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For companies operating in the UAE, the local labour laws make for a unique payroll process. From the absence of income tax to payroll integration with the Wage Protection System (WPS), employers need to take several distinct measures to stay legally compliant. However, with the multitude of laws, it may be difficult to navigate this process, especially without proper knowledge or infrastructure.
That’s why here’s a detailed step-by-step guide on understanding the payroll process in the UAE.
Considerations for Legal Compliance in the UAE
Businesses operating in the UAE need to understand several important factors that impact the payroll process in the UAE. These elements, outlined in labour laws, need to be understood in detail as they ensure fair wages and protect workers from exploitation. Non-compliance with any of these can result employers into paying hefty fines or even getting trade licenses revoked.
Here are some important things that businesses need to consider for properly processing payroll:
1. Work Hours
The UAE mandates a 48-hour work week, with employee shifts being no more than 8 hours. In case of restaurants or hotels, the maximum is capped at 9 hours a day. This, however, excludes executives, supervisors and daily wage workers.
2. Breaks
Workers are entitled to one or more breaks if they’re working for five consecutive hours. These breaks must be less than an hour and won’t be counted as part of working hours.
3. Overtime
At times, workers many need to work overtime for operational reasons when there’s surges in workload. Overtime rates in the UAE include the full wage of normal working hours along with 25% of the total added on to it. The additional amount can ever go up to as high as 50% of the overtime hours fall between 10 PM to 4 AM. This law excludes shift workers.
4. Workdays
Business days in the UAE differ from the standard Monday to Fridays. Workers, excluding daily workers must work for 6 days a week from Saturday to Thursday. Friday is usually considered as the weekly rest day where employees receive a paid day off.
5. Paid Leaves
Employees in the UAE receive various kinds of paid leave like sick leave, maternity leave, study leave and sabbatical leaves. All these leaves are either fully or partially paid. Employees also receive an annual leave of 30 days that is fully paid, including basic salary and allowances.
In addition to this, employees are also entitled to paid leaves on holidays like New Year’s Eve and the Prophet’s birthday. In case employees need to work on a public holiday, they are entitled to either an alternate rest day or overtime wages for the same.
6. Gratuity Benefits
If an employee has worked for a minimum of one year with a company, they are entitled to gratuity benefits upon resigning. For an employee who’s worked for more than a year but less than 5 years, they are entitled to 21 days’ worth of monthly pay for every year worked.
For employees who’ve worked for more than 5 years, they are entitled to 30 days’ worth of pay for every year they’ve worked. Gratuity amount is calculated on basic salary only and doesn’t consider the standard allowances like housing allowance.
7. Social Contributions
Emirati and other GCC employees must contribute a certain percentage of their salary to social schemes under the General Pension Social Security Authority (GPSSA) retirement system. For UAE nationals, the contributions are calculated at 20% of an employee’s gross salary out of which the employee pays 5%, the employer 12.5% and the government pays 2.5%.
The amount, however, differs for other GCC nationals as their social security contributions are determined by their home country’s regulations.
8. Deductions
The UAE does not levy personal income tax, hence there are no tax withholdings from individual salaries. However. There are still mandatory, and sometimes voluntary deductions, that employers are responsible for making.
Mandatory deductions can include social security contributions, health insurance and garnishments like delinquent child support. Voluntary deductions need to be approved by the employee first and include life insurance, third-party retirement contributions, short-term disability plans or tuition fees for certifications.
9. WPS Compliance
The WPS ensures that all employees are paid the right amount and on time. That’s why the UAE government mandates that every business registered in the UAE needs to subscribe to the WPS. Businesses need to follow the established procedure of salary calculation and verification through the WPS to pay their employees’ salary.
10. Area Specific Policies
Free trade zones in the UAE provide tempting business opportunities to foreign investors in terms of tax exemptions, easy approvals and complete ownership. However, each free trade zone has its own compliance policies. Different zones require different trade licenses. Similarly, payroll compliance rules can also vary. So, companies must be mindful in this regard when processing payroll.
