UAE Cabinet Approves Innovative End-of-Service Gratuity System for Private Sector Workers and Free Zones
In a significant development, the UAE Cabinet has granted approval for the implementation of an alternative end-of-service gratuity system for private sector workers and free zones operating within the nation. Under this new Scheme, employers have the option to opt-in, ushering in a transformative approach to employee benefits.
This pioneering initiative involves a shift away from the existing end-of-service gratuity framework, with the new scheme focusing on the creation of savings and investment funds managed by private sector entities. To ensure the effective oversight and management of these funds, the Securities and Commodities Authority will collaborate closely with the Ministry of Human Resources and Emiratisation.
The primary aim of this groundbreaking endeavor is to safeguard and augment the end-of-service gratuities that employees accumulate over the course of their careers. By directing these funds into various investment avenues, the UAE seeks to protect the hard-earned savings that symbolize workers’ dedication to the companies they have faithfully served. Ultimately, the objective is to ensure that these savings are judiciously invested, thereby upholding the rights of workers and fostering the well-being of their families. This marks a significant step towards enhancing financial security and prosperity for the UAE’s workforce.
Is the new end-of-service system mandatory?
According to the UAE government media office, after the Cabinet meeting, Sheikh Mohammed said that the system is optional for employers to join.
Which sectors is the new end-of-service scheme for?
The freshly introduced end-of-service gratuity system extends its coverage to encompass both private sector workers and those employed in free zones. As previously mentioned, participation in this system is at the discretion of employers, and it encompasses the creation of private sector investment and savings funds under the vigilant supervision of the Securities and Commodities Authority, in collaboration with the Ministry of Human Resources and Emiratisation (MOHRE).
Furthermore, it’s worth noting that government sector employees are also eligible to partake in this system, allowing them to leverage its benefits for their savings and investment objectives.
The current end-of-service system for private sector
At present, employees become eligible for a one-time payout once they have completed a continuous year of service with a company. The payout amount is determined by the total duration of their tenure.
The new end-of-service investment system
Participating companies in this voluntary program will be required to make monthly contributions. Upon the completion of their service, employees will not only receive the accumulated savings but also the returns generated from these investments.
As per the UAE government media office, these funds empower employees to strategically invest and save their end-of-service gratuities across a range of investment choices.
The overarching objective is to protect the savings of the workforce, which constitute their end-of-service gratuities, and to ensure that these funds are prudently invested, thereby securing their rights and promoting the financial stability of their families.
How will the end-of-service amount be invested?
There are three ways in which the amount can be invested:
- A risk-free investment that maintains capital
- A risk-based investment: where the risk level varies between low, medium and high.
- A Sharia-compliant investment.
The government has yet to disclose the timeline for the scheme’s rollout, but additional information is anticipated in the forthcoming months. Presently, there are limited investment avenues available to foreign nationals in the private sector. In 2020, the Dubai Financial Center Employee Workplace Savings Scheme was introduced, catering to private sector employees affiliated with companies in the Dubai Financial Center. Moreover, in 2022, the Investment Corporation of Dubai unveiled the Golden Pension Plan.”
Here's how AHG can help Businesses and Employees in the new end of service system
AHG can play a pivotal role in assisting companies and employees in navigating the transition to the new end-of-service gratuity system introduced by the UAE government. Here’s how AHG can contribute:
- Compliance and Advisory Services: AHG can provide comprehensive advisory services to employers on the legal and financial aspects of the new scheme. They can help companies understand their obligations, including the calculation of monthly contributions and compliance with the regulations set forth by the Securities and Commodities Authority.
- Record-keeping and Reporting: AHG can assist employers in maintaining accurate records of contributions and investments. They can also provide reporting services to ensure transparency and compliance with regulatory requirements.
- Taxation and Reporting: AHG can help companies and employees understand the tax implications of the new system. They can provide guidance on tax-efficient investment strategies and assist with tax reporting to ensure compliance with UAE tax laws.
- Transition Support: During the transition period to the new system, AHG can provide hands-on support to companies, ensuring a smooth shift from the traditional lump-sum gratuity system to the new savings and investment-focused approach.