Introduction:

In the United Arab Emirates (UAE), employers have a significant responsibility when it comes to End of Service Gratuity (EOSG) for their employees. This lump-sum payment, mandated by UAE labor law, is based on an employee's salary and length of service. Planning ahead for EOSG liabilities is crucial for businesses, as it can involve substantial financial commitments that may arise unexpectedly. In this article, we will explore the key aspects of EOSG and provide insights into how companies can effectively manage this obligation.

Understanding the EOSG Calculation:

The calculation of EOSG in the UAE is based on a formula that considers an employee's monthly basic salary (typically 60% of the total salary) multiplied by 12 (to obtain the annual amount) and divided by 365 days (to calculate the daily rate). For the first five years of service, the EOSG is calculated at a rate of 21 days' salary per year. Beyond five years, it becomes 30 days' salary per year. Importantly, the calculation for the final year is based on the actual number of days completed rather than a full 365 days.

Case Study Example:

To illustrate this, let's consider an employee with 3 years and 157 days of service, a total basic salary of AED 10,000, and the resulting EOSG requirement of AED 24,013.

Planning for EOSG Requirements:

To mitigate the financial impact of EOSG obligations and ensure compliance with UAE labor laws, companies can take proactive steps. Some firms offer tailored solutions that allow employers to set up funds dedicated to EOSG liabilities within an employee benefit trust plan. This approach offers several advantages:

  1. Enhanced Risk Management: Placing EOSG provision into a trust plan provides greater control and risk management over these funds.
  2. Reduced EOSG Costs: Early investment through the trust plan can lead to lower overall EOSG costs.
  3. Employee Attraction and Retention: Including a savings element within the same structure can help businesses attract and retain top talent.
  4. Duty of Care: Employee savings plans within the structure enable employees to save for various life goals, enhancing their financial well-being.
  5. Simplified Administration: These solutions offer a straightforward, cost-effective, and efficient way to manage EOSG requirements.
  6. Global Investment Opportunities: Funds within the trust plan can be invested globally, providing potential for growth.
  7. Rewarding Loyalty: Companies can reward loyal employees by allocating additional provisions.
  8. Online Access: Employees can access and manage their savings and EOSG provisions conveniently through an online platform.

Conclusion:

In the UAE, planning for End of Service Gratuity requirements is not just a legal obligation; it's a strategic imperative. Employers can benefit from proactive solutions that help them manage their EOSG liabilities efficiently, attract and retain talent, and provide financial security for their employees. By taking these steps, businesses can ensure compliance with labor laws while also strengthening their financial stability and reputation in the competitive UAE job market.