Focus. 02 frequently asked questions on end of service gratuity payments in the united arab emirates ( uae ) and a summary of entitlements in other

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1 MIDDLE EAST JUNE 2013 BE AWARE Focus 02 frequently asked questions on end of service gratuity payments in the united arab emirates ( uae ) and a summary of entitlements in other gcc countries 05 summary table of eosg entitlement in gcc countries 06 other n ews

2 Frequently asked questions on end of service gratuity payments in the United Arab Emirates ( UAE ) and a summary of entitlements in other GCC countries In this article we share some of the questions we are frequently asked by our clients on severance payments in the UAE and other GCC countries. Q3 Is the employee entitled to an EOSG payment if he/she resigns from their employment? Q1 Who is eligible to receive end of service gratuity? All employees who have completed at least one year of continuous service are eligible for an end of service gratuity ( EOSG ) payment on the termination of employment, as provided for in the UAE Federal Labour Law 8 of 1980 (as amended ( UAE L abour L aw ). Employees w ill forfeit the r ight to a n E OSG p ayment in circumstances w here t heir e mployment is terminated pursuant to a rticle 120 o f the U AE L abour L aw. Are e mployees w ho a re re gistered for a p ension e ligible to re ceive a n E OSG p ayment? UAE/GCC n ationals re gistered for state p ension a nd non-uae/gcc n ationals p articipating in a ny company scheme h ave n o e ntitlement to a n E OSG p ayment, in accordance w ith t he U AE L abour L aw, please a lso see question 6 and 8 below. There i s an e xception for U AE n ationals, w here t heir monthly s alary e xceeds the m aximum s alary there i s an entitlement to E OSG. Q2 How much will end of service gratuity cost your business? Where the employer terminates the employment contract, the full amount of EOSG is calculated as follows: 21 days basic wage for each of the first five years of service; and 30 days basic wage for each additional year of service In all cases EOSG is capped at a maximum of two years remuneration. Yes. However the entitlement is reduced as follows: Where an employee resigns from an unlimited term contract he/she is entitled to: One third of the EOSG payment where he/she has between 1 and 3 years of service; Two thirds of the EOSG payment where he/she has between 3 and 5 years of service; and The full EOSG payment (as set out above) where he/she has over 5 years of service. Where an employee resigns from a limited term contract he/she is entitled to: Q4 No EOSG payment where he/she has less than 5 years of service; and The full EOSG payment where he/she has over 5 years of service. Is EOSG payable in the DIFC and the free zones? Yes. However the rules do vary slightly between free zones so you should refer to the relevant free zone rules and regulations or seek further advice if necessary. For example, in the Dubai International Financial Centre ( DIFC ) there is no reduction in EOSG when the employee resigns. Q5 How is a day s basic wage calculated? Does it include ALLoWAncES and commissions? Salary Yes. Pursuant to the UAE Labour Law, where an employee is paid daily/weekly/monthly basis a day s basic wage should be calculated with reference to the employee s salary at the time of termination. 02 Be Aware Newsletter

3 Where the employee is paid on a piece work basis a day s basic wage is calculated as the average remuneration received over the preceding six months. Allowances Allowances such as housing/ transport/education are not included in basic wage for EOSG purposes. Commissions/bonus payments Yes. Recent Cassation court decisions in the UAE have confirmed that commissions and bonus payments that an employee has a contractual entitlement to or which are consistently paid to employees should be taken into account when calculating pay for EOSG purposes. It should be noted however that case decisions in the UAE are not strictly binding on future courts and therefore these provide guidance only. The UAE Labour Law is silent as to the method by which an employer should calculate commissions/bonus therefore we recommend using a method similar to that used for calculating the salary of piece work employees i.e. taking an average of all commissions/bonus payments received over the preceding six months (where applicable). Where an employee receives commission/bonus payments less frequently, then you may need to look back further in order to establish a fair representation of the value of commission/bonus payments earned by the employee e.g. where an employee receives a bonus every 12 months you may need to look back over the last three years and take an average of the commission/bonus payments made. An employee is likely to challenge the calculation of EOSG where no such commission/bonus payments are included. Q6 Is the employee entitled to an EOSG payment if she/he participates in a retirement OR savings scheme? This will depend on the type of pension arrangement in place. Where an employer has a savings fund for its employees and the rules of the fund stipulate that the sums the employer paid into the fund are in discharge of its legal obligation in respect of EOSG, on the termination of employment the employee must be paid the greater of either the savings balance in the account or the EOSG payment. If the employer has a savings fund, but the rules do not stipulate that the amounts paid by the employer are in discharge of the legal obligation towards EOSG, on the termination of employment the employee is entitled to receive both the savings balance in the fund and an EOSG payment. Where an employer has a retirement, insurance or similar scheme, on termination an employee may opt for payment under the retirement scheme or EOSG, whichever is more advantageous to him/her. Unsurprisingly, few employers establish a savings fund or retirement scheme for an employee as the employer cannot be certain that it will not be required to pay out under both the scheme and the EOSG. Where the employer does operate such a fund or retirement scheme, to reduce the risk of an employee being able to claim both payment under the fund/scheme and an EOSG payment, we recommend obtaining the employee s written agreement at the commencement of employment that: he/she will only receive payment under one of the severance payment schemes and they make an election as to which one; and if a court or tribunal determines that the employee is entitled to an EOSG payment on termination that any pension contributions made are offset against the EOSG payment. This will also help to manage the employee s expectations on termination. Q7 Where an employee transfers to the UAE from the employer s overseas branch must their previous service outside the UAE be counted towards the period of service for an EOSG payment? This will depend on the wording of the employee s employment contract. The UAE Labour Law provides that EOSG is calculated with reference to the employee s continuous service with the employer. The law does not go into any further detail nor does it differentiate between service worked in other countries or for connected companies. Therefore where the employee transfers to the UAE from another country and the contract confrms that the employee s previous service counts towards continuous employment with the UAE employer, then there is a risk that the employee has a contractual entitlement for that previous service to count towards the EOSG payment on termination in the UAE. Ordinarly EOSG can be limited to service in country. Care should be taken over contracts, secondement letters etc. Be Aware Newsletter 03

