NEW UAE End of Service Savings System

تيم إليوت
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.

لودميلا يامالوفا
Good to see you, Tim.

تيم إليوت
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?

لودميلا يامالوفا
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.

تيم إليوت
Let’s backtrack slightly. How has the traditional end-of-service system in the UAE worked until now?

لودميلا يامالوفا
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.

تيم إليوت
So why the change? What are the benefits of introducing this alternative scheme?

لودميلا يامالوفا
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.

تيم إليوت
How does this differ from the traditional EOS system?

لودميلا يامالوفا
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.

تيم إليوت
Who does this new law apply to? Is it mandatory?

لودميلا يامالوفا
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.

تيم إليوت
How do employers participate in this scheme?

لودميلا يامالوفا
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.

تيم إليوت
Are there different types of contributions under this system?

لودميلا يامالوفا
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.

تيم إليوت
Let’s dive deeper into mandatory contributions. How do they work?

لودميلا يامالوفا
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.

تيم إليوت
And voluntary contributions?

لودميلا يامالوفا
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.

تيم إليوت
How is the money managed?

لودميلا يامالوفا
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:

1. Share Capital Guarantee Fund (no risk).
2. Risk-Varying Investment Funds (varying levels of risk and return).
3. Sharia-Compliant Investment Funds.

By default, mandatory contributions go into the Share Capital Guarantee Fund, while employees can choose any option for voluntary contributions.

تيم إليوت
When can employees access these funds?

لودميلا يامالوفا
Employees can withdraw voluntary contributions during their employment. For mandatory contributions, access is only available after employment ends.

تيم إليوت
What happens if employment ends or the employee changes jobs?

لودميلا يامالوفا
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.

تيم إليوت
What about the employer’s obligations?

لودميلا يامالوفا
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.

تيم إليوت
Summarize the key benefits of this system for employees and employers.

لودميلا يامالوفا
For employees:

1. Greater financial security.
2. A savings plan option.
3. Investment opportunities.

For employers:

1. Better financial planning.
2. Reduced risk of EOS payment disputes.
3. Potential future tax benefits.

تيم إليوت
Thanks for breaking that down, Ludmila.

لودميلا يامالوفا
Always a pleasure, Tim.

تيم إليوت
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