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Mon 13 Jun 2011 12:01 PM

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Gulf firms ringfence funds for end-of-service benefits

Rise in disputes with employees is forcing firms to separate funds for gratuities

Gulf firms ringfence funds for end-of-service benefits
FOREIGN FIRMS: The bill will allow 100 percent foreign ownership in some sectors. (Getty Images)

Gulf firms are increasingly setting aside capital to fund end-of-service employee payoffs following a rise in the number of disputes with staff, consultancy firm Towers Watson said.

Firms are ringfencing funds rather than leaving it as working capital in the wake of the financial crisis, which saw companies struggle to pay hefty gratuity costs amid widespread redundancies.

“The proven practice has been for end-of-service benefits to be simply accrued, accounted for on the books but the actual cash for that remaining within working capital,” said senior consultant Iain Collins. “[Companies] are beginning to separate funds out…either in whole or in part.”

In the absence of mandatory pension schemes in the Gulf, firms are required to provide an end-of-service payout to employees, calculated on the length of the employment and basic salary.

Saudi Arabia has no cap on the total amount employees can receive while the UAE and Kuwait cap payouts at equivalent to two years’ pay.

Twenty four companies in a survey of 102 Gulf companies said they are funding their employee gratuities compared to just eight companies last year, Towers Watson found.

Disputes between employees are the biggest reason for the shift in thinking, said Collins.

“Many employees who were made redundant during the downturn did not receive their end of service benefits because the funds were not separated from the working capital,” he said.

Dubai-based legal firm Habib Al Mulla & Company said it has seen an increase in the number of legal rows over end-of-service benefits.

“Because of the downturn, many employers terminated staff. As a result of this there was a noticeable increase in employment-related disputes, including those concerning payment of end-of-service benefits,” said Tarik Nassar, a litigation lawyer at the firm.

DIFC Courts, which handles disputes within the financial freezone, saw a 27 percent rise in the number of cases held at its small claims tribunal (SCT) in 2010, compared to the previous year.

A number of companies are farming out the management of end-of-service funds to external firms, creating a lucrative niche for investment firms.

“Most multinational employers in the UAE will make funded provisions for their gratuity obligations under the law, and increasingly these are managed externally,” said Samir Kantaria, partner and head of employment at Al Tamimi & Company.

“In certain instances, depending on the size of the organisation and the level of the funding, the fund becomes self-funding through the interest the fund amount accrues.”

 “We assist lots of SME's, their owners and financial controllers, with investment plans dedicated to providing for end-of-service gratuity funds.  We have witnessed an increase in this type of business over the past year,” said Spencer Lodge, regional director at financial advisors PIC.

Despite the increase in disputes, an estimated 40 percent of GCC-based companies are topping up their gratuity offers in a bid to woo employees and compensate for differing regulations across the Gulf, according to the Towers Watson survey.

“They have wanted to do this as a differentiate themselves but also in some circumstances where employers have got employees dotted around the region, it’s a way of insuring that employees don’t lose out when they move from let’s say from the UAE to Kuwait or Qatar,” said Collins.

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B Mookerjee 8 years ago

The requirement for specific funding for payment of gratuities was not felt in this region because of its low levels of leveraging and cash rich economy. Adequate provisions were being made in the books and payouts never caused any problem. But mainly because of the recent financial crisis affecting the region the wake up call has started to ring. The employers, who were caught off guard, albeit unwittingly, have learnt the lesson and are prepared to discipline their funding of gratuities.
In most advanced, not necessarily rich countries, labour laws provide for investment pattern of superannuation funds to make sure of availabilty of sufficient funds in time. Any deviation from the legally specified pattern of investments attract audit objection.
Perhaps same kind of rules need to be enacted in this region.

Chris 8 years ago

Note that in Saudi the EOS includes the housing allowance and other benefits paid regularly. Employees in the UAE have to put up with companies paying as much as they can as non payroll, to ensure that the housing allowance and transport allowance are not considered when EOS is calculated.
This is a means of employers disregarding their obligations.