 End of Service Gratuity (Gratuity) is a statutory severance pay across most Middle Eastern jurisdictions and one which is conceptually analysed as akin to a retirement savings scheme or pension scheme. This article explores some of the common pitfalls and tricky issues which arise in relation to statutory Gratuity in the United Arab Emirates (UAE) under Federal Law No.8 of 1980 Regarding the Organisation of Labour Relations, as amended (UAE Labour Law). This is, however, a regional issue and many of the points flagged below will apply equally across the Middle East.Potential pitfalls when calculating Gratuity The UAE Labour Law sets out a prescriptive formula for calculating Gratuity. Whilst it does not expressly state that this benefit is payable in relation only to service in the UAE, this is certainly the accepted position. However, many employers often inadvertently recognise non-UAE employment service through contractual agreement, for example where an employee is an international transfer from another jurisdiction within the business. It may be possible to recognise seniority but contractual provisions should be carefully worded so that the Gratuity benefit is not thereby enhanced. Another area for consideration is where an employee receives commission or bonus payments during employment. The UAE Labour Law provides that Gratuity should be calculated on the basis of remuneration excluding all benefits in kind and any type of allowance. This wording leaves the position of commission or bonus payments potentially ambiguous and whether or not such payments should be taken into consideration when calculating Gratuity will very much depend on the particular details of any commission or bonus scheme. Gratuity as an inherent employee entitlement Gratuity may be subject to reductions where an employee resigns. However, once an employee’s service reaches five years, they will be entitled to their full Gratuity payment, notwithstanding that they have resigned. No Gratuity is payable where an employee’s employment is terminated for one of the reasons set out under Article 120 of the UAE Labour Law. However, this article is generally reserved for the most serious acts of gross misconduct, often involving a criminal element. More commonly, in cases of poor performance or misconduct, employers will terminate on notice for, what is referred to under the UAE Labour Law as, a “valid” reason, in which case the employee is entitled to their full Gratuity. Interaction with pensions – GCC nationals There are minimum and maximum earning levels for such pension contributions and a GCC national is potentially entitled to Gratuity on any basic salary earned in excess of the maximum earnings level for pension contributions. On a contractual basis, employers should take care not to inadvertently grant such GCC employees Gratuity in addition to contributions into the state pension scheme. Interaction with pensions – non GCC nationals In our experience, the UAE courts appear to be reluctant to accept that contributions into an international pension scheme are more beneficial to an employee than Gratuity as the pension benefit will generally only be received once he reaches the relevant retirement age, whereas Gratuity is payable immediately. Nonetheless, employers may wish to offer pension benefits as a means of retention or, increasingly, because it is market practice to do so. The risk of having to provide both Gratuity and the pension benefit may be mitigated through contractual provisions and the rules of the relevant scheme should be reviewed and the administrator or provider of the scheme consulted to ensure that the rules themselves can protect the employer as much as possible. –––––––– |
End of Service Gratuity
