There are two proposed changes to the UAE end of service benefit system which may be relevant to your UAE business. The first change will most likely apply to all UAE employers excluding the DIFC (it is not clear yet whether the ADGM will adopt the changes). The second proposed amendment only applies to employers in the DIFC.
1. New UAE End of Service Gratuity Scheme (excluding DIFC)
Last week, the UAE Cabinet announced a change to the end of service gratuity scheme applicable for non-GCC national employees in onshore UAE and certain of the UAE free zones (excluding the DIFC). Changes to end of service gratuity were hinted at in the new UAE Federal Labour Law which came into force in February 2022 so amendments were expected in this area.
Essentially, employers will be able to offer their employees the option to opt-in to a voluntary alternative end of service benefits scheme, similar to the Qualifying Scheme in the DIFC which is an employee savings scheme.
What does this mean for affected employers?
Instead of paying out a lump sum gratuity payment on termination of employment, employers would instead make a monthly contribution into a fund on behalf of the employees, such fund to be supervised by the UAE Securities and Commodities Authority. This will mean that employers will need to factor these regular monthly payments into ongoing cash flow requirements as well as ensuring they have appropriate administrative measures in place to deal with the new scheme.
What does this mean for employees opting into the new scheme?
It is stated to be a voluntary scheme (at least to start with) so there is no need to opt-in if the employer does not wish to. However, we would expect most reputable employers in the UAE to opt-in to the new scheme or give employees the choice. The main benefit to the employee is that there is greater certainty that their gratuity entitlement is “ring fenced” within the fund and in the event that the employer faces financial difficulties. This new scheme will remove the risk of an employer failing to take account of the end of service liability on their balance sheets and will provide protection against the consequences of insolvency of employing entities. The new scheme will also give employees the option to choose investment options based on their risk appetite (low, medium and high risk as well as a Sharia-compliant investment option).
It will be interesting to see how existing end of service gratuity accruals will be dealt with under the new scheme - if similar to the approach taken when the DIFC changed from the gratuity scheme to Qualifying Scheme contributions then employees may be given the option to “roll in” accrued end of service gratuity to the new scheme and invest the funds.
We still await further details around the scheme and supporting legislation and will provide an update in due course.
2. Proposed Amendments to the DIFC Employment Law – Qualifying Schemes and GCC Nationals (DIFC only)
End of service gratuity for expat employees was replaced with a requirement for DIFC employers to pay on a monthly basis into a Qualifying Scheme from 1 February 2020. Please see our article written on the replacement of end of service gratuity in the DIFC. A Qualifying Scheme is a ring fenced employee savings scheme, the most popular Qualifying Scheme is the DIFC Employee Workplace Savings Plan (“DEWS”).
As matters stand, DIFC employers are only required to make monthly payments into a Qualifying Scheme for non-GCC National employees. GCC Nationals receive pension contributions through GPSSA instead and the pension contribution amounts depend on the requirements of their specific GCC nationality (Saudi Arabia, UAE, Qatar, Oman, Kuwait and Bahrain). This has sometimes caused unfairness for certain GCC national employees in practice as caps can be placed on contributions by employers through the GPSSA pension system meaning that had these individuals been non-GCC nationals then they would have received higher effective contributions from their employer.
On 31 August 2023, the DIFC announced proposed amendments to the DIFC Employment Law to place an obligation on DIFC employers of eligible GCC nationals to make “top-up” payments into a Qualifying Scheme. This may require DIFC employers to pay the positive difference into a Qualifying Scheme where there is a shortfall between what would have been payable into a scheme if the individual had not been a GCC national, and what is paid under the GPSSA pension schemes. Monthly payments into a Qualifying Scheme will be subject to a de minimis threshold of AED 1,000.
Amendments are also proposed to deal with the situation when an employer is prohibited from contributing into a Qualifying Scheme for an employee due to sanctions.
We will provide further updates on whether these proposed amendments become DIFC law.
If you have any questions on these updates, please feel free to reach out to us.
