Gratuity or end of service benefit is part of UAE Labor law. Employees who meet certain conditions are paid a lump sum on leaving the company. However, gratuity funding has been the cause of many court cases.
Companies with long-serving staff can have very high gratuity liabilities. Unfortunately, many employers seek to fund their gratuity liability via cash flow. As a result, when a long-serving staff member leaves it can have a financial impact on the company.
Consequently, where employers have been in financial difficulties, employees may not receive their payment. If this occurs, the employee and employer could be involved in unnecessary litigation. This is costly and results in a drain on management resources, bad public relations and lowers staff morale.
Consequently, UAE is looking at ways to separate the liability to employees and the trading success of the company.
There are several potential solutions, for example employer savings schemes. The company’s needs will determine what is most appropriate. Each solution separates the funding from the sponsoring company. The liability increases each year for most businesses. Therefore a funding strategy must be in place. This approach:
There is also the added possibility that the gratuity arrangement will become self-funding over time with favourable investment performance.
Initially, there is an assessment of gratuity liability based on employee tenure and salaries. Consideration is then taken of:
Due to the short period of time before these events are to occur, we fund them differently. Next, a schedule of payments and an investment strategy decided for the rest of the staff using actuarial analysis.
Once the scheme is running, the level of funding is based on changes in employee numbers, salaries, legislation, and investment growth.
We can do this for you or you can visit the Dubai Government website.
What Should I Do Next?
Please contact us to discuss your gratuity liability funding needs.