Financial experts call for new UAE gratuity payment legislation

New legislation will help protect employees in the event a company goes into insolvency, according to local experts
Financial experts call for new UAE gratuity payment legislation
Stricter laws would help ensure employees are protected in the event their employer goes into insolvency, and help give employees the confidence that that will allow them to make their gratuities a part of their long-term savings plans.
By Bernd Debusmann Jr
Wed 18 Jul 2018 11:21 AM

A number of Dubai-based financial experts are calling on the emirate to implement new legislation to set capital aside – separate from company assets – to be used for the gratuity payments of employees.

According to the experts, stricter laws would help ensure employees are protected in the event their employer goes into insolvency, and help give employees the confidence that that will allow them to make their gratuities a part of their long-term savings plans.

“Entitlement to end-of-service benefit is an integral part of an expatriate’s employment in the UAE, but whilst it is expected it will be paid upon leaving service, few question how it will be funded,” said Shiraz Sethi, regional managing partner and head of employment at DWF (Middle East) LLC.

“Current labour law requires that an employer makes the payment to the employee.”

Sethi added that the law, however, does not require a company to set aside capital to do so.

“Therefore, when a struggling firm ends up in liquidation, this can leave employees empty handed,” he added.

Research conducted by Old Mutual International and Quilter Cheviot indicated that only 12 percent of people in the UAE are relying solely on their gratuity to fund their retirement, with 51 percent of people saying they are relying on gratuity “a little” and 34 percent saying they aren’t relying on it at all.

Simon Fielder, regional chairman at Praxis IFM, said that “something needs to be put in place to hold employee gratuities as legally separate entities from the employer’s operational assets and balance sheets.”

“It is important for the UAE to learn from the final salary related mistakes of Western pension schemes,” he added.

"Until gratuity is converted to something that has to be funded, there is little chance of the local financial services industry and for local stock markets to mature from the emerging status where they presently linger.”

In a bid to attract new businesses and talent to the UAE, the country recently announced changes to the visa system that will allow some expatriates to apply for 10 year visas.

Additionally, new legislation will see the current bank guarantee for private sector workers replaced by a new labour insurance system which will protect employees if a company faces difficulties and is has insufficient funds available, up to AED 20,000 per employee.

“There are signs that things are slowly changing in the region,” said Mark Leale, head of Quilter Cheviot Investment Management’s Dubai office.

“Firms are starting to take note and put plans in place. However, more need to follow suit. Whilst legislation may at some point force a change, firms should not wait for this to be the catalyst to start making provisions.”

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