New UAE legislation that replaces bank guarantees for private sector labour recruitment with a low-cost insurance policy will reduce costs for employers and offer better protection to vulnerable low-income expat employees, analysts said.
“The implications for the employer is that it will have to pay a lower upfront amount but secure potentially much wider cover for employee entitlements,” said Sara Khoja, a partner in the employment team at law firm Clyde & Co in Dubai.
“The employee will have better protection as he or she can complain to the Ministry of Human Resources and Emiratisation in the event of non-payment of minimum entitlements and then the ministry can draw on the insurance to provide a pay out.”
The new UAE Cabinet-approved legislation - unveiled by Sheikh Mohammed bin Rashid, Prime Minister and Ruler of Dubai, on Wednesday – does away with the Dh3,000 bank guarantee companies currently have to deposit for each new hire.
They will be replaced by a Dh60 insurance policy that offers workers protection for their workplace perks - such as end of service benefits, holiday allowance, overtime allowance, unpaid wages, return air ticket and cases of work injury, with the maximum pay out capped at Dh20,000 per person.
Ms Khoja said the current Dh3,000 system acts as a cash deposit with the Ministry of Human Resources and Emiratisation, which is drawn on by the Ministry if the employee has to be repatriated, for example, due to being reported as an absconder, arrested and deported or due to the employer going bankrupt so the employee is sent home.
Ms Khoja said the new system will particularly benefit "vulnerable employees" such as low-income blue-collar workers.
“The current Dh3,000 does not provide any cover for employee entitlements such as notice, gratuity and holiday. This new scheme is designed to provide some cover for these entitlements in the event the employer cannot pay these” she added.
While employees will be better protected, Ms Khoja said some risks still remain.
“The risk for employees is that there is a maximum cap on the pay out so if their entitlements are more then they will not recover it all,” she said. “For the employer, the risk is that the Dh60 premium may go up in the coming years if there are a lot claims made by employees which result in pay outs.”
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The reforms will also see the government release the Dh14 billion in bank guarantees currently held back into the economy, which will reduce the burden on private sector firms by freeing up capital to companies for other purposes.
The move comes on the back of a series of new government measures, including Abu Dhabi's Dh50 billion stimulus package, announced earlier this month, aimed at lowering the cost doing business in the country to propel growth, attract more foreign and direct investment and create jobs
“The UAE government is trying to lower costs to stimulate the business economy, which is typically where all the growth in job numbers will be,” said David Mackenzie, managing director of the GCC recruitment consultancy Mackenzie Jones Group. “Because the market is quite tough at the moment, the government is making it easier for businesses to be successful by reducing the costs and the paperwork."
Other reforms announced by the UAE cabinet on Wednesday included changes to visas, which can now renewed without the need for leaving and re-entering the country and a new no fee, six-month temporary visa to help those that have lost their jobs find new employment.
"This is great because it means you have continuity of workforce," said Mr Mackenzie. "At the moment, when we want to move people from one free zone to somewhere else, they can get a labour ban. The reforms give us complete freedom of movement, which is a very positive thing."
Keren Bobker, a senior partner at Dubai financial advisory firm Holborn Assets and a consumer rights columnist for The National, said the reforms will "safeguard the rights and benefits of employees".
“I hope there will be fewer cases where staff do not receive their entitlements from an employer when they leave a company," she said.
“Allowing those made redundant to have a special six-month visa while they look for new employment is also helpful. Many nationalities have only a 30-day grace period before they have to leave the country, so being able to remain in the UAE without the risk of paying fines or receiving a ban reduces the risk of people falling into debt."
However, Ms Khoja said the new rules will not apply to domestic workers, such as maids, and analysts were unsure whether banks would continue to freeze accounts for those that had lost their jobs.
“If there are no debts, then an account ought to be unfrozen very quickly but although a person will be able to stay I think it is unlikely a bank will want to unfreeze if they see no evidence of income to service debts," said Ms Bobker. "The smart course of action is to withdraw cash before you received your final payment to help tide you over."
The new rules will be particularly helpful to small and medium-sized companies, which have struggled during the three-year oil price slump to stay afloat, with little access to bank financing.
"In the immediacy, small to medium sized enterprises will experience improved cash flow to inject back into their businesses," said Steven Mayne, managing partner at Creative Zone, a consultancy that helps businesses set up in free zones. "This practical and positive approach to cost reduction will serve to attract far more investment here."