Mounting bill to pay off expats

If every expatriate left the UAE today, companies would have to find more than $4 billion to cover their end of service gratuity payments. And many have not set the funds aside, which is why the system has to be restructured, according to experts.

An end-of-service benefit scheme run by Emirates Airline, called Provident, has been singled out as a good model for all companies.Johannes Eisele / AFP

Countries across the Arabian Gulf will face a bill of as much as US$75 billion (Dh275.49bn) to cover end-of-service payments for expatriate employees by 2020.

Today, the figure stands at about $16bn, according to a report released yesterday by the research firm Insight Discovery.

"The calculation is based on salary in the year that the person leaves, which of course increases over time," said Simon Stirzaker,the senior manager for development and strategy at Royal Bank of Canada. "That's why you see the figure rising by 2020," .

Estimates suggest that if every expatriate left the UAE today, companies would have to find more than $4bn to cover their end-of-service gratuity payments.

However, many firms do not specifically set aside funds to cover the one-off, lump-sum payment due when employment in the Emirates comes to an end.

Article 132 of the Labour Law states that a person is entitled to "21 days' pay for each year of the first five years of service and 30 days' pay for each additional year, provided that the total sum does not exceed two years' salary".

The payment is based on an employee's basic salary, which is lower than the total sum received each month that may include benefits such as housing and utilities. However, representatives of the UAE and the International Labour Organization have discussed the establishment of a pension fund for expatriate workers so that the Government can guarantee that workers receive end-of-service benefits.

"In other parts of the world, we would consider this as what's called a defined benefit or a final salary-type pension scheme. Instead of paying you a pension for the rest of your life, they just give you a lump sum," said Mr Stirzaker. "The problem with this type of benefit is that, as we are seeing in other parts of the world, if the funds are not available, then you have got a problem."

Companies in the UAE tend to prefer to keep the money due to their employees in their working-capital accounts, rather than set it aside.

It is not that the money does not exist, said Mr Stirzaker. Companies made a provision in their profit-and-loss accounts each year, and the size of the liability would be shown in their balance sheets.

"But when you say 'where's the money?' It's tied up in the company's working capital, so effectively what employers are actually doing is they are taking an interest-free loan from their employees to run their business," said Mr Stirzaker.

The arrangement could prove problematic in volatile economic periods, when a company may be forced to restructure or let a large number of employees go.

"It suddenly has to find the cash to pay out this benefit at the time they need the cash the most," said Mr Stirzaker.

However, not all companies keep the end-of-service gratuities in their working capital. And there is an "increasing" desire among companies to change, says Nigel Sillitoe, the chief executive of Insight Discovery.

Experts point to companies such as Emirates Group, the parent of Emirates Airline, which has a corporate savings plan for employees. And other companies have made similar arrangements where they have set funds aside and structured them in such a way that if a company were to fail or to get into any financial difficulty those funds could not be touched, said Mr Stirzaker. "An employer has to be concerned about it in the fact that we are living in an ever-changing world and a very volatile one.

"The potential for the need to restructure at some point in the near future is always there and a finance director needs to be thinking 'well, have I got sufficient reserves to meet my obligations?'"