End of Service Benefits in the UAE – A Complete Guide 2024

All full-time employees working in the UAE, whether UAE nationals or foreign employees, are entitled to receive ‘end of service benefits’ at the end of service, subject to conditions, under Article 51 of the UAE Federal Labour Law.

This is an important financial benefit for employees. It is also critical for businesses because failure to pay end of service benefits can result in substantial financial and operational fines, as well as reputational damage that could impact upon staff recruitment and retention.

The rules, which differ for UAE/GCC nationals and expatriate employees, are set out in the Federal Decree Law No.33 of 2021 (UAE Labour Law), which came into force in February 2022 to govern employment relations. These are supplemented by Cabinet Resolution No.1 of 2022, which provides further clarity for employees working on part-time, temporary or flexible work contracts.

Expatriate employees who have completed a minimum of one year of continuous service in mainland UAE and certain of the UAE free zones are automatically entitled to a lump sum ‘End of Service Gratuity’ (EOSG) payment at the end of their employment. Employers must ensure that all EOSG settlements are paid within 14 days of the end of the employees’ contract.

Alternatively, in 2023 the UAE government introduced a voluntary end-of-service benefits Savings Scheme for employers and employees in the private sector as an alternative to the lump sum EOSG system

Emirati nationals are not entitled to EOSG but must instead be registered under a pension scheme with the General Pensions and Social Security Authority (GPSSA) in Dubai or the Abu Dhabi Pension Fund (ADPF) in Abu Dhabi. Similarly, GCC nationals working in the UAE must be registered under a pension scheme with GPSSA, regardless of the Emirate in which they are employed.

Additionally, the Dubai International Financial Centre (DIFC) operates its own DIFC Employee Workplace Savings (DEWS) scheme, which requires employers to contribute to a saving scheme on behalf of their employees.

Calculating EOSG – Full-Time Expatriate Employees

This benefit is based on both a full-time employee’s basic salary and the length of service. Employees that have not completed one year of continuous service are not entitled to any EOSG pay-out at the end of their employment contract.

The EOSG is calculated using only the employees’ final monthly basic salary (exclusive of allowances and increments) prior to termination of employment and accrues at the rate of:

• 21 days’ salary for each of the first five years of service.
• 30 days’ salary for each year of service thereafter.

The calculation is pro-rated for any part of the year worked and the total EOSG payment may not exceed the equivalent of two years’ salary.

Here is an example of how this works:

• Final monthly basic salary: AED10,000
• Total years worked: 7

For the first five years:

• Entitlement is 21 days per year.
• Calculation: Daily salary AED333.33 x 21 (days) x 5 (years) = AED35,000

For the following two years:

• Entitlement is 30 days per year.
• Calculation: Daily salary AED333.33 x 30 (days) x 2 (years) = AED20,000

Total EOSG settlement payment:

• AED35,000 + AED20,000 = AED55,000

It is worth noting that although EOSG is based on the employee’s final monthly basic salary prior to termination of employment, this may not provide sufficient future security for staff who are engaged with a low basic wage but the capacity to earn a high percentage of their income through commission and other sales incentives. However, the Law gives employers flexibility to be more generous with EOSG benefits than the statutory minimum, so employers that offer more generous EOSG terms may have an advantage in attracting and retaining the best employees.

Calculating EOSG – Alternative Work Pattern Expatriate Employees

It is essential for employers to be aware that any employee working an alternative pattern to the standard full-time schedule – part-time, temporary, flexible, remote working or job sharing – are also eligible for EOSG, under Article 30 of Cabinet Resolution No.1 of 2022, provided they have completed over one year of service with the employer.

The EOSG calculation for alternative work pattern employees is pro-rated on the actual hours worked as compared to the actual hours worked by a full-time employee (8 hours a day for 5 days a week). This ensures that the employee will receive a fair EOSG amount based on the hours they have worked relative to a full-time position.

The number of working hours set out in the employee’s contract per year is divided by the standard number of full-time working hours for the same period (2,080 hours per year for full-time employees) and then multiplied by 100 to give a percentage on which the EOSG can be calculated. This percentage is then applied to the EOSG amount that would have been due to a full-time employee for the same duration of service.

