UAE set to overhaul its end-of-service gratuity scheme


Current EOSG regime and its shortcomings

Historically employers in the UAE have not offered their expat employees contributions to private pension schemes or other savings arrangements to help plan for their retirement. This is largely due to the UAE Labour Law, which has a structure in place commonly known as End of Service Gratuity (“EOSG”) which is a statutory right for expat employees (other than those based in DIFC or ADGM) to receive a lump sum at the end of their employment with a company in the UAE. Employers have traditionally viewed their employees’ EOSG entitlements as a benefit in lieu of a pension contribution.

In basic terms, EOSG is an amount calculated based on the duration of an employee’s employment and their last basic salary on termination of employment.  Employers in the UAE are obliged to pay this sum out on termination of employment. However, there is no direct statutory obligation on employers to accrue these liabilities in their accounts, to hold those funds in a secured structure off the employer’s balance sheet, or indeed to invest these sums for the benefit of the employees.

This means that an employee’s ability to receive their EOSG entitlement is subject to the financial prudence and business performance of the employer – if the employer becomes insolvent, then the employee’s ability to receive some or all of the EOSG entitlement is jeopardised – and the employees have no ability to direct how their accruals might be invested over the accrual period.

New regime

Following a UAE Cabinet meeting held on 4 September 2023, the UAE Government announced the introduction of an alternative scheme to the traditional EOSG scheme to address some of these concerns.

While the underlying laws and details of the new EOSG scheme are yet to be released, we understand it will involve the creation of savings and investment funds, held off the employer’s balance sheet, and to be overseen by the Securities and Commodities Authority working in collaboration with the Ministry of Human Resources and Emiratisation. Employers will have the right to elect into this scheme, subject to which eligible employees will then be able to invest their gratuity across the available savings schemes. Based on information issued by the UAE Government Media Office, the available schemes will consist of the following three separate investment options:

  • a risk-free capital guarantee (ensuring capital preservation);
  • a risk-based investment (with risk levels varying between low, medium, and high); or
  • a Sharia-compliant investment option (to ensure compliance with Islamic Sharia law).

Electing employers in the UAE will be able to choose to enrol their employees in the new scheme and to pay monthly contributions into these external funds. By contributing to external funds, this avoids the risk that an employer may fail to pay out EOSG lump sums when employees leave their employment, and the potential legal challenges associated with employment litigation claims or breaches of directors’ duties under the original gratuity system. It would also offer employees greater control over how their EOSG accruals are invested.

The number of employers choosing to participate in the scheme is obviously yet to be seen although we anticipate that workforces will strongly advocate for employers to engage with the EOSG scheme upon its implementation.  

It will also be interesting to see how UAE Courts view directors’ duties in this context; might directors of employers who do not enrol into the new scheme be considered to be in breach of their directors’ duties in the event that the employer then fails to pay out EOSG entitlements?

A further update will follow when the new laws are released.