Country Overview

The United Arab Emirates (UAE) has emerged as a significant economic force in the Middle East. This federation of 7 emirates is bordered by Saudi Arabia in the south and west; and by Oman in the east. Additionally, it shares maritime borders with Iran in the north and Qatar in the west. The UAE’s key sectors include oil and gas, tourism and aviation. The UAE economy magazine of second quarter of 2024 by Ministry of Economy of the UAE, shows that the non-oil GDP of the country has experience a growth rate of 6.2% in 2023 as compared to 2022.

To diversify the country’s economy and reduce its dependency on oil, the country is currently following their Centennial Plan 2071. It is a long-term Government work plan which aims to develop a knowledge-based economy for the future generations, focusing on education and advanced technology. The plan is based on four pillars:

• Future-focused Government
• Excellent education
• A diversified knowledge economy
• A happy and cohesive society

With its forward-thinking approach to business and the government’s constant commitment to the development of the country, the UAE is a top choice for companies looking to tap into the Middle East and beyond. Further the country is driven to becoming a green economy, opening new paths for investment in renewable energy and eco-friendly technologies.

Market Glimpse

Investors looking for growth potential and access to regional and global markets finds the UAE a prime location. Central Bank of the UAE in its June 2024 Economic Quarterly Review mentions that the real GDP growth is projected at 3.9% in 2024, and the projection increases to 6.2% in 2025.

The country’s Foreign Direct Investment (FDI) has also been witnessing a growth. The World Investment Report 2024 by the United Nations Conference on Trade and Development (UNCTAD) indicates that FDI inflows to the UAE reached USD 30.688 billion in 2023, up from USD 22.737 billion in 2022, making the UAE the second-largest recipient of FDI globally.

As part of Centennial Plan 2071, the country is actively engaged in incentivising new economic sectors in the knowledge and digital economy. The current highly promising sectors of the country, marked by Ministry of Economy, include fintech, e-commerce, health care, information and communications technology, medical tourism, renewable energy etc.

To encourage foreign investors and businesses more, the country offers several incentives, such as:

• 40 free zones allowing tax exemptions and 100% ownership
• No impose income tax on individuals, investors or corporates
• No minimum capital
• Low customs tariffs ranging from 0% to 5% and many others

Despite these advantages, businesses should be mindful of certain challenges:

Transitioning from the wider economic context, we now turn our attention to the intricacies of payroll management, a critical component for any successful enterprise. This guide will explain the essential aspects of payroll, ensuring compliance and better operational efficiency.

Payroll Compliance Essentials

In UAE investors can opt for setting online as well as conventional businesses. Online businesses can be established under 15 minutes. On the other hand, the establishment of conventional businesses across various emirates necessitates a series of procedures and approvals from the Department of Economic Development and other relevant authorities for the official registration of the entity. The keys steps are as follows:

• Identifying the nature of economic activity to select the appropriate legal form
• Reservation and registration of the trade name
• Application for initial approval on establishing the entity in the State before obtaining the commercial license
• Drafting a Memorandum of Association and a local service agent agreement
• Registration of location and address of the commercial activity
• Collecting additional government approvals
• Submit documents and pay fees
• Registration with the Chamber of Commerce

Engaging in employment activities or acting as a mediator for recruitment is strictly prohibited without obtaining a license from the Ministry of Human Resources and Emiratisation. This must be done in accordance with the specified conditions and procedures. Furthermore, no employer should hire any employee who does not have a work permit.

Ministry of Human Resources and Emiratisation (MOHRE) is the government body responsible for regulating and managing labour relations in UAE, overseeing employment laws, and implementing policies to support the national workforce.

In this guide, the statutory details right from onboarding to offboarding of an employee will be discussed in depth. To start with, the links to relevant official sites are embedded below:

Onboarding Simplified

In the UAE, streamlining the onboarding process is essential for a smooth transition for both employers and employees. Discover below the best practices and legal requirements to make the onboarding experience compliant:

1. Employee Classification

In UAE, employees can be classified as following:

2. Employment Contract

An employment contract is an agreement where a worker agrees to work under the employer’s supervision for a wage. The contract must be in accordance with the standards defined by the Cabinet Resolution No. (1) of 2022.

