Understanding Payroll in United Arab Emirates: What Global Companies Need to Know About UAE Payroll
The United Arab Emirates, known as the ‘Gateway to the Middle East’, has gone through tremendous and accelerated transformation over the last few decades. Split over seven Emirates, the UAE has long been attractive to expanding businesses around the world, offering a favorable tax regime, free trade zones and access to some of the biggest and fastest-emerging markets on the planet. In addition to its strategic location, the country has a robust economy, which is down to a number of compelling factors. The UAE has very strong financial reserves, progressive policies regarding diversification and benefits from increased foreign direct investment.
The effects of the crisis in 2008 and 2009 did not entirely spare the UAE but the country did manage to navigate through the crisis safely, despite the harder-felt effects on other countries. Partly, this was down to diversification policies being put in place successfully and a variety of governmental measures designed to maintain investment confidence.
As with many other countries, mitigating the economic fallout of COVID-19 is the country’s present challenge, given its oil and non-oil economies were both affected. The government’s comprehensive plan for different sectors coming out of the post-COVID phase can be put to work sooner, as the UAE has one of the highest recovery rates, along with Abu Dhabi’s ‘Tomorrow 2021’ development plan, is also intended to boost competitiveness and entrepreneurship for the country. Additionally and of very notable interest, GDP growth is expected to reach 2.6% by the end of 2020, while the IMF has forecast a strong rebound in GDP for 2021.
In the private sector, the workforce is made up of a large number of foreign citizens and fresh graduates, thus creating a unique talent pool skewed towards a younger demographic. Private businesses, coincidentally, offer a great array of benefits in order to attract the right talent. In the public sector, the workforce is much larger and offers many benefits, including strong job security, shorter working hours and fewer working days.
The UAE is a country with a stable economy, an excellent infrastructure and facilitates easy trading. Combine this with the digital strategy designed to support foreign investment and you have a country ripe for the expanding business. In mid-2019, the country announced 13 sectors eligible for up to 100% foreign ownership. However, despite the country’s forward-thinking approach, it does still remain dependent on the oil-driven economy and is therefore susceptible to price crashes. Then there’s the regularly amended payroll regulations, and the laws pertaining to the individual Emirates’ regions and free zone laws, which all have their own complexities. Exploring the following important aspects of the UAE payroll and working regulations will help you gain an understanding of how you can succeed doing business there.
Starting a business in the UAE is relatively easy and this is mainly due to the government’s offering of incentives for doing so. The process therefore has many similarities to those of other countries.
The main tasks to complete are deciding on the type of activity your business will be involved in. This is critical because it may not be feasible for operations in the UAE. Then you’ll need to select the jurisdiction that’s most relevant to the company: your business may fall into a mainland, free-zone or offshore jurisdiction based purely on the business activity.
From here, the company structure needs to be decided. This could range from a sole proprietorship, civil company or limited liability company, through to a foreign company branch or free zone company. One of the best aspects to starting a business in the UAE, and very popular with foreign investors, is the free zones. A free zone offers zero% corporation and individual tax, while a company is also entitled to 100% foreign ownership and can benefit from many exemptions on import and export tax.
Next, you’ll need to gain approval for your chosen business venture, and its name; this is carried out by the Department of Economic Development. The name is especially important as UAE law states it cannot violate public morals and must be relevant to the business activity. Following approval, you’ll be able to license and register your company for the chosen activities. The remaining steps involve opening a bank account, processing the necessary visas (5- or 10-year). There may be a few other steps involved, depending on the unique nature of your business but, overall, incorporation can be completed in as little as a couple of weeks if your company is a free zone entity, or up to three months outside a free zone.
Every company is legally required to have a formal entity established in order to process a UAE payroll, but all applicable payroll registrations are completed during the process of establishing the entity.
To compensate employees that are registered under the Wages Protection System (WPS), it is mandatory for UAE businesses to make payments from an in-country bank account.
Whether you’re a UAE national or foreign worker, you are subject to UAE labor law, with some exemptions for certain categories.
New hires are required to sign a Federal Labour Contract, which must be registered with the Ministry of Labour as soon as the contract has been signed (during the visa application process for foreign employees).
