When registering a company in the UAE and hiring employees, it is necessary to take into account also such thing as “termination payments”, which are called “ESB”. These are the payments that are paid to the employee upon the termination of his service.
This issue must be taken into account when registering a company in the UAE, as it can lead to unexpected significant costs.
Article 132 of the Labor Law of the United Arab Emirates says that an employee who has worked continuously for one year or several years has the right to severance pay upon the termination of his employment. The law states that the total amount of severance pay must not exceed two years’ wages. The lump-sum amount due is calculated according to the following scheme: a 21-day salary for each of the first five years of work, plus a salary for 30 days for each additional year of work.
Thus, for the first five years, workers are paid about 5.8% of their annual salary for each year of work.
After five years, the percentage reaches 8.2% of the annual salary for each year of work.
Most expatriate employees have additional unemployment benefits or personal pensions that exist in their home country or are not available or are of low size for the UAE. Consequently, many employees rely on ESB payments. However, many incorrectly estimate the true cost of the premium.
ESB payments are based only on employer contributions (employees do not make any contributions for accumulation). As a percentage of ordinary wages, the employer’s contribution rate is, as we have already mentioned, about 5.8% and 8.2% for each year of the employee’s work.
These are quite low values compared with the established pension contributions in various other countries, which can often include contributions from both employers and workers.
In the UAE Labor Law, Article 137 says that if an employee works three years or less and leaves on his own initiative, then he is entitled to only one-third of his ESB premium.