Based on the type of employment, all employers are required to furnish a written employment contract to the employees, according to the agreed work pattern, mentioning all the details, clauses and company policies. The contract ought to be made in two copies, one for the employer and another to be handed over to the employee.

As per Cabinet Resolution No. (1) of 2022, the employment contract shall include the following details:

• Employer’s name & address
• Worker’s name, nationality & date of birth
• Qualifications
• Occupation or profession
• Date of joining work
• Place of work
• Working hours
• Rest days
• Probation period if applicable
• Term of the contract
• Wage as agreed upon including benefits and allowances
• Length of the deserved annual leave
• Notice period
• Procedures of terminating the employment contract
• Any other data determined by MOHRE in accordance with what is required to regulate the relationship between both parties

3. Minimum Wages

MOHRE has not set any minimum wages amount payable to the employees in UAE.

However, as per Article 27 of Federal Decree-Law No. 33 of 2021, allows to set the minimum wage payable to employees in general or in a particular area or occupation through a cabinet resolution based on a proposal made by MOHRE.

4. Probation Period

In UAE, employers can hire an employee on a probationary period for up to 6 months from the start of their employment. During this period, the employer has the right to terminate the employee’s service, provided that the employee receives written notice at least 14 days before the termination date. It is not permissible to appoint a worker under probationary period more than once at one employer. This period shall be counted within the term of service.

V. Workplace Protocols

The UAE’s labour law, Federal Decree-Law No. 33 of 2021 – Regarding the Regulation of Employment Relationships and its amendments (“Labour Law”) and its implementing resolution, Cabinet Resolution No. 1 of 2022, governs employment in all emirates of the UAE. The employment law took effect Feb. 2, 2022, and replaced the previous labour law, Federal Law No. 8 of 1980.

Employers are responsible for upholding overtime, hours of work, mandated holiday pay, paid leave time, electronic wage payment requirements, and payment of minimum amounts at termination. Separate labour laws apply to employees who live and work in the Dubai International Financial Centre (DIFC) or the Abu Dhabi Global Market (ADGM). The law are mentioned respectively: DIFC Employment Law (DIFC Law No. 6 of 2018) and the ADGM Employment Regulations 2019.

1. Working Hours

Article 17 of the Labour Law talks about working hours. The normal workings hours limit is as follows:

Note: The working hours may vary for some categories of employment.

The normal working hours shall be reduced by 2 hours during the holy month of Ramadan.

2. Breaks

3. Rest Day

The worker shall be granted a paid weekend of not less than 1 day, according to the employment contract or the work regulation.

4. Overtime

The employee may work more than normal working hours and any work done after the standard working hours are counted as overtime.

The maximum overtime hours per day is 2 hours. However, total working hours including overtime cannot exceed more than 144 hours for a period of 3 weeks.

Article 19 of the Labour Law deals with the calculation of overtime pay. If the work conditions require employees to work for more than the normal working hours, then they are entitled to receive an additional pay of 25% of their basic wage.

In case the employees work on weekend, the employer must provide them with another day off or an additional pay to 50% of their basic wage for that day.

5. Night Work Pay

If the work conditions require employees to works overtime during night, that is between 10 pm and 4 am, then the employees are entitled to receive an additional pay of 50% of their regular wage for that day, except for employees on regular shift rotations.

6. Leaves Entitlement

As per the approval of UAE Cabinet, the employees are entitled to get paid public holidays as mentioned below:

Note: Excluding New Year’s Day and National Day, the dates are subject to variation each year.

Apart from the public holidays, the employees of UAE are entitled to several other paid statutory leaves as provided below as mentioned in the relevant sections of the Labour Law:

* After employee has completed 1 year of service. Employees who have completed 6 months of service but not a year, are obliged to receive 2 annual leaves per month.

** Full pay for first 45 days, half pay for the following 15 days. If the employee gives birth to a sick child or a child of determination, whose health condition requires a constant companion, then employee is entitled to 30 days leaves with full pay starting after the end of the maternity leave and can extend it for another 30 days without pay.

*** Full pay for first 15 days, the following 30 days with half pay and the rest unpaid. During the probationary period sick leaves are unpaid.

