What is it?
Gratuity or end of service benefit is part of UAE Labor law whereby employees who meet certain conditions are paid a lump sum on leaving the company.
What Is The Problem?
The gratuity liability of companies with long serving staff can be very high. Many employers seek to fund their gratuity liability via cashflow.
This has resulted in many employees not being paid their dues and unnecessary litigation to claim what is rightfully owed. The main reason being that employees are usually laid off when times are tough and consequently there was no cash to pay them their salaries let alone their gratuity.
As a consequence, UAE is looking at ways to separate the liability to employees and the trading success of the company.
What Is The Solution?
There are several potential solutions. The most appropriate one will depend on the company’s needs. However, all involve separating the gratuity fund from the sponsoring company and funding the liability regularly rather than when it falls due.
This approach smooths out the impact of the gratuity liability on company profits; results in employees being paid on time and avoids unnecessary legal expenses for the company.
There is also the added possibility that the gratuity arrangement will become self-funding over time with favourable investment performance.
What Service Do I Provide?
Initially there is an assessment of gratuity liability based on employee tenure and salaries. Consideration is then taken of staff turnover during the last 3 to 5 years and any foreseen events whereby gratuity will be payable, for example the end of a project resulting in the laying off of staff or the retirement of a long serving member of staff. Due to the short period of time before these events are to occur, we fund for them differently.
From this data the potential capital required to fund the gratuity liability is calculated. Discussions are undertaken about the level of funding the sponsoring company is able to afford, the schedule of payments agreed on and the investment strategy required.
The scheme is reviewed annually to ensure it remains fit for purpose and adjustments are made in accordance with changes in staff numbers.
What Should I Do Next?
Please contact us to discuss your gratuity liability funding needs.