4 To reduce the risk of an employee s previous service in another country (particularly one where there is no end of service entitlement) or for a connected company counting towards service for the calculation of any EOSG entitlement, we strongly recommend expressly stating in the contract whether the previous non-uae service will count towards service for the calculation of any EOSG entitlement. Q8 Can a UAE/GCC national choose to receive an EOSG payment instead of a pension? It is mandatory for all UAE nationals holding a family book and all GCC nationals working in the UAE ( Eligible Employees ) to be registered with the relevant pension authority. All Eligible Employees must be registered with the pension authority within one month of starting employment. The employer will be liable for late penalties and interest for a late registration or failure to register and Eligible Employee. An Eligible Employee cannot elect to receive an EOSG payment on the termination of their employment instead of a pension. A UAE national, however, that receives more than the maximum wage for the purposes of pension contributions (currently AED 50,000 per month) is entitled to receive an EOSG in respect of the difference between their actual salary and AED 50, Be Aware Newsletter

5 Summary table of EOSG entitlement in GCC countries Country EOSG calculation Is EOSG reduced if the employee resigns? UAE 21 days pay for each of the first Yes. 5 years of service; and Bahrain Kuwait Oman Qatar Saudi Arabia 30 days pay for each additional year of service Half a month s pay for each of the first 3 years of service; and One month s pay for each additional year of service Half a month s pay for each of the first 5 years of service; and One month s pay for each additional year of service Calculation differs where employee is not paid monthly. 15 days pay for each of the first 3 years of service; and 30 days pay for each additional year of service Three weeks pay for each year of service Half a month s pay for each of the first 5 years of service; and One month s pay for each additional year of service Yes but please note that female employees are entitled to the full award if they leave employment because of their marriage and within one year from the date of marriage. Yes but please note female employees are entitled to the full award if they leave within six months from the date of her marriage or three months from giving birth. Minimum service for EOSG? Yes. The employee must have a minimum of one year s service. Yes. The employee must have a minimum of one year s service. Yes. The employee must have a minimum of one year s service. The definition of a day s pay for the purposes of EOSG calculation varies in each GCC country and we would recommend that you obtain legal advice if you have any questions concerning this. Practical steps: Review and update your business current policies and contracts to ensure that employees receive the correct entitlements on termination particularly where employees receive a pension or have service outside of the UAE or GCC country which could result in hefty end of service entitlements on termination. Make financial provisions for the pecuniary obligations. Be Aware Newsletter 05

6 Other News Emirates ID now compulsory for visa amendments in the UAE Immigration authorities in the UAE have confirmed that Emirates ID cards are now required for the following processes: Visa and labour card renewal Visa and labour card cancellation Visa modifications There is no guidance on whether employers are responsible for obtaining the cost of the Emirates ID cards, although in practice as it is part of the recruitment requirements employers generally reimburse employees the cost is around AED 300 per employee. The Emirates ID Authority is imposing flat rate fines of AED1,000 per person for failure to apply for Emirates ID cards although it is not clear when or how this fine will be imposed. Private sector minimum pay increase of 60% for Oman nationals Omanis have been given an increased minimum monthly wage to 325 rials (approximately AED 3,100). We await the publication of the legislation. This is part of a range of ongoing political and economic reforms in the country. To date, there is currently no change to the mandatory annual salary of 3% for Omani and non-omani employees. SUMMERTIME WORKING HOURS CONFIRMED IN UAE FOR OUTDOOR WORKERS Workers in "open areas under the sun" are required to have a break between 12:30pm and 3pm. The legislation will be in force this year from 15 June to 15 September. We will issue an Alert to give full details of the legislation for businesses unfamiliar with the annual rules. 06 Be Aware Newsletter

7 YOUR MIDDLE EAST TEAM Neil Crossley Employment, Pensions & Benefits Practice Group Head T neil.crossley@dlapiper.com Tala Al-Hejailan Legal Consultant T tala.al-hejailan@dlapiper.com Patricia Wardrop Legal Consultant T patricia.wardrop@dlapiper.com Ashleigh Robertson Legal consultant T ashleigh.robertson@dlapiper.com Natalie Morrison Legal Consultant T natalie.morrison@dlapiper.com Joanna Taylor Senior Legal Consultant T joanna.taylor@dlapiper.com If you have finished with this document, please pass it on to other interested parties or recycle it, thank you. DLA Piper middle east llp is part of DLA Piper, a global law firm operating through various separate and distinct legal entities. For further information please refer to Copyright 2013 DLA Piper. All rights reserved. JUN