The bye-bye benefits.
Under the labour law, employees are eligible for gratuity at the end of completing a full year of service and this payment is calculated as 21 days' basic salary. This excludes any car or housing allowances.
A recent report published by Zurich Global Life, Middle East & Africa, exploring the end-of-service benefit dilemma, highlighted challenges associated with EoSB payments. The report estimated that the average EoSB payment has risen by 140 per cent over the last six years, owing to an increase in the typical length of service from fewer than five years to nearly seven years, and the associated rate of salary growth over that period.
There is no law that states that a company has to set aside monies to pay future gratuity payments, although it would be good business and accounting practice to do so. Per wealth management firm SEI's latest EoSB survey report, 70 per cent of SMEs in the region do not segregate the funds allocated for EoSB from their working capital. This is at odds with best practise as SMEs are prone to cash flow issues and can often be strongly impacted by market fluctuations that may see them using the EoSB funds for other purposes, according to Samer Abdel Kader, Head of SEI Investments Middle East.
He added that in times of economic upheaval, SMEs may look at downsizing their staff, only to realise the EoSB pay-outs will make an impact on their bottom line as the liability increases year on year. At the moment, particularly in the oil and gas sector, employers are laying employees off and they have to find the money to do so at a time when the oil price is down.
As to penalties for not making these payments, he said the penalty would most likely be, but not be limited to, litigation. Aside from the legal penalties involved in mismanagement of EoSB payouts, the reputational risk to the company could have far-reaching and long-term effects, not only with regards to recruitment and employee morale but also with partners, vendors and industry peers.
"The best way to avoid pitfalls such as these is to ensure that the funds for EoSB are segregated from working capital and, preferably, protected by a trust structure as part of a corporate pension or savings scheme," he said.
Kader added that SMEs are typically focused on growth and this makes recruitment a high priority. With the number of start-ups and SMEs in the region, competition for top talent is fierce and becoming established as an employer of choice is a proven way to stand out from the crowd. Recruitment is not cheap, however, and offering hefty bonuses and pay increases will strain any company, regardless of size.
"A more efficient way of recruiting and retaining talent is by offering them more meaningful benefits than the typical cash pay out. This can come in the form of offering a pension plan or an employee savings plan that helps employees invest and save a portion of their salaries that they may then withdraw at the end of their tenure. In most cases, this will amount to more than the basic end of service benefit and can encourage employees to stay with the company longer, knowing they are working towards a savings goal. Some employers choose to reward high performers by contributing to this savings as well, thereby encouraging performance and retention," said Kader.
While some companies continue to hold provisions for EoSBs in a separate fund, the majority of participants still continue to pay benefits from their company accounts, according to the sixth End of Service Benefits survey by global advisory firm, Towers Watson. The firm surveyed across-section of 180 organisations in varying sectors based in the Middle East, in order to ascertain the level of provision, and the structure and delivery of mandatory and enhanced employee ESoBs.
Kader added that liability projections are the first step in a well-managed EoSB plan. In projecting future EoSB liabilities, companies are made aware of the funds required for EoSB payouts at any given point in the future. Once this liability is determined and funds are suitably accrued, it is incumbent upon the company to protect these funds by segregating them from working capital and possibly investing them to allow for the account to be suitably funded. Liability projections should be done on a regular basis to ensure companies are not blind-sided when employees retire or are made redundant.
Top three tips for SME owners to accommodate EoSB payments
1. Protect the funds for EoSB
Ensure that the funds allocated towards EoSB payouts are separated from your working capital as this could have serious repercussions further down the line.
2. Ensure the EoSB account is regularly funded
EoSB liabilities increase year on year and fluctuate with the number of employees recruited and their tenures at any given point in time. By ensuring liability projections are up to date, companies are in a better position to ensure their EoSB account is adequately funded at all times.
3. Encourage employee participation
Savings plans and pension plans encourage employees to save towards a financial goal that is greater than their basic EoSB entitlement. By encouraging employees to save and invest through corporate plans, companies can increase retention rates and differentiate themselves as employers of choice.
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