UAE cabinet approves optional alternative scheme for private sector gratuity

22 November 2023 3 min read

By Jawad Elazar

At a glance

The UAE Cabinet members approved the introduction of an optional alternative scheme to the end of service gratuity entitlements or employees in the private sector (inclusive of free zones) which was implemented on 14 October 2023.
Employers can subscribe to an investment and saving fund.
The employer is obliged to pay the monthly fee to the saving fund to subscribe to the Alternative Scheme and this is not deducted from the employee’s salary.
Employees may contribute an additional amount (a monthly or lump sum) in addition to the basic contribution.

The UAE Cabinet members approved the introduction of an optional alternative scheme to the end of service gratuity entitlements (Alternative Scheme) for employees in the private sector (inclusive of free zones) which was implemented on 14 October 2023.

Employers can subscribe to an investment and saving fund. In doing so, participation in the Alternative Scheme is considered mandatory if chosen by the employer and the traditional end of service gratuity scheme will be replaced.

The employer is obliged to pay the monthly fee to the saving fund to subscribe to the Alternative Scheme (Basic Contribution) and this is not deducted from the employee’s salary. For full-time employees who have less than five years of continuous service of employment with the employer, 5.83% of the employee’s monthly basic salary is paid into the saving fund, whereas full-time employees who have more than five years of continuous service of employment will have 8.33% of their monthly basic salary paid into the saving fun. The Basic Contribution fees must be paid within 15 days of the first day of each month. Fines and sanctions apply to the employer for non-payment unless they have withdrawn from the Alternative Scheme in accordance with the law.

Within 14 days of the date of termination of employment, the beneficiary employee shall be entitled to all Basic Contribution amounts paid into the Fund together with any returns realised during the period they have invested into the Fund. Alternatively, the beneficiary employee may notify the fund manager in writing within the 14-day period of their wish that the Fund continues investing the sums already contributed. The employee has the right to withdraw the sums already contributed at any time following the end of the employment relationship.

If applicable, the employee will also, upon termination of employment, receive their accrued end of service gratuity as calculated at the time of subscribing to the Alternative Scheme.

Employees may contribute an additional amount (a monthly or lump sum) in addition to the basic contribution (Voluntary Contribution). The Voluntary Contribution must not exceed 25% of the employee’s monthly total salary if the payment is monthly, and it must not exceed 25% of the employee’s annual total salary if the payment is a lump sum. During the period of employment, the employee may withdraw part or all of the Voluntary Contribution amounts paid in or the investment returns from it, in accordance with the controls in force with the fund manager. The Voluntary Contribution is not counted among the beneficiary’s end of service entitlements.

The fund manager must provide various investment options, including risk-free, risk-based and Sharia compliant investment options. The fund manager may accept any contributions from individual investors, non-citizen employees working in the public sector and citizens working in the private and public sectors (which would be in addition to the contribution of payments towards pension schemes).

Implementing regulations to be published.