**** This provision was not carried over to Federal Decree-Law No. 33 of 2021, but the law allows employees to take periods of unpaid leave for reasons other than the entitlements provided in the law with the employer’s approval.
a) Holiday Pay
If work conditions require employees to work on any of the public holidays, the employer is obliged to provide compensation. This can be in form of a day off for each holiday worked or payment for that day at the regular wage rate, plus an additional increase of at least 50% of the basic wage for that day.

7. Event-based Compensation

When an employee suffers a work-related injury or contracts an occupational illness, the employer must file a report with the police, MOHRE and pay the cost of the employee’s treatment until the employee either recovers or is proven disabled.

If the injury or illness prevents the employee from working, the employer also must pay the employee’s full salary for the period of treatment or for 6 months; whichever is shorter.

If treatment lasts longer than 6 months, the employer must pay half the employee’s pay for an additional 6 months or until the employee recovers, is declared disabled, or dies; whichever occurs first.

In case the employee’s demise, the family is entitled to receive the compensation as follows:

8. Other benefits

Although there are no other statutory benefits available, the employees may receive one-time or additional payment benefits, subject to their employment contract, such as:

• Bonuses
• Commissions and other supplemental wages
• Health insurance
• Accommodation and air tickets

Salary Essentials

In the UAE, wages must be paid through the Wages Protection System (WPS) as per Ministerial Resolution No. 598 of 2022. Employers and employees must register with the MOHRE and have an account with UAE bank or Exchange Houses for wage transfers.

WPS is a government-mandated electronic payment system introduced by MOHRE. It ensures that wages are paid on time and in full, and in accordance with the employment contract. The Salary Information File (SIF) is a digital file format used by employers to submit salary payment details to the MOHRE via WPS system. The SIF contains wage information for the employees in the mandated format. The SIF contains three records namely,

1. Employee Detail Record (EDR)
2. Employee Variable Pay (EVP)
3. Salary control Record (SCR)

These contains information such as Employee ID, Payment dates and amounts, Fixed pay and Variable Pay, days on leave. EDR and EVP are employee level record. However, SCR captures information at employer level.

Salary shall be paid on the first day of the month following the payday specified in the employment contract or at least once per month. The establishment is considered compliant with wage payment requirements if more than 80% of the total wages of eligible employees are transferred according to their type of employment.

1. Salary Components

Various salary components are commonly included as part of an employee’s gross salary, the table below provides an overview of the various salary components that constitute the salary structure in UAE payroll:

2. Payslip Components

In UAE, employers are required to provide payslips to their employees, and these can be issued online. As per the Labour Law payroll reports must be kept for minimum 10 years. These payslips typically include the following components:

• Basic salary
• Allowances
• Deductions
• Net salary
• Leave encashments
• End-of-service benefits

Decoding Deductions

1. Withholding Taxes

Individuals working in the UAE, whether they are UAE nationals or expatriates, are exempt from paying income tax.

2. Social Security

Every employer of UAE nationals and employees who are UAE nationals, are required to contribute to General Pension & Social Security Authority (GPSSA) monthly as per the guidelines specified in Pension and Social Security. Foreign employees or expatriates do not need to contribute to this scheme.

Contributions in the private sector are calculated during the year based on the insured’s contribution account salary in January of each year.

Contribution account salary (‘Salary’) includes sum of Basic salary plus fixed allowances.

For the insured who joins work after the month of January, contribution is calculated based on the month’s Salary during which the employee has joined the organization until the following January. Contributions are then paid based on the January Salary of each year. For employees in the public sector, contributions are based on the salary received each month.

Employers must register new employees with GPSSA within 30 days of the employees’ joining date and deduct the contribution amount from their salary every month. Contributions are not required for periods during which the employee was suspended or for periods for which the employee was deprived of pay as the result of a disciplinary or judicial decision.

Refer to the table below for the contribution rates applicable for employees of UAE nationality:

The Abu Dhabi Pension Fund contribution rate is as follows:

Gulf Cooperation Council (GCC) Insurance Protection Extension Program
Under the GCC Insurance Protection Extension Program, the UAE employers employing workers from other GCC countries, are required to register such employees in the pension or retirement insurance system of their home country. The other GCC countries are Bahrain, Kuwait, Oman, Qatar, and Saudi Arabia.

