Gratuity Reserve Schemes – Gulf Cooperation Council

End of Service Gratuities are a benefit paid to international employees under statute. This has been established under law, in particular in the Gulf Cooperation Council (GCC) regions to partially compensate expatriates for the absence of a true pension scheme in the area and to attract international employees.Traditionally companies in the GCC have funded their gratuity obligation from their internal working capital but more and more are starting to adopt properly managed and administered Gratuity Reserve Schemes. This move will provide security for both the company and the employee and will be seen as adopting world-class standards of corporate governance.

End of Service Gratuity

The Labour Laws in the GCC vary but generally contain gratuity provisions whereby international employees are entitled to a lump sum payment at the end of their employment, subject to a minimum of one-year service. The gratuity benefit is payable immediately on cessation of employment (whether by resignation, death, retirement or termination). The employer can offer a gratuity benefit that is higher than the statutory requirement, if desired. Gratuity payment liability increases as the salaries and length of employment increase and it is a medium to long-term liability of the employer and should be provided for accordingly.

The Basis of the Calculation

The gratuity provisions vary from country to country, and depending on whether a limited or unlimited contract existed and also whether the employee completed such a contract satisfactorily. The amount is calculated based on the employee’s final salary, so companies can only estimate their liability but can plan for their future gratuity exposure and satisfy their statutory obligation. 

The Gratuity Reserve Scheme

Gratuity Reserve Schemes are an important part of an employee benefit package, and will aid in attracting and retaining international staff. Our schemes are designed to allow companies to make an off balance sheet provision for their gratuity liability and to ring fence this from creditors in the event of the company’s insolvency. The Gratuity Reserve Scheme assets are held in a fiduciary capacity and in a segregated account either in the recognised jurisdiction of Guernsey, Channel Islands or if preferred within the GCC regions.

Contributions are funded by the employer through voluntary contributions and by the company’s payroll. These payments can be made either on a monthly or on an ad hoc basis, as required, giving flexibility to match the company’s cash flow. We offer the ability to access a wide range of investments in various currencies from leading investment managers or, if you prefer, a range of cash and liquidity funds. 

Summary

As the member states of the Gulf region continue to mature, the requirement for labour and skills can only increase. With this demographic shift, expats will remain in the region for longer and many will remain and settle. It will then become more and more important for companies to manage their contingent liability by establishing an off balance sheet Gratuity Reserve Scheme to protect their employees and the company during an economic down turn or periods of uncertainty.

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