Alternative End-of-Service Gratuity Scheme in UAE

How would you like to have beneficial savings after your retirement? Most workers prefer gratuity as it comes in the form of the best savings. The alternative end-of-service gratuity scheme gives financial security to the individual after their retirement. However, in the United Arab Emirates (UAE), this savings scheme becomes an investment opportunity for many employees, especially those who belong to the private sector and free zones. They can make golden investments and receive huge returns after their retirement.

Under UAE labour law, employees are provided with a lump-sum amount as a gratuity if they are terminated after one year of service. To earn the gratuity, it is important to serve the company for twelve months. The calculation of gratuity is simple: it is calculated based on the last basic salary and years of service of the employee. The first five years of employment for gratuity are calculated as 21 days’ salary per year. However, 30 days’ salary is considered after five years.
It has worked for a long time in the UAE, ensuring financial sustainability and long-term planning for the employees.

It could be challenging to introduce a new scheme in the country, but people who have concerns about future planning would be interested in knowing about those schemes. The alternative gratuity scheme had to be introduced as the traditional one had many concerns:

• Zero Retirement Plans

A lump-sum amount of money does not secure someone’s future for a long time. The financial security has to last for at least a few years after the retirement age.

• Burden on Employers

Companies face a financial burden if they choose a traditional gratuity system because they have to pay lump-sum payouts that could affect the company’s financial cycle.

• Inflation

Inflation does not suffice for individuals with the lump-sum gratuity amount as the cost of living rises quickly.

• Meeting the Global Standards

Alternative end-of-service gratuities had to be introduced in the UAE to meet international standards for retirement plans.

The alternative saving scheme makes a person well-equipped for their plans, especially when it comes to finances:

• Voluntary Participation from Employer

Employers can decide on better savings schemes for their employees so they can retire happily. However, non-citizen employees and UAE employees working in the government sector have the option to register in the scheme.

• Better Investments

With the alternative end-of-service gratuity, the investments can turn into growth for many individuals. The financial investments can offer them a great deal of return.

• Empowering the Employees

Employees are free to use their retirement savings whenever they want to. However, this gives them an opportunity to invest with little risk. Moreover, financial planning makes them think about their future in great ways.

• Carrying Savings from One Job to Another

Previously, the gratuity was specified to one employer. However, the new savings scheme allows people to carry their savings even when they are switching jobs. It provides security and continuity to the retirement plans.

The transition of the new savings scheme has to be conducted smoothly; therefore, legal compliance is essential. The lawyers in Dubai can assist businesses in making changes to regulatory requirements. They can create essential drafts and employment contracts, ensuring gratuity is calculated as per the legal requirement. Moreover, the legal aspects of alternative end-of-service include the company’s registration for the new scheme, the consent of the employees to register for the scheme, and investment guidelines to protect the savings of the employees.

The new savings scheme keeps the employer away from long-term liabilities. They can manage the cash flow efficiently and make effective financial planning for their business. However, the employees get financial security and better investment opportunities in the future. They get higher returns than they could get in the traditional gratuity system.

Challenges of Alternative End-of-Service Gratuity

Though the new savings scheme seems good for everyone, it has challenges to be addressed properly:

• Employee’s Education

Many individuals may not know the best investment saving plans so that they will need financial literacy support. However, not everyone in the UAE understands the financial sector easily.

• Economy Fluctuating

Economic instability could have an adverse effect on people’s money, as they may not get sufficient returns on their investments.

• Adjustment Problems with Employers

Transitioning from one savings scheme to another could be difficult as the company must make financial adjustments and comply with legal requirements.

Employers in the UAE are advised to hire lawyers in Dubai to make a smooth transition from the older to the newer savings scheme, as it involves legal obligations. Also, having a legal consultation will help you avoid many mistakes that you could make in your business with the new savings scheme. Let the legal professional help you in keeping your cash flow right on track.

As an employer, you should know the financial situation of the company before making your decision to change the savings scheme. It will be good to seek legal advice in the UAE because that will ensure legal compliance. Consequently, you will need to choose a financial institution that will authorize a gratuity fund. Your lawyer can help you with that. It is equally important to discuss the new changes with your employees before you implement them. You must convey the company’s goals and how the new gratuity scheme is good for them and the company. Let them think of the options and benefits they can have with an alternative gratuity scheme.

Companies have to move toward a change in a smooth manner, ensuring that nothing is disrupted and that most stakeholders are happy with the transitional change. However, you should have legal support at all times to keep yourself away from problems and save the reputation of the company. The lawyers in Dubai could be a great help in managing the transitional phase at your company.