benefits package from employer insolvency or inflation.

A 2023 survey titled ‘End of service benefits in the Gulf Cooperation Council’ – comprising Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the UAE – by HR and actuarial consulting firm WTW found that seven in 10 GCC organisations had indicated that they did not fund EOS benefits but settled them as they became due from company assets, although over half of respondents (55%) said providing enhanced EOS benefits was industry best practice.

The survey also found that recent regulatory changes in the GCC indicated a shift towards funded solutions for EOS benefits. Almost two in five respondents expect EOS benefits to shift to a contributory system of private plans over the next five years. This suggests that market leaders and innovative businesses should be implementing EOS benefit plans now if they are to maintain a competitive edge.

What is the EOSG calculation in UAE?

Employees become eligible for an EOSG after completing one year of service at a company. EOSG is calculated based on an employee’s last basic salary on termination of employment (excluding allowances such as housing, travel, utilities etc.) and the years of service with their employer as follows:

• Less than one year: no entitlement to any gratuity pay
• One to five years of service period: 21 days of last basic salary for each year of employment
• More than five years of service period: 30 days of last basic salary for each year of employment

The final year calculation will be based on the number of days completed in that year. The total gratuity should not exceed the value of two years of last basic salary and all entitlements must be paid within 14 days from the employee’s end date.

New End of Service Investment Scheme

UAE Cabinet Decision No. 96 of 2023 introduced, as of 10 October 2023, significant changes to the EOSG scheme and established a voluntary alternative scheme for non-GCC national employees based in the UAE and within certain UAE free zones.

The new scheme enables employers to offer employees the opportunity to opt in to a voluntary end of service benefits scheme, as an alternative to the existing EOSG payment. It operates based on monthly contributions made by employers to an investment fund, through a subscription.

To align with the EOSG system, employers are required to make basic contribution payments of the following specified amounts:

• One to five years of service period: 5.83% of a full-time employee’s monthly basic salary.
• More than five years of service period: 8.33% of a full-time employee’s monthly basic salary for the years following.

A full-time employee’s monthly basic salary is as stipulated in their employment contract.

Employers also have the option to permit employees to make voluntary contributions, either as a percentage of their gross salary or an additional amount. Employees are not permitted withdraw the contributions made by their employer during the course of their employment, but any voluntary contributions may be withdrawn.

To align with the EOSG system, employers are obliged to make EOS payments within a period not exceeding 14 days from termination of employment, or within a period not exceeding 10 working days from the date of death.

Employers enrolled into the new scheme will be required to account for regular monthly payments as part of their payroll administrative functions, as well as from a cash-flow perspective, and ensure that payments are facilitated consistently on a month-to-month basis.

How can companies plan for their EOSG requirements?

Sovereign and PRO Partner Group offer bespoke solutions that enable employers in the UAE to build funds against their EOSG liabilities within an employee benefit trust plan. Placing EOSG provision into trust provides enhanced risk management and reduced EOSG costs through early investment.

It is also possible to incorporate an employee savings element within our plans to help your end of service benefits scheme to stand out, which will assist in attracting and retaining talent. Most employees now regard retirement provision as a key part of their remuneration package. By incorporating multiple objectives within a single plan, companies can gain the maximum benefit from the structure.

Our plans allow companies to ringfence these ESOG funds by taking the cash and liability off their balance sheet and placing it into trust. This gives peace of mind to employers because the funds can be invested and allowed to accumulate, while EOSG payments can be withdrawn as and when required. It also gives peace of mind to employees because the funds are protected and properly invested.

Companies registered in the Dubai International Financial Centre (DIFC) that wish to explore setting up a ESOG plan with a provider outside the DIFC can do so, but the DIFC Authority will have to approve the provider.

What information is required when setting up an EOSG plan?

Initially, employers will be required to complete a questionnaire to find out the basic information necessary to structure an employee savings plan that will meet the particular requirements of their business. This will cover:

• The objectives – to establish a savings plan; to establish a retirement plan; to hold funds securely off balance sheet; to assist in recruitment and retention; to transfer an existing plan; and the required launch date.
• Prospective membership – the number of eligible employees; the location of employees; the average annual salary, the anticipated opt-in from employees; eligibility criteria; and any anticipated expansion.
• Contributions – the approximate initial transfer value (we can assist with these calculations); the annual employer contribution; the annual employee contribution; the desired currency (USD, EUR, GBP); the capacity for voluntary employee contributions; the frequency of contributions; and location of payroll provision.
• Risk appetite or expectations – the employer’s readiness to accept a given level of risk; the scheme / employer’s ability to absorb or support risks.

Investment Management and Investment Portfolios

After the initial questionnaire has been reviewed, the available investment management and portfolio options will be discussed with your appointed contact.

There are three simple engagement messages to assist your employees to choose how involved they want to be.

Employee Savings Plans

By establishing an employee savings plan, employers are demonstrating their commitment to fulfil their duty of care as employers by enabling employees to save easily for life goals such as marriage, house purchase, children, education or holidays.

Employee Savings Plans offer the following advantages:

• A simple, easy to use, cost effective and efficient savings solution.
• Assist employers to meet their EOSG liabilities.
• Provides easy access to global investment and fund managers.
• Reduces EOSG costs through early investment.
• Increases a company’s ability to attract and retain the best talent.
• Offers additional savings options for employees.
• Facility to reward loyal and valued staff through extra provision.
• Enhanced risk management by placing EOSG provision into trust.
• Provides one simple solution for an internationally mobile workforce.
• Offers online viewing and access, allowing employee self-service.

For GCC or Africa-based employers, our plans allow employees to harmonise employee benefits across their regional footprint, allow employees to move around their regional footprint while staying within the same plan. Both employers and employees will benefit from the economies of scale and the efficiency of dealing with one single provider.

An international plan is flexible, so an employer can write the rules to suit their requirements. It could be tailored to employees in executive or managerial roles, or to a group of contractors that are tied to a particular construction project.

Where are the funds held?

The Chanel Island of Guernsey is an established centre of excellence for the establishment, administration and management of international retirement benefit plans. It has a modern and principles-based regulatory regime, underpinned by the Guernsey Financial Services Commission (GFSC), which conforms fully to international standards.

Guernsey offers specialist pensions services and a full range of retirement benefit solutions. Guernsey offers a tax neutral environment in which the assets of a scheme can grow free of taxation and can be paid to scheme members gross.

For non-Guernsey resident employers, Sovereign has developed a multi-employer occupational pension scheme that qualifies for an exemption from Guernsey income tax, which employers can elect to join. Alternatively, Sovereign can establish bespoke occupational pension schemes that will also qualify for an exemption from Guernsey income tax, should this be preferred.

Sovereign Trust (Guernsey) Ltd holds a fiduciary licence applicable to Pension Scheme Business and Gratuity Scheme Business and is authorised to provide formation, management and administration services for various types of Guernsey pension and savings arrangements, including both individual and corporate and both resident and non-resident clients.

How can Sovereign help?

Sovereign Group has decades of experience in the corporate services sector in the UAE and wider GCC. Sovereign is also a market leader in the provision of occupational pensions and savings plans that is recognised for “products that are differentiated from competitors as innovative and backed by consistent service and support”. This has been achieved through substantial investment in our network, administration systems and infrastructure.

If you need assistance planning for your EOSG liabilities in the UAE, or wider GCC, then Sovereign and PPG would be happy to assist you with a solution that best meets the requirements of your company and employees.