After completion of one year of service, every foreign employee in the United Arab Emirates is legally entitled to a gratuity upon termination of employment ("End-of-Service Gratuity"). With the introduction of the Voluntary Alternative End-of-Service Benefits Scheme ("Savings Scheme"), employers throughout the country can now choose a new option to pay the End-of-Service Gratuity.
What is the Savings Scheme?
Currently, the End-of-Service Gratuity is calculated based on the last monthly basic salary and paid to the employee by the employer upon termination of the employment. Other regulations only apply in the financial free zones Dubai International Financial Centre and Abu Dhabi Global Market.
In contrast, End-of-Service Gratuity according to the Savings Scheme is paid by the employer by way of monthly contributions into an approved investment fund on behalf of the employee. These contributions are calculated based on the employee's then-current basic salary.
Which investment funds are available?
In July 2024, the first two investment funds run by Daman Investments and Lunate were approved. Since then, the number of providers has increased to four, with National Bonds and First Abu Dhabi Bank also offering investment options.
All investment funds are accredited by the Securities & Commodities Authority and monitored by the Ministry of Human Resources & Emiratisation.
Who is eligible to take part in the Savings Scheme?
The Savings Scheme is open to all private sector employers, including those based in free zones (but excluding the Dubai International Financial Centre and Abu Dhabi Global Market).
The participation is not mandatory. The employer can therefore choose whether to make use of the Savings Scheme or continue to pay the End-of-Service Gratuity in the traditional manner.
What options does the employee have?
It is up to the employer alone to decide for which employees the Saving Scheme shall be activated. If chosen, participation is mandatory for the selected employees.
However, certain employees are entitled to select the specific investment fund. If the employee is a so-called skilled worker, i.e. receives a monthly salary of at least AED 4,000 and works in a skill level between 1 and 5, he can choose from various investment options depending on his risk appetite and preference. In principle, there are risk-free portfolios with a capital protection guarantee, portfolios with low, medium or high risk and Sharia-compliant investment funds. An unskilled worker, though, is obliged to choose the risk-free option.
What is the rate of the monthly contributions?
The monthly contributions payable by the employer (so-called basic contributions) amount to 5.83% of the employee's monthly basic salary in the first five years of employment and 8.33% from the sixth year onwards. Thus, such calculation basis corresponds to the traditional method, which takes into consideration 21 days monthly basic salary for each year of the first five years of service and 30 days monthly basic salary for each additional year from the sixth year onwards.
The employer's monthly contributions are additional payments and cannot be deducted from the employee's salary.
The employee has no access to the basic contributions during the employment.
Can the employee make additional contributions?
Employees themselves can make voluntary contributions to the investment fund. They are allowed to transfer up to 25% of their annual salary as a lump sum. Alternatively, they can instruct their employer to deduct up to 25% from their monthly salary and pay it into the investment fund on their behalf.
In contrast to the basic contributions, the employee is allowed to withdraw, partly or completely, the voluntary contributions before the end of the employment.
What happens upon termination of the employment?
Upon termination of the employment, the employee can choose whether to have the amounts saved in the Savings Scheme paid out or to continue investing in the fund.
As for the End-of-Service Gratuity entitlement which the employee had acquired up to his participation in the Savings Scheme, the full amount is due upon termination in addition to the entitlements arising from the Savings Scheme and must be paid out by the employer. The basis for calculation is the monthly basic salary at the time of commencement of participation in the Savings Scheme.
If the employee leaves the company before completion of the first year of employment, the employer can claim back the contributions already paid for this employee from the investment fund provider.
What advantages does the Savings Scheme offer?
From an employee's point of view, the Savings Scheme primarily protects against insolvency of the employer at the time of termination of the employment. Since the monthly contributions already made are held in the account of a third party, it also makes it easier for the employee to access the money saved. In addition, the paid contributions may yield returns on investment while the employment is ongoing, instead of the End-of-Service Gratuity sitting in the employer's bank account as bare interest-free retentions.
For the employer, the Savings Scheme offers potential savings as the contributions are calculated monthly based on the then-current basic salary and not, according to the conventional method of calculating the End-of-Service Gratuity, based on the last monthly basic salary paid at the end of the employment.