The UAE is set to undergo a substantial transformation in handling end-of-service gratuity for employees in the private sector where employers will soon have the option to select from several schemes for their employees.
The existing end-of-service gratuity system in the UAE involves employers providing employees with a lump-sum payment at the end of their employment relationship calculated based on the employee's last basic salary. Employees will only be eligible for this end-of-service gratuity payout if they have been employed for more than a year. The current market practice and system is for the employers to set aside this monthly accruing amount on behalf of the employee with no opportunity to accrue earnings during that time.
Recently, the UAE Cabinet approved a plan to introduce an alternative end-of-service gratuity system for private sector employees and free zone workers within the UAE. This innovative and voluntary initiative involves the establishment of private-sector investment and savings funds overseen by the Securities and Commodities Authority in collaboration with the Ministry of Human Resources and Emiratisation. Under this scheme, employers can choose to invest and save their employees' end-of-service gratuities through these funds, offering a range of investment options.
Under this new proposed scheme, participating employers will make monthly contributions on behalf of their employees to the selected investment funds and upon termination of the employment relationship, the employee will receive their end-of-service gratuity along with any accrued returns from the funds directly.
Employers can choose to enroll their workers, regardless of their professional levels, in the new scheme and pay a monthly contribution. Currently, there are three investment options:
- Risk-free capital guarantee;
- Investments, where risks vary between low, medium, and high; or
- Sharia-compliant investments.
Details regarding the implementation timeline and how existing end-of-service gratuity accruals will be handled are yet to be provided and clarified.
The UAE is progressing toward a more advanced landscape for both employees and employers demonstrating a giant positive leap. The concept of establishing a countrywide saving scheme open to all employees in the private sector is groundbreaking in the region.
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