Business | Investment
Companies should plan for gratuities
As the uncertain economic climate begins to claim jobs in the region, it's becoming likely that more companies are looking at the possibility of having to let staff go.
- By Philip Story, Special to Gulf News
- Published: 23:30 November 21, 2008
As the uncertain economic climate begins to claim jobs in the region, it's becoming likely that more companies are looking at the possibility of having to let staff go.
Accordingly, it's imperative for UAE companies to consider the necessity of carefully planned gratuity provisions for employees and look at how best to manage and protect gratuity sums during this time to ensure they have the required amount to pay redundant staff.
A significant issue for many companies here right now is protecting gratuity payments during an economic crisis. Companies need to think about safeguarding their investments and ensuring they are not vulnerable to external factors. One aspect of staff remuneration that can be enhanced without increasing costs is the provision for gratuity and that is what a corporate Group Savings plan is about. It allows companies to plan for gratuities in a scheme that adds value for both company and individual.
For employees this means that if they find themselves in a position where their job was no longer considered a necessity by their company, they could be confident that their employer would be able to provide for the legally required gratuity payment to help them during a time when they may not have a monthly salary or a new job offer.
For employers, having a corporate Group Savings plan in place can give them peace of mind that they have suitable gratuity provisions if they are forced to make cut backs in human capital.
While Group Savings schemes aren't as common in this part of the world as they are in the West, they are available in this region and are designed to allow companies to make provisions for gratuity liability with the option of providing additional occupational benefits for employees.
A Group Savings scheme allows employers to plan for future gratuity exposure and contribute regular payments with the potential for return on investment to cover the final gratuity payment when an employee leaves the company. Employees have the option to add to the contribution made by employers, ensuring that if there comes a time in their future when they need this money, it will be there for them to rely on.
It's paramount that all companies in the UAE understand the legal obligations related to employee gratuity. It is a compulsory provision that results in the individual receiving a lump sum at cessation of employment at any age, whether through the employee's decision or due to redundancy. With few exceptions, an employee who has completed one or more year's continuous employment is entitled to a gratuity based on 21 days pay for each of the first five years, and 30 days pay for each subsequent year, with the total gratuity capped at the equivalent of two years' pay - this gratuity can only be calculated on the salary at the date of leaving employment.
Few companies realise the extent of the potential exposure gratuity provisions place on their balance sheets and often fail to plan, leaving them open to financial risk if a number of employees choose to leave, or if staff cutbacks have to be made within a similar timeframe. With the economic outlook as uncertain as it currently is, all companies will be looking at methods to save on costs - the legal obligations related to employee gratuities means this outgoing can't be overlooked and proper planning for its provision is an urgent need.
- The writer is Head of Employee Benefits, Friends Provident Middle East
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