The UAE just made a big change to its end of service benefit laws. Sheikh Mohammed bin Rashid Al Maktoum, Ruler of Dubai, has introduced a new plan to protect workers’ savings and encourage investment.
During today’s Cabinet session, we adopted an alternative system for end of service rewards for workers in the private sector and free zones in the country. The system will be optional for employers to join. The system includes establishing savings and investment funds from the private sector supervised by the Securities and Commodities Authority in coordination with the Ministry of Human Resources. Emiratisation involves saving and investing end of service rewards for workers and employees according to various investment options. The goal is to preserve workers’ savings, which represent the end of their services in operating companies, and to ensure that they are invested safely in order to guarantee their rights and achieve stability for their families.
“The aim is to preserve the workers’ savings, which represent the end of their services in the operating companies, and to ensure that they are invested in a safe way to guarantee their rights and achieve the stability of their families,” Sheikh Mohammed said via X, formerly known as Twitter.
Source: (Arabian Business, 2023)
Here is what you need to know about end of service benefit law: What is the new change?
The new change involves a significant revision of the existing end of service benefit system in the UAE. This system traditionally allowed employers to make complete payments to their employees at the conclusion of their employment, usually calculated based on years of service. The revised system represents a departure from this traditional approach.
Under the new system, the UAE government, in collaboration with relevant authorities such as the Securities and Commodities Authority and the Ministry of Human Resources and Emiratisation, seeks to ensure greater protection and investment of workers’ savings. Here’s an expanded explanation:
- Broadened Coverage: The change extends coverage to include not only employees in the private sector but also those working in free zones. This expansion ensures a larger portion of the workforce benefits from these changes. It also gives more flexibility to employers who maintain multiple trade licenses or legal entities across different free zones to participate in a group scheme and benefit from economies of scale, ultimately bringing the cost of managing this scheme significantly lower.
- Protection of Savings: The primary objective is to safeguard the savings of workers. These savings, typically received as end of service benefits, are crucial for employees and their families.
The new scheme is expected to follow the same model as the previously launched DEWS scheme in DIFC. Employers are required by law to make monthly contributions to offset their end of service gratuity liability.
This eliminates the cash flow constraints on employers to pay large cash sums on employee’s departure, also it gives employees a higher degree of security that their earned gratuity money is kept under safe custody of an independent scheme manager.
- Encouraging Responsible Investment:The new system places an emphasis on responsible and secure investment of these savings. This give the new system a foundation to become a powerful retirement planning tool. Employees can accumulate growth of their funds over extended periods of time and start accumulating wealth as they continue in the scheme.
- Government Oversight: The UAE government is working closely with key authorities, including the Securities and Commodities Authority which is deeply involved in monitoring and regulating financial activities of the plan administrators and fund managers who offer investment advice to scheme members. Along with the Ministry of Human Resources and Emiratisation, to put in place the right rules and regulations that mandate the regular contribution to this scheme and moderate the relationship between employers and employees when it comes to end of service gratuity schemes.. This collaborative effort ensures comprehensive and well-regulated management of workers’ end of service benefits.
The proposed scheme is inline with the global trends in employee workplace savings and pension systems across the world. This move is seen as another step in the right direction in terms of talent retention. An objective that comes high on the UAE’s policy agenda. It also aligns with the vision to turn the UAE into a long term residence and retirement destination rather than touristic one.
How does that affect company cash flow?
- Potential Impact on Short-Term Cash Flow: Companies may experience a short-term impact on their cash flow as they transition to the new system. This impact will vary according to existing measures an employer has in place.
For employers that segregate gratuity funds as a common practice, this new change doesn’t disrupt the monthly cash flow much. However, for employers that never practiced segregating accrued gratuities, this could lead to major effects on their cash flow and potentially the whole financial position of the company.
The main positive outcome to employers under the new scheme is the certainty of accrual process. Meaning, when a company makes a monthly contribution towards the new scheme, this will be based on the current monthly salary. Unlike the previous scheme where the payment in full was calculated based on the final salary of the employee.
- Long-Term Benefits for Company Stability: Over the long term, this change can positively affect company cash flow by ensuring that the funds are set aside for end of service benefits instead of remaining as a liability on the company’s balance sheet.
Employers who used only provision for gratuity but never actually funded it were under a lot of pressure from their financial audits to follow the financial reporting standards and were usually unable to avail credit facilities from financial institutions.
The new gratuity scheme ensures that gratuity liability is efficiently covered and segregated from the company’s cash flow. - Corporate Tax Efficiency: Under the new scheme, monthly gratuity contributions are considered part of the payroll expenses (similar to salaries, visa costs, and insurance premiums). This gives compliant employers a chance to optimize their corporate tax reporting and pay taxes only on their real profits other than inflated revenue numbers that don’t account for gratuity payouts.
How does that protect employees?
- Preservation of Workers’ Savings: The primary aim of the new system is to protect workers’ savings. By ensuring that these savings are managed and invested securely, employees are less vulnerable to financial risks and can rely on their end of service benefits for future needs.
- Enhanced Financial Security: Employees can have greater confidence that their end of service benefits will be available to them when needed, contributing to their financial security and well-being. This protection helps safeguard their rights and supports their families’ stability.
What is expected next?
- Implementation and Regulation: The next steps involve the practical implementation of the new system and the development of regulations to govern it. The collaboration with the Securities and Commodities Authority and the Ministry of Human Resources and Emiratisation will likely play a key role in defining the specifics of this system.
- Communication and Education: Employers and employees will need clear communication and education about how the new system works, its benefits, and any changes in processes. This will ensure a smooth transition and understanding of the revised end of service benefit framework.
- Monitoring and Evaluation: Ongoing monitoring and evaluation of the system’s effectiveness will be essential to ensure that it achieves its intended goals of protecting workers’ savings and encouraging responsible investments.
How can FinFlx assist in navigating these end of service changes?
The UAE is making big changes in how workers’ benefits work, and FinFlx is keeping up. Here’s how:
- Following the Rules: FinFlx’s Gratuity Scheme helps companies manage End of Service Gratuity while staying compliant with UAE labor laws. This means companies can feel confident that they’re doing the right thing for their employees.
- Keeping Money Safe: With the new focus on keeping workers’ money safe, FinFlx’s services are even more valuable. Employers can use FinFlx to segregate employee’s gratuity through their banking partner Emirates NBD.
- Making Smart Savings: FinFlx helps companies save their money wisely and while earning a high interest of 4% on all deposits without restrictions. This fits perfectly with the UAE’s vision of making smart investments to keep the economy strong.
In a nutshell, FinFlx is all set to adapt to the changes in the UAE’s worker benefits system. They’re here to help companies manage their responsibilities, teach employees about money, and make smarter saving habits. As the UAE makes these important changes, FinFlx is the trusted partner that will help both employers and employees thrive in this new era of workplace benefits.
Related: Use this Free Gratuity Calculator For Companies to get a full report of your business’s current and future gratuity liability in line with the new UAE labor law, and avoid any fines related to miscalculations or late payments
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