Introduction: The Modern Shift Toward Defined-Contribution Savings
For decades, the standard UAE severance model operated exclusively as a unfunded, defined-benefit gratuity: employers paid a lump-sum severance at the moment of an employee's exit.
However, recognizing global best practices and modern wealth preservation needs, the UAE government launched two landmark alternative schemes:
- DIFC Employee Workplace Savings (DEWS): Pioneered in the Dubai International Financial Centre in February 2020.
- Voluntary Alternative End-of-Service Benefits Scheme: Enacted across the federal mainland and other free zones under Cabinet Decision No. 96 of 2023 (effective November 2023).
These initiatives empower employers to deposit monthly contributions into regulated, capital-protected investment funds rather than holding an unfunded liability on their corporate balance sheets.
1. How the UAE Alternative Savings Scheme Operates
Under Cabinet Decision No. 96 of 2023, employers can voluntarily enroll their workforce in accredited investment funds licensed by the Securities and Commodities Authority (SCA) and MOHRE.
Mandatory Monthly Contribution Rates
Instead of accruing days at the end of employment, the employer pays monthly contributions directly into the employee's designated savings account:
| Tenure Milestone | Monthly Employer Contribution |
|---|---|
| First 5 Years of Service | 5.84% of the employee's monthly basic salary |
| Exceeding 5 Years of Service | 8.33% of the employee's monthly basic salary |
Mathematical Logic: 5.84% of basic salary corresponds precisely to 21 days per year, and 8.33% corresponds precisely to 30 days per year under Article 51 of the UAE Labour Law.
2. Key Differences: Traditional Gratuity vs Alternative Scheme
| Feature | Traditional Gratuity (Article 51) | Alternative Savings Scheme (DEWS / Cabinet 96) |
|---|---|---|
| Funding Structure | Unfunded liability paid at departure | Monthly funded deposits into individual trust accounts |
| Investment Returns | Fixed statutory formula only | Potential market returns and compounding growth |
| Risk of Insolvency | High (subject to employer solvency) | Zero (funds held safely in independent custodian trusts) |
| Employee Voluntary Top-Up | Not allowed | Permitted (employees can contribute voluntary percentages) |
| Sharia-Compliant Options | Not applicable | Yes, dedicated Islamic Sukuk and Sharia equity funds |
3. What Happens to Accrued Gratuity When an Employer Enrolls?
When a company transitions from the traditional statutory gratuity system to the alternative savings scheme:
- Prior Service is Frozen: Gratuity earned prior to the enrollment date is calculated based on the employee's basic wage on the date of transition and safely recorded.
- Payment of Frozen Balance: The frozen historical entitlement is disbursed when the employee terminates employment, calculated according to the statutory rules of Article 51.
- Future Service Grows Monthly: From the enrollment date onward, the worker's benefits accrue monthly through the fund deposits.
4. Portability and Withdrawal Rules
- Upon Job Change: When an employee leaves a participating employer, they can choose to withdraw their accumulated capital (plus investment profits) tax-free or leave the account active to continue growing.
- New Employer Enrollment: If the new employer is also enrolled in the scheme, the existing investment portfolio can be transferred seamlessly.
5. Which System is Better for Employees?
For the vast majority of UAE professionals, the alternative savings scheme offers significant advantages:
- Protection against corporate bankruptcy or wage delays.
- Freedom to choose risk profiles (from capital-guaranteed cash instruments to moderate or aggressive global equities).
- Complete transparency via real-time mobile app dashboards showing exact balances and compound earnings.
If your employer remains under the traditional system, you can use our [UAE Gratuity Calculator](/) to project your statutory severance anytime.