Registration of an employee from another GCC country who is working in the UAE in the pension or retirement insurance system of their home country involves coordination with the GPSSA, which functions as a liaison to the social insurance agencies of other GCC countries.

Employers in the UAE are required, for each of their employees working in the UAE whose home country is another GCC country, to deduct any applicable contributions from the employee’s wages and make any applicable employer-provided contributions based on requirements of the pension or retirement insurance program of the employee’s home country.

The employee and employer shall bear their share of the contributions in accordance with the rates applicable under the law of the employee’s home state, provided that the share of the employer does not exceed the percentage in force in the state of employment. If the actual employer’s share exceeds the percentage in force in the state of employment, then the difference in rates to be deducted from employee’s wage.

Reporting

The contribution should be paid to GPSSA before 15^th of the following month.

Non-compliance

Contribution for Dubai International Financial Centre (DIFC) region

GPSSA is contribution across the country, while DIFC Employee Workplace Savings (DEWS) caters primarily to employees who are working with employers having office in DIFC. DEWS is a defined contribution plan with investment components. In contrast, GPSSA provides a defined benefit plan, offering predetermined benefits based on Salary.

DEWS Contribution

DEWS plan is a progressive end of service benefits plan that was introduced by the DIFC in 2020. All Companies registered in DIFC are eligible for this scheme. This came into force from 1^st February 2020.

DEWS is mandatory for expatriate employees working in DIFC. Employers make contributions to DEWS on basic salary every month. The contribution rate is defined based on the service period of an employee.

However, employees can decide to contribute to DEWS a fixed percentage of their wage on voluntary basis. Employee can define the wage for making DEWS contribution.

DEWS contribution does not apply to UAE and GCC nationals, as they are covered by GPSSA. However, the UAE and GCC nationals may voluntarily choose to enrol and make contributions to DEWS.

The following table refers to the DEWS contribution rate of an Employer based on service period completion:

The employer is not required to pay DEWS contribution amount for employees who are on probation. Employer shall transfer the accrued gratuity to employees at the time of changeover date.

3. Minimum Take Home Pay

In any situation, deductions or withholdings from a wage cannot be more than 50% of basic wage and fixed allowances received (‘Wage’). No deductions or withholdings from a worker’s wage are allowed, except in specific situations, such as:

• Loan repayments, within the monthly deduction limit, with employee’s written consent and no interest.
• Recovery of excess amounts paid to the worker, up to 20% of the Wage.
• Deductions for contributions to bonuses, pensions, and insurances as per state legislation.
• Worker’s contributions to the Savings Fund or loans from the Fund approved by the Ministry.
• Instalments for social projects or other benefits/services with employee’s written worker consent.
• Deductions for violations, not exceeding 5% of the Wage, as per approved penalty regulations.
• Court-ordered debts, not exceeding a quarter of the wage, except for alimony. In case of several debts, the deduction will take place as per the privilege categories.
• Deductions for damage caused by the worker but it should not exceed 5 days’ Wage per month, deduction amount greater than that is approved by the court.

Seamless Offboarding

Ensuring compliance during the offboarding process is crucial and should not be overlooked by employers. In UAE, upon termination of employment, employees are entitled to end-of-service benefits, which are calculated based on the length of service and the final salary.

The employer shall pay the worker’s wages and all other entitlements within 14 days of the contract end date. An employee gets terminated either because of retirement or resignation or illegitimate termination or dismissal.

1. Retirement

Employees can retire from the organization upon reaching 60 years of age. Upon retirement, the employee is entitled to receive the following End of Service (EOS) Benefits:

• A notice period with full pay, or compensation if the employer prefers the employee not to work during this period
• Compensation for any unused holiday entitlement
• Repatriation expenses if the employee is leaving the UAE unless he has already joined the service of another employer.
• End of Service Gratuity (EOSG)
• The amount of any debts or loans which may be due from the employee shall be deducted from End of Service Benefits.