Essential Steps in UAE Payroll Process
Companies in the UAE need to ensure compliance when it comes to the payroll process to avoid delays and fines. From registering with the WPS to sending timely SIFs, companies need to develop a full proof payroll strategy. Here’s a simplification of the payroll process companies need to follow, including best practices to ensure complete compliance:
1. Setting Up the Payroll Process
Companies need to set up their payroll process to ensure smoother operations, right off the bat. Firstly, they need to register with the Ministry of Human Resources and Emiratization (MOHRE), providing trade license details, contact information and the details of company activities. After this, they can obtain a license that is necessary for work permits.
2. Managing Employee Data
Companies must ensure proper documentation and records of employee information. For instance, they need to draft employment contracts outlining terms like salary, employee benefits, work hours and leave entitlement. Employers also need to sponsor their expatriate employees’ work permits and visas.
Upon hiring, employers need to collect employee information about insurance, voluntary deductions and other relevant details. All this information also needs to be stored securely and for easy access for the payroll process.
3. Choosing a Payroll System
Businesses in the UAE have three options for a payroll system – do it in-house, outsource it or opt for a WPS provider. In most cases, businesses either choose to outsource it or partner with an employer of record. It is not only cost effective but also increases efficiency to have the payroll process done externally.
4. Calculating Employee Salaries
Employers need to calculate salary according to number of hours worked. In addition to factoring basic salary, they also need to include allowances like housing allowance and vehicle allowance. This is also the stage where bonuses and commissions are added to the salary.
5. Calculating Overtime and Deductions
After calculating salary, employers need to factor in overtime and paid leaves. In the UAE, employees receive 1.5 times their usual pay for overtime work. The leave salary for paid leaves can range from fully paid to partially paid depending on the type of leave and its duration.
Employers are also responsible for making the necessary withholdings like national pension plans. There is also employee approved voluntary deductions like insurance and debt repayments that need to be made at this stage.
6. Create and submit SIF files
After calculating salary, employers need to maintain the data for individual employees in salary information files (SIF). This document is usually in the form of an Excel spreadsheet and contains details like employee ID from the Ministry of Labour, banks details of employee, pay cycle dates, basic salary, allowances, lop days, employer ID and employer bank details.
Once the file is ready, it is sent to the WPS agent who checks and sends the file to WPS which in turn, forwards it to the central bank. After this, the Central Bank cross checks with MOHRE to verify the details of the files for accuracy.
7. Process Payroll
Once the verification is complete and the results are positive, the WPS agent in then issued a payment order from the Central Bank and MOHRE. The WPS agent can then disburse the salary payments directly to the employees’ bank accounts.
In case the SIF checks reveal and discrepancies, the employers are sent an email notifying them of the errors.
8. Maintain Proper Payroll Records
Employers must maintain a proper payroll records, from attendance and leave management data to salary calculations for a certain amount of time, even after an employee has left.
The records must be maintained accurately so that they can be presented to the MOHRE upon request. Besides this, employers also need to issue pay slips to employees timely to ensure transparency of the salary process.
Simplify Payroll with Payroll Management Software
With so many intricacies, payroll process in the UAE becomes difficult to navigate especially with HR teams who don’t have access to the right tools. In 2023, nearly 33,000 cases of unpaid salaries were fined in the UAE. This highlights the need for advanced payroll management software that can be customised for different compliance policies.
For further ease of operations, companies can opt for a comprehensive human resource management software. This can allow easy integrations between attendance tracking, leave management, and payroll, helping companies stay compliant while also boosting efficiency.
Ridden with complexities, managing the payroll process in the UAE requires a clear understanding of labour laws. For a better understanding of the UAE payroll process, download our free eBook ‘Demystifying UAE Payroll in 2023: Your Go-To Guide.’ Get detailed insights and practical tips to ensure your business stays compliant and efficient.
What is the greatest compliance challenge that you have faced in the UAE? Let us know in the comments.
