Ensuring long-term security for employees

Question: I run a successful, ten-year-old Dubai-based business and have always adhered to local laws pertaining to end-of-service gratuity. I have not encountered any problems with this approach so far, but am starting to worry about the amount of liability building up, not to mention the notion of providing long-term financial security for my employees, many of whom are long-serving and integral to our day-to-day success.

Answer: You are absolutely right to pay attention to this complex and timely issue. To be perfectly frank, basic end-of-service gratuity as defined in UAE law is becoming outdated and problematic in many ways.

Currently, employees earn 21 days' pay for each of their first five years of service, and 30 days for every subsequent year. Maximum gratuity is capped at two years full pay. The amount owed is cut by two-thirds if the employee leaves voluntarily before serving three full years and by one-third if an employee leaves before five years is up. Employees qualify for full gratuity if they are made redundant.

Gratuity

As gratuity is calculated on salary alone, it is normal for employers to minimise basic salaries and amplify add-ons within an overall package.

For companies following this tack, the message many employees will infer is that the bare minimum is being done and that overall company strategy is set for the short-term. Your company is also likely to have built up an unhealthy operational liability if, as you imply, gratuities are funded from general operating budgets.

In this respect, you are not alone; according to a 2010 study, the UAE's total end-of-service liability stood at a notable $4 billion (Dh14.68 billion). For the wider GCC, that figure is $15 billion.Fortunately, business mindsets are changing, and the number of businesses funding their end of service gratuities is on the rise.

Considering you've been in business for ten years, it is a good idea to talk to an independent financial adviser about how you can tackle the liability backlog with a robust, long-term catch-up plan. If the worst comes to worst and your company goes bust, the last thing you want is a succession of lawsuits from disgruntled employees.

A five- to ten-year programme keeping pace with the increasing liability could be a good strategy.

Ultimately, you want to ring-fence capital to fund staff gratuity — preferably using a vehicle that enables investment in assets yielding real returns above the rate of inflation. This can result in benefits for both employers and employees, as liabilities are protected from creditors, a controlled investment strategy is in place, and there is potential for higher returns.

Indeed, depending on the size of the organisation and the level of the funding, programmes of this nature can become self-sustaining through interest alone.

Slowly but surely, the UAE is shedding its reputation as a short-term option for ambitious employees, with many looking to stay for decades and even retire here. If your business is in the game for the long haul, you need to eliminate end of service benefit liability as soon as possible and, ideally, look to establish a genuine retirement plan for your employees.

Retirement accounts

The latter could involve setting up retirement accounts for your employees with one or both parties contributing to the pot. Such accounts can then be channelled into a single-asset pool for each employee that is then managed by mutual fund firms, insurance companies and banks. This approach can empower employees by enabling them to select their own investment focus.

Employee expectations are changing fast and legislation probably isn't far behind, so don't get caught out!

The writer is Head of Employee Benefits, Nexus Insurance Brokers. Opinions expressed here are his own and do not necessarily reflect those of Gulf News.