The calculation of EOSG for foreign employees in case of retirement is outlined below:

• Wage here is calculated according to the last basic wage the worker was entitled.
• For part of the year, the worker shall be entitled to a benefit in proportion to the period spent at work during the year, if they completed one year of continuous service.
• The unpaid days of absence from work shall not be included in the calculation of the service term.

EOSG for workers who are nationals:

Such worker shall be entitled to end of service benefits at the end of their service, in accordance with the legislation regulating the pensions and social securities in the State directly from the authorities.

2. Resignation

Employees can resign from their positions, provided they adhere to the notice period. Upon resignation, the employee is entitled to receive the following EOS benefits:

• A notice period with full pay, or compensation if the employer prefers the employee not to work during this period
• Compensation for any unused holiday entitlement
• End of Service Gratuity (EOSG)
• The amount of any debts or loans which may be due from the labourer shall be deducted from EOS benefits.

The calculation of EOSG for foreign workers in case of Resignation is outlined below:

• Wage here is calculated according to the last basic wage the worker was entitled.
• For part of the year, the worker shall be entitled to a benefit in proportion to the period spent at work during the year, if they completed one year of continuous service.
• The unpaid days of absence from work shall not be included in the calculation of the service term.

EOSG for workers who are nationals:

Such worker shall be entitled to end of service benefits at the end of their service, in accordance with the legislation regulating the pensions and social securities in the State directly from the authorities.

3. Dismissal

As per Article 44 of Labour Law, the employer can dismiss the employee if the employee has violated the establishment’s rules or has submitted forged documents or did not perform the basic duty. Upon dismissal, the employee is entitled to receive the following EOS benefits:

• Remuneration due
• Compensation for any unused holiday entitlement
• The amount of any debts or loans which may be due from the labourer shall be deducted from End of Service Benefits.

As per Article 47 of Labour Law, the employer shall pay the below mentioned EOS benefits to the employee as estimated by the competent court if it is proven that the termination is unlawful:

• Full pay for the notice period
• Fair compensation
• Compensation for any unused holiday entitlement
• Repatriation expenses if the employee is leaving the UAE unless he has already joined the service of another employer
• End of Service Gratuity (EOSG)
• The amount of any debts or loans which may be due from the labourer shall be deducted from End of Service Benefits.

Fair compensation shall be defined as follows:

• Considering the work type
• the amount of damage caused to the employee
• Employee service term
• should not exceed the worker’s wage for a period of three months according to the last wage he was entitled.

The EOSG calculation for foreign nationals and nationals is same as defined under Retirement and Resignation.

To bring consistency with DIFC regulations, MOHRE has introduced an Alternate End of Service Benefit Scheme in collaboration with Securities and Commodities Authority (SCA) which was released as Cabinet Resolution No. (96) of 2023. This benefit refers to systems designed to replace the EOSB. These alternatives aim to modernize employee benefits, providing greater financial security, flexibility, and sustainability for employees and employers alike.

Alternate End of Service Benefit

Employers choosing to participate in the scheme will need to contribute monthly to an investment fund. These contributions will entitle beneficiaries (employees) to receive the allocated basic subscription amount, along with any investment returns generated, in place of their end of service benefits.

Employees can opt to participate in this benefits through which their contributions will be transferred in investment funds approved by MOHRE and SCA and get benefits from it.

If opted to the new Scheme, the existing end-of-service gratuity system will be suspended for these employees and end of service benefits they would have accrued will be calculated based on their years of service up to the date they join the new Scheme and will be transferred to the employees.

Alternate End of Service Benefit is calculated based on service period completion. For employees under five years of service, the contribution rate by employer is 5.83% of basic salary, while for those who have more than five years of service, it is 8.33% of basic salary.

Conclusion

The UAE offers a highly attractive business environment, supported by government initiatives that actively promote foreign investment. The nation’s rapid technological advancements and dynamic workforce drive continuous innovation, making it a prime destination for international businesses. However, managing payroll in the UAE presents its own set of complexities. Navigating different pay periods, social security obligations and its statutory reporting requires an efficient payroll system. Investing in advanced payroll solutions and staying updated with the regulatory changes are essential for effective payroll management in the UAE.