In free zones, employees are generally not governed by the labor law. As such, free zones have their own labor law and specific template contracts, which relevant parties are obliged to use. As would be expected, each free zone has its own requirements for information. Employees are considered under contract with the authority of each free zone, and probation periods are capped at a maximum of six months.
Unlike many other countries, there are no trade unions in the UAE, and collective bargaining agreements do not exist. However, the UAE does have established offices to provide legal support to workers. Care units have also been set up across the Emirates to help provide worker protection and to provide information on worker rights.
According to Article 65 of the UAE Labour Law, the maximum workweek and workday hours in the private sector are usually eight hours per day, or 48 hours per week. They can also vary depending on an organization’s domain as well as an employee’s education or type. For example, the typical UAE work week for public sector employees begins on Sunday and ends on Thursday, but private businesses are free to set their own schedules.
In the public sector, which isn’t governed by Labour Law, this is seven hours a day.
Technically, there is no minimum wage in the UAE, however UAE Labour Law does stipulate that the basic needs of any employee must be met.
Wages in the UAE tend to vary by level of education. Employers must register with the Ministry of Human Resources and Emiratisation (MoHRE) and then subscribe to the UAE’s electronic salary transfer system, known as the Wages Protection System (WPS). All employee wages must be paid through this system. Late or unpaid salaries can result in heavy fines.
As the maximum working week is 48, any hours worked beyond this entitles employees to be compensated with overtime pay of time plus 25%, or time plus 50% for work performed between 9pm and 4am. Employees who work on Friday, which is considered a day of rest, are entitled to a substitute day of rest or overtime pay of time and a half. Women generally may not be required to work at night (10pm to 7am) unless they hold managerial positions or certain medical, technical, or service-industry jobs. Under labor law, an employee must not work more than five consecutive hours without a break of no less than one hour.
Termination/gratuity pay is mandatory in the UAE, except for employees who are terminated for cause, quit without giving proper notice, or quit before completing a definite-term contract. Employees who have completed one or more years of continuous service are entitled to 21 days of severance pay for each of the first five years of service and 30 days of pay for each additional year of service. There is a two-year maximum payout.
If an employee wishes to terminate a contract short, they may be liable (depending on the contract) to pay the employer ‘early termination compensation’.
In terms of pensions, in the private sector an employer contributes 12.5%, topped up by a further 2.5% by the government.
Bonus schemes are common in the UAE, but there are no specific guidelines or laws related to what can be awarded.
Tax and Withholding Considerations
Currently, most UAE businesses regulated by UAE Labour Law have no obligation to pay corporation tax and this is unlikely to change in the near future at least. The only exceptions are for certain industries including branches of foreign banks and companies engaged in oil and gas.
The Ministry of Finance introduced VAT at the standard rate of 5% on January 1 2018. Compared to many other countries, this is still a very low rate of VAT and will be unlikely to deter either workers or businesses from the UAE.
Paid Leave and Sick Leave
Labour Law currently mandates seven paid public holidays. Regulations in the UAE entitle all employees to holiday, sick and maternity leave. This is calculated at two days per month, provided an employee has completed at least six months of service but not one year. Once an employee has completed a year of service, they are then entitled to 30 days per annum.
In terms of sick pay, employees are entitled to 90 sick days per year (continuous or intermittent), provided they have completed three months of continuous service following the probation period. The breakdown is as follows:
- First 15 days: full pay
- The next 30 days: half pay
- The final 45 days: no pay
Maternity leave entitlement is 45 days, including the time before and after delivery. For one year of continuous employment for the same employer, full pay is granted, otherwise this is half pay. There is no provision for paternity leave under UAE labor law.
The UAE is fast becoming a prime base for expanding businesses. There’s no direct tax for corporations, the business climate is increasingly diverse and politically it’s very stable. However, as with any country, there are challenges to overcome. Regulations and laws that are split across the seven Emirates change regularly, making for a complex payroll journey, while jurisdictions and free trade zones can be equally confusing. It therefore makes sense to consider a global payroll solution that can guide you through the various pinch points and to help make your expansion in the UAE as smooth and hassle-free as possible.
This article is for informational purposes only and not intended to convey or constitute legal or any other advice. It is not a substitute for advice from a qualified professional.