By: HUB’s EB Global Benefits Team

What Is It About?

The United Arab Emirates (UAE) has recently enacted significant labor law and tax reforms. These reforms aim to modernize the employment framework and align UAE labor practices with global standards.

Labor Law Reforms

Per labor law changes introduced in 2024, employers can now offer flexible working arrangements, including part-time, remote, and job-sharing roles.

Payroll regulations mandate the use of the Wage Protection System (WPS) to ensure timely and transparent salary payments. Employers must register with WPS-approved financial institutions to process payment of salaries, which are then disbursed directly to employees’ bank accounts or prepaid payroll cards. This approach has already applied to the private sector under federal jurisdiction. Recent reforms expanded WPS to cover employees in free zones, including DMCC, promoting uniform wage practices across all jurisdictions. The Ministry of Human Resources and Emiratization (MOHRE) monitors compliance, with penalties of up to AED 1 million and suspension of work permits for late or incomplete payments.

Retirement Benefits

The End-of-Service Gratuity (EOSG) is a statutory benefit in the UAE, provided as a lump-sum payment upon employment termination. The benefit is based on service with the company and final basic salary.

In 2020, the DIFC jurisdiction replaced this defined benefit system for foreign employees with an Employee Workplace Savings (DEWS) Plan, requiring monthly employer contributions funded and managed in investment funds.

Nationwide, the Voluntary Alternative End-of-Service Benefits Scheme, introduced in 2023, allows private-sector employers across all emirates (including free zones, except DIFC) to adopt pre-funded savings or investment plans as an alternative to the traditional EOSG.

In 2024, this system was extended to UAE and Gulf Cooperation Council (GCC) local country nationals working in the DIFC.

Mandatory Health Insurance: Expansion and Adjustments

Effective January 1, 2025, health insurance will become mandatory for all private-sector employers across the UAE, covering foreign employees in all seven emirates. Previously required only in Abu Dhabi and Dubai, this mandate expands coverage across the UAE.

Emirati citizens will remain covered under government-funded health insurance programs but may also participate in employer-sponsored plans.

Value Added Tax (VAT) Updates

Employers can now recover VAT on health insurance premiums that cover employees and dependents - one spouse and up to three children. Export documentation requirements have also been streamlined, making it easier for eligible businesses to apply zero-rated VAT to goods and services.

Unemployment Insurance Growth

The Involuntary Loss of Employment (ILOE) scheme, launched in 2023, has seen rapid adoption, with over 7 million employees enrolled as of 2024. The scheme provides financial support of 60% of basic salary for up to three months in cases of involuntary job loss. Adoption in free zones continues to grow as employers align with federal labor mandates. Timely subscription of insurance and employee enrollment are critical for compliance with applicable mandates.

Emiratization

The UAE has expanded its Emiratization initiative to include private-sector companies with 20 to 49 employees. By the end of 2025, these companies must employ at least two Emiratis. Non-compliance will result in fines of AED 108,000 per unfilled position in 2025.

Employers must act decisively to integrate these reforms into their policies and operations, ensuring compliance, enhancing employee benefits, and maintaining their competitive edge in a rapidly changing regulatory landscape.

Impact on Companies

  • Increased Compliance Risk - Failure to adhere to the new regulations can lead to substantial financial penalties, reputational risks, and operational disruptions.
  • Employers have an opportunity to de-risk the mandatory defined benefit gratuity severance program transforming it into a defined contribution arrangement.
  • Small companies that operate in the UAE will face increased pressure to hire local nationals or face stiff penalties due to the stricter Emiratization mandate.

Suggested Employer Action

  • Evaluate the viability of transforming the legal gratuity severance program into a defined contribution arrangement.
  • Review current policies to ensure alignment with updated legal and regulatory frameworks.
  • Adjust budgets to accommodate additional costs from expanded benefit structures and regulatory mandates.
  • Enhance search for Emirati citizens to replace foreign employees to comply with new local labor content requirements.
  • Engage specialized advisors to develop compliance strategies and optimize the effectiveness of benefit programs.

If you have any questions, please contact your HUB Advisor. View more updates in our Global Benefits Directory.