UAE’s Optional Alternative System to the End-of-Service Gratuity System

 UAE’s Optional Alternative System to the End-of-Service Gratuity System

In a landmark move, the UAE Cabinet has taken a significant stride forward with Cabinet Resolution No. 96 of 2023, introducing an Optional Alternative System to the traditional End-of-Service (EoS) Gratuity System. This progressive resolution marks a new era in the country’s labor landscape, offering both employers and employees a more dynamic and customizable approach to EoS benefits.

One of the key aspects of the new system is its voluntary nature. Employers now have the option to choose from a selection of schemes for their employees, a significant departure from the previous, mandatory End-of-Service Gratuity System. This choice empowers both employers and employees to tailor their benefits to better suit their individual needs and long-term financial goals.

The existing EoS Gratuity System operates on a simple principle – employers provide a lump-sum payment based on the employee’s last basic salary, only applicable after a year of employment. The new Resolutions offers a fresh perspective, allowing employers to have the choice to invest and save their employees’ gratuity through private-sector investments and saving funds, governed by the Securities and Commodities Authority in collaboration with the Ministry of Human Resources and Emiratization.

Under the new system a diverse range of investment options has been made available to employers and employees. They can opt for a risk-free capital guarantee, a risk-based investment with varying levels of risk, or a Sharia-compliant investment option. This diverse selection allows individuals to align their investments with their risk tolerance and ethical considerations, allowing for personalization and flexibility of their financial planning. 

This innovative resolution not only allows employees more control over their EoS benefits, but also ensures their accrued returns are fully accessible upon termination of employment. This flexibility and empowerment of employees redefines the traditional model of end-of-service gratuity, equipping them with more financial freedom.

The Optional Alternative Systems to the EoS is not just about providing employees with a flexible retirement planning tool. It also offers employers a sustainable and cost-effective method of fulfilling their obligations. This new system highlights the UAE’s commitment to fostering an environment of financial security and long-term sustainability for both employers and their workforce.

It is important to know the new system is option. Employers are not obliged to enroll their employees in this scheme. However, those who do opt in will contribute to these external funds monthly, securing a brighter financial future for their employees.

Cabinet Resolution No. 26 of 2023 is a landmark moment in the UAE’s labor landscape. By introducing the Optional Alternative System to the EoS Gratuity System, the government is paving the way for a future where employees enjoy greater control over their retirement benefits, and employers are offered a more sustainable, cost-effective means of fulfilling their obligations. This forward-thinking resolution showcases the UAE’s commitment to progressive employment policies, which will result in a strong, more secure financial future for all.

The author of this Galadari Insight is Ahmed Ziad Galadari.
Ahmed is a qualified advocate with full rights of audience before all UAE courts. He obtained his L.L.B degree in Sharia & Law from the University of Sharjah in 2018 before continuing studies and obtaining an L.L.M degree in International Business Law from University Paris II Panthéon-Assas in 2022. Ahmed is a member of the Chartered Institute of Arbitrators (CIArb).

For more information, please contact Ahmed directly.

 Ahmed Ziad Galadari