A Guide to UAE’s New Law on End-of-Service Gratuity

An overview of UAE's new alternative system to the traditional End-of-Service gratuity

Federal Cabinet Resolution No. 96 of 2023

The UAE Cabinet has taken a significant stride forward with the issuance of the Resolution No. 96 of 2023 in October 2023 (Cabinet Resolution), which introduces an optional alternative system to the traditional End-of-Service (EoS) gratuity system. 

The main objective of the Cabinet Resolution is protecting the employees from inflation waves or the employer insolvency or eventual bankruptcy. As for the scope of its application, it shall apply to employers and employees in the UAE’s private sector, including free zones. 

This initiative empowers employees to invest their EoS benefits in well-established funds, offering them the prospect of earning returns upon the completion of their service. 

The existing EoS gratuity system operates on a simple principle: the employers provide a lump-sum payment based on the employee’s last basic salary, only applicable after a year of employment. The new Cabinet Resolution offers a fresh perspective, allowing employers to have the choice to invest and save their employees’ gratuity through private-sector investment funds, governed by the Securities and Commodities Authority (SCA) in collaboration with the Ministry of Human Resources and Emiratization (Ministry) (Investment Fund). 

The participating employer will be required to make a monthly contribution to the selected Investment Fund.

Types of Investments

As per Article 8 of the Cabinet Resolution, the new system offers a diverse range of investment options including: 

  1. Capital Guarantee Portfolio – a risk-free option that guarantees the preservation of capital, which shall be adhered to if the beneficiary is an unskilled worker
  2. Risk-based Investment options: include options for various investment portfolios that carry varying degrees of financial risk in proportion to the expected returns thereof
  3. Investment Funds Compliant with Sharia options

Employees will be entitled to receive their savings (contributions made by the employer) and returns on investments (as per the investment option selected) at the end of the employment. If employment has been terminated, it is likely that the employee will have the option to continue with the Investment Fund (without additional contribution from the previous employer) by not withdrawing their savings and returns.

Thus, participating employers will not be required to pay EoS gratuity to the employees at the end of their employment. However, other benefits such as the airfare for return ticket, payment of unused annual leaves and other contractual benefits will still be required to be paid by the employers at the end of the employment relationship. 

Employees will be entitled to receive a monthly basic subscription, which is defined as the financial amount paid by the employer to the Investment Fund for the purposes of implementing the alternative scheme. 

The basic subscription amounts paid shall not be included in a judicial enforcement, seizure, liquidation, or bankruptcy procedures imposed on the employer. All the amounts must be paid in Dirhams.

Change of Employer

In the event the employee moves from current employer to another, the latest one may replace the previous one in completing the payment of the basic subscriptions in the alternative scheme, in accordance with the Cabinet Resolution. 

Supervision and Control

Article 11 states that the Ministry and SCA may take all necessary measures for the purposes of monitoring, supervising, and inspecting the alternative scheme. They may also establish the controls, restrictions, and procedures necessary to implement the provisions of the Cabinet Resolution. 

Failure to pay the basic subscription on time

According to Article 12 of the Cabinet Resolution, the following procedure shall be applied in the event that the employer fails to pay the basic subscription on time:

  1. The Investment Fund’s manager shall, within thirty (30) days from the date of payment, send a written warming to the employer on the necessity of paying the basic subscription within a period not exceeding five (5) working days from the date of receiving the warning.
  2. In the event that the basic subscription is not paid within fifteen (15) days from the date of sending the same, the Investment Fund’s manager shall notify the Ministry.
  3. After two (2) months, the Ministry shall stop issuing new work permits to the employer until all subscription amounts due are paid, or any other administrative measures shall be taken in accordance with the regulations.
  4. After four (4) months have passed from the date of failure to pay the subscriptions amounts, the Ministry shall impose an administrative fine on the employer in the amount of Dirhams One Thousand (AED 1,000) per month for each beneficiary.

This article has been written by the experts at OH LLP.

*It reflects the personal opinion of the law firm and does not constitute legal advice*

OH LLP has legal consultants in the UAE, offering a wide range of legal services to new and established companies. For further details, please contact us on: info@ohllp.com or +97124110619

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