The UAE's New End-of-Service Benefits System: A Short Introduction

For decades, the UAE's gratuity system has been a cornerstone of employment law—but it's always been a bit of a double-edged sword. Employers carried hefty liabilities on their books, while employees worried about whether they'd actually receive their full gratuity if their company hit rough waters. And sometimes things can go wrong, like the recent events at Petrofac have shown. Enter the UAE's new Alternative End-of-Service Benefits Scheme (EOSB), officially launched in October 2023, which is quietly revolutionizing how end-of-service benefits work in the Emirates.

The Traditional Gratuity System

Under the traditional system, end-of-service gratuity was straightforward but inflexible. Employers paid nothing throughout an employee's tenure, then faced a lump-sum payment upon termination calculated on final basic salary and years of service—21 days' pay per year for the first five years, then 30 days' pay for each subsequent year.

So what is the problem with that, you might ask? Well, in essence, this mechanism created massive unfunded liabilities for employers, particularly those with long-serving staff. Companies have to pay the EOS payoffs out of their cash-flows – the EOS gratuity has not been funded. Therefore, for employees, the system offered zero protection if their employer faced insolvency. Furthermore, their gratuity earned no investment returns while sitting as a theoretical liability on balance sheets.

The New Era: Investment-Based Savings Scheme

Introduced through Cabinet Resolution No. 96 of 2023 and operational since March 2025, the Alternative EOSB Scheme transforms the gratuity system into an investment based solution. Here's how it works:

• Employers who opt in make monthly contributions to approved investment funds: 5.83% of basic salary for employees with under five years' service, rising to 8.33% for those with five years or more. These contributions are over and above the normal salary, which continues to the paid in full.

• Employers select and appoint a licensed Fund Manager, who in turn offers a range of investment funds.

• Each employee can choose which investment fund to invest the contributions into. Employees are free to choose among the funds on offer according to their risk appetite (except Blue Collar workers who earn less than AED 4,000/month – such employees can only choose a capital guarantee fund).

• At present there are 4 licensed fund managers to choose from: Ghaf Benefits (by Lunate), Daman Investments, National Bonds, and First Abu Dhabi Bank (FAB). Together, they offer (or have announced) a total of 15 different investment funds.

• In addition, employees can boost their nest egg by contributing up to 25% of their salary voluntarily by way of payroll-deduction.

• Employees gain access to the End of Service gratuity monies once they leave employment. Of course, the voluntarily saved extra contributions can be withdrawn at any point in time.

Advantages of the new system

There are several noteworthy advantages of the new system, for both employers and employees. The most important aspect is certainty: The EOSB gratuity is now funded, the cash has been paid in, is managed by a licensed Fund Manager, and is sitting with one of the six officially licensed custodian banks in the UAE. Such certainty also applies to employers – cash flows become much more regular and plannable, and are no longer subject to erratic jumps in the case employees leave the company.

And last but not least – depending on many factors, including investment returns of the chosen funds – the end result for employees may actually be better, due to the fact that the contributions are invested, generating additional investment profits.

That said, employers must carefully manage the transition. This may well be the first time that many employees are confronted with investment decisions – information, explanation and coaching will be key.

But fear not – first of all, GratuityAdviser is here to help, giving you all information & tools you need to manage the transition. And the journey has just begun: The new system is still voluntary, and to date no information has been released as to when it will eventually become compulsory. Stay tuned!