Tim Elliott
Welcome to Lawgical, the UAE’s first—and still the only—regular legal podcast. My name is Tim Elliott, and as always, here’s our expert, the managing partner of the Dubai-based legal firm Yamalova & Plewka, Ludmila Yamalova.
Ludmila Yamalova
Good to see you, Tim.
Tim Elliott
Thanks for being here. Once again, in this edition of Lawgical, it’s a slightly quicker-fire Q&A approach to the legal issues we discuss.
Big news in the UAE legal world—really big news. We’re diving into the recently announced new alternative end-of-service (EOS) scheme here in the UAE. This was introduced just last week. Ludmila, the UAE is well-known for its end-of-service benefit system, which essentially provides employees with a gratuity at the end of their employment, as long as they meet the requirements of minimum time served and other prerequisites.
Now we’re seeing the introduction of an alternative EOS scheme. Let’s start there: how new is this scheme to the UAE, and what is it?
Ludmila Yamalova
It is indeed very new. It was introduced in October 2023, and as we’re recording this, it’s still October. This is truly hot off the press, and I think we’re one of the first to break it down in detail.
Legally speaking, the UAE Cabinet issued Decision No. 96 of 2023, titled the Optional Alternative Scheme for the End-of-Service System. This legislation introduces the new alternative EOS scheme we’re discussing today.
Tim Elliott
Let’s backtrack slightly. How has the traditional end-of-service system in the UAE worked until now?
Ludmila Yamalova
The traditional system applied to employees who worked for at least one year with a company. After completing that first year, they would start accruing end-of-service benefits.
The calculation was based on the employee’s basic salary:
- For up to five years of service, they accrued 21 days of basic salary for each year.
- From the sixth year onward, it increased to 30 days of basic salary per year.
For example, if an employee worked eight years, the first five years would accrue at the 21-day rate, and the remaining three years at the 30-day rate. It’s often viewed as a form of pension plan for expatriates.
Tim Elliott
So why the change? What are the benefits of introducing this alternative scheme?
Ludmila Yamalova
For employees, the main benefit is that their money is deposited regularly with a third party—a licensed investment fund. These funds are specialized, regulated financial institutions, which means employees’ EOS savings are more secure.
This provides a guarantee for employees, even in cases of company bankruptcy or liquidation. For instance, if a company collapses and owes an employee AED 100,000 in EOS gratuity after eight years of service, under the new system, that money is already held securely in the fund.
Additionally, employees can use this fund as a personal savings mechanism by making voluntary contributions.
Tim Elliott
How does this differ from the traditional EOS system?
Ludmila Yamalova
Under the traditional system, companies accrue EOS on their books but aren’t required to set the money aside in a separate account. This means companies often use those funds as operating capital. When employees resign or are terminated, the company might not have enough money to pay their EOS obligations, especially for long-serving employees or senior staff.
The new system ensures that EOS funds are separate from the company’s accounts, providing more security for employees.
Tim Elliott
Who does this new law apply to? Is it mandatory?
Ludmila Yamalova
The law applies to employers in the private sector, including free zones. However, it is currently optional.
The title of the law itself includes the word “optional,” and employers can decide whether to adopt this alternative system. Once they opt in, they must follow all the regulations and terms. For enrolled employees, the system becomes mandatory.
Tim Elliott
How do employers participate in this scheme?
Ludmila Yamalova
Employers need to submit a request to the Ministry of Human Resources and Emiratization (MoHRE) to enroll. However, not all companies in the UAE fall under MoHRE’s jurisdiction, particularly those in certain free zones. The details on how free zone companies can participate are still unfolding.
Tim Elliott
Are there different types of contributions under this system?
Ludmila Yamalova
Yes, there are mandatory and voluntary contributions.
- Mandatory Contributions: Made by employers to fulfill their statutory EOS obligations.
- Voluntary Contributions: Employees can make additional contributions as part of a savings plan.
Tim Elliott
Let’s dive deeper into mandatory contributions. How do they work?
Ludmila Yamalova
Mandatory contributions depend on the employee’s length of service and employment type. For full-time employees:
- For up to five years of service: 5.83% of basic salary monthly.
- For over five years of service: 8.33% of basic salary monthly.
These percentages mirror the calculations under the traditional labor law.
Tim Elliott
And voluntary contributions?
Ludmila Yamalova
Employees can choose to contribute a percentage of their salary or a fixed amount. Employers can facilitate this by deducting the chosen amount from the employee’s salary and depositing it into the fund. However, voluntary contributions cannot exceed 25% of the employee’s monthly salary.
Tim Elliott
How is the money managed?
Ludmila Yamalova
The funds are managed by licensed financial institutions under the oversight of the UAE’s Securities and Commodities Authority (ESCA). Employees have three investment options:
- Share Capital Guarantee Fund (no risk).
- Risk-Varying Investment Funds (varying levels of risk and return).
- Sharia-Compliant Investment Funds.
By default, mandatory contributions go into the Share Capital Guarantee Fund, while employees can choose any option for voluntary contributions.
Tim Elliott
When can employees access these funds?
Ludmila Yamalova
Employees can withdraw voluntary contributions during their employment. For mandatory contributions, access is only available after employment ends.
Tim Elliott
What happens if employment ends or the employee changes jobs?
Ludmila Yamalova
Employees can either withdraw their EOS benefits or leave the funds in the system. If they change employers, the new employer can continue contributing to the same account.
Tim Elliott
What about the employer’s obligations?
Ludmila Yamalova
Employers must choose a licensed fund, identify the employees they want to enroll, and fully switch from the traditional EOS system for those employees. They must ensure mandatory contributions are paid monthly and cannot deduct these from employees’ salaries.
Tim Elliott
Summarize the key benefits of this system for employees and employers.
Ludmila Yamalova
For employees:
- Greater financial security.
- A savings plan option.
- Investment opportunities.
For employers:
- Better financial planning.
- Reduced risk of EOS payment disputes.
- Potential future tax benefits.
Tim Elliott
Thanks for breaking that down, Ludmila.
Ludmila Yamalova
Always a pleasure, Tim.
Tim Elliott
For more legal insights, visit lylawyers.com. Follow LYLawyers on Facebook, Instagram, TikTok, LinkedIn, and wherever you get your updates. See you next time on Lawgical!