In October 2023, the United Arab Emirates’ Cabinet introduced Cabinet Decision No. 96 of 2023, implementing a new voluntary end-of-service benefits scheme as an alternative to the existing lump sum payment. The Ministry of Human Resources and Emiratisation (“MOHRE”) rolled out this New Scheme for private sector employers and employees. This briefing explores the impact of the New Scheme, along with its advantages and disadvantages for both parties.
1. Introduction
On 1 November 2023, the Ministry of Human Resources and Emiratisation (“MOHRE”) announced the implementation of the New Scheme. Through Cabinet Resolution No. 96 of 2023 and Ministerial Resolution No. 668 of 2023, this scheme provides a flexible, investment-oriented approach to managing end-of-service benefits, aligning with the United Arab Emirates’ (“’UAE”) vision to foster a competitive and secure work environment.
Under UAE Labour Law, Articles 51 and 52 of Federal Decree Law No. 33 of 2021, employees are entitled to an end- of-service gratuity at the end of their service. The gratuity is calculated based on the employee’s salary and years of service as follows:
- Less than one year: no payment
- One to five years: 21 days’ salary for each year of service
- More than five years: 30 days’ salary for each year of service.
The New Scheme introduces a voluntary alternative that enables employees to invest their end-of-service benefits in investment/savings funds, with the employee receiving both savings and investment returns at the end of their employment.
The scheme applies to all national and expatriate employees in the private sector, including those in UAE free zones. The scheme is currently voluntary for employers. Once employers choose to participate by selecting investment funds and determining which employees to include, subscription becomes mandatory for the selected employees. Employers must remain in the program for a minimum of one year after registering.
2. What are the key features of the New Scheme?
The New Scheme is voluntary for employers and offers several innovative features designed to benefit both employers and employees.
The New Scheme provides various investment options:
- A capital guarantee portfolio option ensures the preservation of the principal amount and is particularly suited for employees seeking minimal risk. It is mandatory for unskilled workers and voluntary for skilled workers, defined as those earning at least AED 4,000 per month.
- Risk-based investment options are available to accommodate different levels of risk tolerance. These are divided into three categories: low-risk (for conservative investors), medium-risk (for those balancing risk and growth), and high-risk (for aggressive investors seeking maxi-mum returns but willing to accept higher risk).
- Sharia-compliant funds adhere to Islamic finance principles for those seeking investments aligned with Sharia law. The New Scheme also protects end-of-service benefits from inflation and company insolvency, ensuring that employees’ benefits retain their value over time. Employees can make voluntary contributions of up to 25% of their monthly salary, offering more control over savings growth.
Employers are required to contribute a percentage of the employee’s basic salary to the scheme, with rates set at 5.83% for service periods up to five years and 8.33% for longer tenures.
3. What are the advantages and disadvantages of the New Scheme?
The New Scheme offers benefits and challenges for both employers and employees.
For employers, it facilitates better financial planning, allowing them to manage monthly contributions and reduce the burden of lump sum payments upon employee termination. It can also help attract and retain talent by offering potentially higher benefits. However, the scheme introduces administrative burdens, including selecting investment funds, managing contributions, and ensuring regulatory compliance. The mandatory one-year participation commitment may also be a drawback for some employers. For employees, the scheme offers the potential for higher returns on their end-of-service benefits compared to the traditional lump sum approach. Voluntary contributions allow employees to increase their savings, while a variety of investment options cater to different risk preferences. However, employees face investment risks, particularly outside the capital guarantee portfolio, and once selected by their employer, they cannot opt out of the scheme. The complexity of investment choices may also be overwhelming for some employees.
4. Which legal and regulatory aspects need to be considered?
The New Scheme is governed by a strong legal and regulatory framework to ensure its effective implementation and oversight. Employers interested in participating must register with MOHRE, following established procedures.
Once registered, employers must comply with specific contribution deadlines. Failure to meet these deadlines can result in penalties, including fines and suspension of the employer’s ability to obtain new work permits. MOHRE and the Securities and Commodities Authority (“SCA”) jointly oversee the scheme, ensuring participating employers and investment funds comply with regulations. The SCA monitors fund performance and resolves complaints to safeguard stakeholder interests.
5. Conclusion and Outlook
The introduction of the alternative end-of-service benefits scheme is a progressive step in the UAE’s ongoing labour law reforms, which began in 2021 to align with international standards and enhance the UAE’s attractiveness for global talent. The scheme’s success will depend on its adoption by employers and employees, given its voluntary nature. MOHRE and SCA will provide oversight to ensure the scheme’s long-term success.
Dr. Constantin Frank-Fahle, LL.M.
Founding Partner
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