Here is an example of how this applies to a part-time employee working 6 hours per day for 3 days a week, using the same case study as above for Full-Time Employees in mainland UAE (i.e. final monthly basic salary of AED10,000 and 7 years worked, to give a total EOSG settlement payment of AED55,000).

• Part-Time hours per year: (6 × 3) × 52 = 936 hours
• Full-Time hours per year: (8 × 5) × 52 = 2,080 hours
• Prorated percentage: (936 ÷ 2,080) × 100 = 45%

The prorated percentage is then applied to the full-time EOSG to provide the part-time EOSG:

• (AED55,000 ÷ 100) x 45 = AED24,750

Calculating EOSG – Voluntary End of Service Benefits Savings Scheme

In October 2023, the UAE Ministry of Human Resources and Emiratisation (MoHRE) issued Cabinet Resolution No.96 of 2023, which introduced a voluntary, alternative end-of-service benefits Savings Scheme for employers and employees in the private sector as an alternative to the EOSG lump sum payment system . The new Savings Scheme allows employers to invest monthly end-of-service contributions in an authorised investment fund, instead of having to make a lump-sum payment at the end of the employees’ service.

It is open to private-sector employers and employees, including those located in the free zones, and is part of the UAE’s broader strategy to attract and retain global talent by providing a more secure and beneficial financial system to its expatriate workforce.

To participate in the Savings Scheme, employers must submit a request to the MoHRE, select one of the licensed investment funds and decide which category of employees should be included in the alternative scheme.

For employees selected by their employers to participate in the alternative Savings Scheme system, subscription becomes mandatory and the use of the previous EOSG system must be discontinued. On termination of employment, an employee’s entitlement to EOSG will be calculated from the commencement date of employment up to the implementation date of the Savings Scheme.

Employers are required to calculate the monthly subscription amount as follows:

• For members with less than five years of service – 5.83% of the basic monthly salary
• For members with five years of service or more – 8.33% of the basic monthly salary

Employers are required to transfer the contributions to the investment fund within 15 calendar days of the first day of the month.

In addition to the basic employer subscription amount, employees are permitted to contribute an additional percentage of their salary toward the Savings Scheme. The voluntary subscription percentage cannot exceed 25% of the total salary.

For additional monthly voluntary subscriptions, the employer will deduct the additional amount from the employee’s wages and transfer the amount to their investment account. Employees are entitled to withdraw part or all the voluntary contributions at any time during their employment.

An employee’s right to voluntary participation in the Savings Scheme ends with the termination of the employment relationship with the employer, but their funds can be retained in the investment fund after the termination if they wish.

Employees are entitled to choose the investment fund they would like to use for their voluntary subscription. If unspecified, the investments will automatically be incorporated into the Capital Guarantee Fund.

How should businesses prepare for meeting EOSG obligations?

The financial obligations associated with EOSG can be significant, particularly for larger organisations or those with long-serving employees, because pay-outs are generally large. Businesses should therefore take proactive measures to manage these obligations effectively.

As a best practice, businesses should consider maintaining a dedicated EOSG reserve fund. By setting aside a portion of funds regularly, businesses can gradually build a buffer to cover future EOSG payments. This reduces the risk of cash flow issues if multiple employees leave the business.

Another key step is considering establishing an audit process to assess EOSG liabilities accurately. Such audits help businesses track the accumulation of EOSG obligations over time, allowing them to adjust their financial strategies accordingly. Regular audits provide insights into how changes in the workforce, such as salary changes, promotions or employee turnover rates, could impact their future EOSG liabilities.

Sovereign’s dedicated HR Consultancy team is fully qualified and capable of providing tailored guidance on best practices for managing EOSG liabilities, ensuring compliance with UAE Labour Laws and conducting stringent HR Audits.

By working closely with specialists who understand the complexities of EOSG regulations, businesses can safeguard themselves against potential risks, regardless of any changes in their workforce. By being proactive, rather than reactive, businesses can navigate EOSG complexities with confidence.

For further information, please contact Faraz Ahmed, HR Consultant at Sovereign: [email protected].