The gratuity system was put in place to help attract expat workers to the region and encourage them to stay. But, many UAE companies did not put funds aside to finance this and now are left with potentially large liabilities they may not be able to meet, reports Shane McGinley

There has been much rumour and speculation recently about a predicted expat exodus from the region and the downturn has seen some of the biggest business names announcing redundancies.

The gratuity system was originally set up to encourage foreign workers to stay longer in the UAE. However, a new survey by Zurich International Life has found that “recent redundancies in the market place have highlighted cash flow issues that can arise when gratuity liabilities are not funded”.

The survey looked at the UAE and Qatar and discovered that over half of those questioned were not aware of how their company planned to fund their gratuity liability.

Another 22 per cent said that the gratuity liability remained on the company’s balance sheet and was therefore not funded or only partly funded at most.

Only three per cent of the companies questioned had put an investment plan in place to manage the funds required to pay for gratuity.

“We feel that, during the boom years in the UAE, the options for gratuity funding were perhaps not fully understood and now is the right time for companies to take a more strategic and proactive approach to their end-of-service gratuity liability,” said Carlos Sabugueiro, CEO, Middle East and Africa, global life emerging markets of Zurich Financial Services Group.

“There are companies that understand, strategise and invest in a gratuity scheme but there are still many without a plan. We all understand that the end-of-service gratuity is a legal requirement in this region and we believe that organisations should begin to use it as a way to reward employees’ loyalty,” he added.

The UAE has federal laws in place to cater for the paying of gratuity. “It is not particularly transparent, but it is better than most GCC countries,” said Sabugueiro, “there is a lot of ambiguity in some of the others, so this one is pretty good”.

According to chapter VII of the UAE Federal Law No. 8, which relates to termination and severance pay in relation to labour relations, “a worker who has completed one or more years of continuous service shall be entitled to severance pay at the end of his employment”.

Any days of absence from work without pay are not be included in calculating the period of service. For the first five years of service an employee is entitled to 21 days gratuity and for each additional year of service after that they are entitled to 30 days gratuity. However, “the aggregate amount of severance pay should not exceed two years wage”, the law states.

There are some important considerations to take into account. “The final basic salary part is absolutely key,” said Sabugueiro, “generally when you look at your salary or take home money, it [often] includes a housing allow-ance, travelling allowance, petrol allowance, schooling allowance, etc. Probably only 50 per cent of your take home is actually your basic salary”.

These allowances and supplements are taken out when an employee’s gratuity entitlement is determined.

Employers should forward a benefit statement to each employee at least once a year, showing exactly how the salaries are worked out and what the basic pay actually is, advises Sabugueiro.

Pay cuts are now also a reality in the marketplace, but employees should be aware that this also directly impacts their final gratuity.

The gratuity an employee is entitled to is based on the final salary amount they are being paid at the time of leaving the company. Therefore employees should bring this issue up when negotiating a pay cut, said Sabugueiro.

The type of contract an employee signed also determines their gratuity and the terms are set out clearly in Federal Law No. 8.

This states that if a worker with in indefinite term contract decides to leave the company they are entitled to a third of their gratuity if they have worked for the company for over a year, two thirds if they have worked for more than three years and 100 per cent if they have worked for five years or more.

If a worker decides to quit their job and they signed a definite term contract they are only entitled to gratuity if they have been working for the company for over five years.

Sabugueiro advises that companies who have not put any funds aside for gratuity should act now. If a company has no strategy in place it can have seriously implications if it plans to merge, float on the stock market or make make any future financial projections as the ongoing gratuity liability reduces the overall value of the company, said Sabugueiro.

Some companies may not be able to make staff cuts, as they may not able to cover the gratuity due. “They should draw a line in the sand and start funding from today,” Sabugueiro advises.

Sorce:http://www.7days.ae

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