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Peace of mind, three little words but in this 25-8 always-on world who has it? What are the ingredients for achieving it?

Well, in the latest step in its mission to become one of the happiest places on the planet, the UAE is aiming to add to its recipe for workers with flavours such as long-term stability, financial security and, perhaps most significantly more independence from employers, particularly when it comes to their gratuity.

For the newly introduced end-of-service scheme in the UAE serves as more than just a financial safety net for employees; it is also a boon for their mental well-being. Knowing that their gratuity benefits are securely invested and that the chances of wrongful withholding post-termination are minimal, can provide residents with a growing and profound sense of security.

This builds on the momentum that protects and attracts global talent such as green and golden visas, and the new Labour Law which came into force in February this year.

Writing for mentl, Michael Kortbawi, Founding Partner at BSA Ahmad Bin Hezeem & Associates, unpacks what the new rules mean for the financial stability of employees, and protections it may offer against companies that go bankrupt or that unlawfully withhold gratuities from their workers.

And ultimately what it all means for our wellbeing.

The UAE’s decision to establish an alternative end-of-service benefits system represents a noteworthy step towards safeguarding employees’ rights and enhancing their protection.

Under this voluntary scheme, private sector employees and free zone workers now have the option to invest their end-of-service gratuity into various savings schemes.

It is important to note that the DIFC was a trailblazer in this regard and introduced this concept three years ago as the DIFC Employee Workplace Savings (DEWS). This scheme, unlike the onshore one, was a progressive end-of-service benefits scheme for all workers. It replaced the existing Gratuity Benefits with a purpose; to allow employees to increase their savings by contributing towards the savings scheme. It was mandatory for all DIFC-registered employers to enroll their employees into this plan and start making required contributions by at least 30 April 2020 with further contribution payments on a monthly basis.

So, the question that may arise is the following: what is the point in having an alternative end-of-service scheme if the employees are already well covered with this said scheme?

More control for employees

One of the key advantages of this new alternative system is its flexibility. It allows employees to actively grow their end-of-service benefits through a range of investments options, all supervised by the Securities and Commodities authority and the Ministry of Human Resources and Emiratisation. This approach breaks the traditional model of end-of-service gratuity and gives employees more control over their financial destinies, aligning the UAE with international employment.

More specifically, existing end-of-service benefits (known as gratuity) are based on an employee’s basic salary and are paid out when employment concludes, and eligibility requires at least one year of uninterrupted service. However, under the new system, a Private Sector Investment and saving funds will be created in cooperation with the relevant authorities. As a result, eligible employees can allocate their gratuity into various savings programs offered within such fund. Employees will then have three primary investment options:

–        Non-risk investments,

–        Varying levels of risk investments (low to high),

–        And Islamic Sharia law-compliant investments.

With these options, employees, or their designated beneficiaries (in case of their deaths), will receive their end-of-service benefits, along with earnings from the investment funds, at the end of their employment. Government employees are also included in this program, which fosters a culture of saving and investment across different layers of the workforce.

Protection for workers

More importantly, the employees will no longer suffer from the consequences that usually occur during bankruptcy. The dire consequence faced in the past by employees whose employers failed to keep a provision for end-of-service equation will be eliminated, as the profit will be kept with third parties with this new arrangement.

The regulation governing the alternative scheme of payment of end-of service benefits to employee upon the end of employment (“Alternative Scheme”) has not been published yet. Therefore, we do not have full clarity on the mechanisms governing the Alternative Scheme. Thus, it remains uncertain to what extent the employer will be involved in the payment/ release of the end-of-service gratuity under the Alternative Scheme.

However, the aim of the Alternative Scheme is to ensure the payment of the end of service gratuity to employees along with the returns on investments and to restrict the employer’s discretion in this respect.

Under the Alternative Scheme, the funds will be supervised by the UAE Securities and Commodities Authority in coordination with the Ministry of Human Resources and Emiratization, which should compromise any misconduct or abusive act from the employer’s end in relation to the payment/ release of the end of service gratuity.

Additionally, we understand that the employees will likely have the option to continue with the investment fund after termination/ end of employment, without further contributions from their former employer. Hence, we anticipate that the employer’s involvement in the payment/ release of the end-of-service gratuity process to be minimal, upon the end of employment.

In light of the above, we believe that under the Alternative Scheme, it will likely be harder for the employer to wrongfully withhold the gratuity after termination.

The UAE’s progressive initiative not only safeguards employees’ rights but also promotes long-term financial stability both for them and their families. It signifies a commitment to creating an inviting environment for both domestic and international talent, enhancing the country’s status as a global hub.

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