How UAE firms can cope well with gratuity

Dubai - Companies may consider strategy to make these payments a means of retaining employees, encourage loyalty

Companies in the UAE should calculate the present value of gratuity liabilities and set this amount aside to be invested in a bespoke portfolio of low-risk assets to remain better prepared financially to issue end-of-service (EOS) payments to employees who resign or are terminated from their position, according to global financial planning experts.
Joseph Borders, financial planner at Guardian Wealth Management, said the attitude of some businesses to gratuity varies between choosing to cover payments out of cash funds as they arise, to setting aside an amount at the end of each year in anticipation of future costs.
Borders, however, advises against both options. While the first method is the most expensive and is out of line with UAE Commercial Companies Law because, as of last year, International Financial Reporting Standards (IFRS) must be fully implemented, the second method is better than nothing.
"However, setting an amount aside each year implies that the funds are kept in an unproductive account instead of generating modest returns."
Borders advises that companies should calculate the present value of gratuity liabilities and set this amount aside to be invested in a bespoke portfolio of low-risk assets, with a respected custodian in a well-regulated jurisdiction. Stable, reliable growth will greatly discount, if not eliminate, the need to spend additional funds on EOS commitments and protect cash/working capital against unforeseen changes in the market.
Given the transitory nature of the UAE's expatriate workforce, Borders suggests companies consider a strategy to make gratuity payments work as a means of retaining employees and encourage loyalty among staff instead of rewarding service.
According to the UAE Labour Law, a worker having spent 1 year or more in continuous service shall be entitled to an end of service gratuity upon the termination of his or her service.
The days of absence from work without pay shall not be included in the calculation of the period of service, and the gratuity is calculated based on the wage for 21 days for each of the first five years of service, and the wage for 30 years for every additional year.
"In the UAE, staff turnover can be high with sourcing, hiring, and training of talent often proving expensive. An opportunity exists to use gratuities as a retention tool," said Borders, who suggested making EOS payments clearly visible to employees each month.
If companies simply add one extra line to pay slips to state, for example, 'current end of service gratuity', employees would be able to watch that figure grow month on month and begin to feel as if they are invested personally in the company.
"The continued growth of this amount could help create a psychological barrier against resignation as doing so would mean starting from zero at another firm," said Borders.
Another option could see employees opt to make contributions to their end of service payment out of their monthly salary. "A 10 per cent of base pay, for example, would greatly increase the feeling of loyalty while salary expenses would be reduced, and employee loyalty would increase," he said.
- issacjohn@khaleejtimes.com