In a significant development, the UAE Cabinet has unveiled Cabinet Resolution No. (96) of 2023 and Ministerial Resolution No. 668 of 2023, introducing an innovative voluntary end-of-service system for private sector employers and employees in the UAE. This alternative, referred to as the “Scheme,” is applicable to entities within free zones as well. The Scheme aims to provide a more dynamic and customizable approach to end-of-service benefits, offering employees diverse options to optimize savings returns based on their risk appetite. Simultaneously, it provides employers with a strategic tool for more effective financial planning concerning employment liabilities.
The End of Service Gratuity Explained
ESG, is a mandated monetary sum that an employer must provide to an employee upon the conclusion of the employment relationship. This payment is contingent upon the employee meeting specific conditions outlined in the law.
The ESG program was established four decades ago with the aim of ensuring that individuals without pension benefits receive a lump sum amount when their employment concludes. This financial support is intended to assist them during the post-termination period or to contribute to their savings.
Employer Choice and Employee Enrollment
Employers have the flexibility to choose between the traditional end of service gratuity (ESG) model and the Scheme.
If the employer opts for the ESG model, employees will be automatically enrolled, with no choice to opt out.
Transition in ESG Calculation
Employers selecting the Scheme must calculate the ESG due to employees up to the changeover date.
The calculated ESG amount, based on the employee’s basic salary at the changeover date, remains on the employer’s balance sheet until paid out upon termination.
Mandatory Subscription Amounts
Employers committed to the Scheme must subscribe for a minimum of one year, making monthly payments to the investment fund based on a percentage of the employee’s basic wage.
Notably, no deduction is made from the employee’s wage, and this subscription is an additional employer obligation beyond the basic wage.
Voluntary Employee Contributions
Employees are given the opportunity to contribute voluntarily to the Scheme from their own wage (Employee Contributions).
These contributions can be withdrawn partially or fully during the employee’s service period.
Contributions can either be made directly by the employee into the investment fund account as a lump sum or by the employer on behalf of the employee, deducted from the monthly wage (up to 25% of the employee’s total monthly wage).
Diverse Investment Options
The Scheme provides employees with various investment options, including a risk-free capital guarantee portfolio and a risk-based investment option offering different degrees of financial risk.
Employees categorized as “skilled labor” have the freedom to choose any investment option, while those classified as “unskilled labor” must adhere to the capital guarantee option.
Flexibility for Employers
Employers have the ability to switch between fund managers with approval from the Ministry of Human Resources and Emiratisation (MOHRE) and the Securities and Commodities Authority (SCA).
Withdrawal from the Scheme is possible under certain conditions, subject to MOHRE approval.
Administration and Oversight
The Scheme is under the supervision and control of MOHRE and the SCA.
Both entities ensure compliance with standards and obligations imposed on licensed investment fund service providers, including the fund manager, administrative services provider, and custodian.
Enrollment Process
MOHRE has confirmed that the Scheme is now available for enrollment.
Employers can initiate the application process by calling MOHRE, providing essential company details during the call.
Further details regarding the enrollment procedure for free zone companies and options regarding investment/fund managers and administrators are eagerly awaited.
In conclusion, this voluntary alternative introduces a progressive and adaptable approach to end-of-service benefits, empowering both employers and employees to align their financial arrangements with individual preferences and risk tolerance. The Scheme reflects a forward-looking strategy in the UAE’s employment landscape, fostering financial flexibility and choice for all stakeholders involved.
This article, along with any accompanying commentary, should not be considered legal advice. It is presented purely for informational purposes without taking into account any particular objectives, circumstances, or facts. The content reflects the author’s opinions at the time of writing, which may change over time due to varying objectives, circumstances, or facts. Individual perspectives may differ among colleagues or the firm. It is advisable to seek legal advice for each specific matter from the law firm qualified to practice in that particular jurisdiction.