Business | Investment
Debunking myths surrounding gratuity
Gratuity, as prescribed by the UAE labour law, is a lump sum benefit payable to each employee upon leaving employment; however, a number of misconceptions regarding this benefit exist.
- By Philip Story, Special to Gulf News
- Published: 23:32 September 26, 2008
Gratuity, as prescribed by the UAE labour law, is a lump sum benefit payable to each employee upon leaving employment; however, a number of misconceptions regarding this benefit exist.
The basic calculation itself is quite straightforward - an employee, who has completed one or more years of 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. These are the standard rules and additional riders may apply to certain segments of the workforce. For example, workers in one of the free zones.
For employees this payment can be a welcome windfall when changing jobs or leaving the country. For employers, it can help increase employee loyalty in this transient community, especially when staff see the prospect of higher gratuity payments with longer periods of service. Recent research has highlighted that in their obligation to pay this gratuity, many employers rely on industry myths regarding funding for it, or mitigating its impact on a company's finances. In fact, these practices may actually end up leaving a dent in the accounts further down the line.
Perhaps the most common misconception among employers is that of the "13-month payment". This is when the employer pays employees their gratuity lump sum annually based on that year's earnings, in the belief that the final gratuity liability is being mitigated. In reality, because the gratuity can only be calculated on the salary at the date of leaving employment, it's likely that the company will have to pay the full final salary gratuity on top of the annual payments it has previously made.
Many employers also think they can prepare for the final payment by setting aside 10 per cent of the basic payroll for each month. This forward planning may help to some extent, but the final salary calculation that employers are obliged to make means that the contribution cannot be accurately calculated until the time an employee actually leaves.
There are lots of factors that impinge on the amount any given employer may need to put aside including the rate of inflation, staff retention, pay rises awarded and industry trends, especially if the employer needs to continually offer higher salaries to attract new staff. The days of mitigating liability by paying a low basic wage and increasing remuneration through allowances are waning.
An increasing number of employers in the country are considering the introduction of pension or "group savings" products to attract staff from countries where employee benefit packages are seen as an integral part of an employee's remuneration. If an employer here chooses to run a pension scheme as well as the obligatory gratuity payment, they must take great care when structuring the contract of employment to ensure the employee understands how the group saving scheme works and what they are entitled to.
If appropriate wording is not used at the time when other benefits are put in place, staff could be led to believe that they are entitled to pension benefits in addition to gratuity when leaving employment. And without this contractual definition, employees may well be able to claim both sums from the company.
Whether companies decide to invest in group savings plans linked to gratuities or not, it is advisable to have a firm plan with built-in contingencies to support future gratuity payments. The risk of not planning can be detrimental to the financial health of any business.
- The writer is head of employee benefits, Friends Provident Middle East.
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