Payroll Rules in the UAE, Dubai and Abu Dhabi

Posted on 24 April 2023 by IRIS FMP

Categories: Culture

The economy of the UAE, Dubai, and Abu Dhabi is fuelled by many factors with oil and gas, financial services, real estate, international trade, aviation, and tourism among its chief industries.

There is one key element which unites businesses from all these sectors – the requirement to pay staff in line with UAE payroll regulations. That means making regular payments on time and in the correct currency while practising full compliance with laws and regulations.

Here, we closely examine the payroll procedures businesses must follow when expanding to the UAE, Dubai, and Abu Dhabi.

Expanding to the UAE, Dubai and Abu Dhabi

Dubai – the most populated city in the UAE – and Abu Dhabi have developed into centres for international and regional trade and continue to attract global organizations due to their thriving economies, high living standards, warm climate, and work-life benefits. The favorable tax regimes and free trade zones also on offer make it easy to see why businesses are drawn to this corner of the world.

The UAE has established regulations aimed at enhancing and supporting foreign businesses wishing to expand into the region. For example, some businesses may be exempt from paying tax for several years, while there is no income tax and corporation tax paid in the UAE either.

Not only is there a plethora of investment opportunities available in the UAE, but there is also an impressive talent pool of workers available thanks to the large number of expats living in the region supported by a strong and stable economy.

One of the biggest attractions for US businesses expanding to the UAE is Free Zones.

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What are Free Zones in the UAE?

Free Zones allow expatriates and foreign investors to gain full ownership of companies. There are more than 40 Free Zones in the UAE supporting a multitude of business sectors from renewable energy to maritime services and e-Commerce to science and technology. Each zone provides vital infrastructure that allows businesses to save on resources and focus on their growth plans.

The benefits of Free Zones for US investors include:

  • 100% Foreign Ownership
  • 100% Repatriation of Capital and Profits
  • 100% Exemption from Corporate and Income Tax
  • 100% Exemption from Customs Duty
  • Fast and Easy Business Set-up
  • Developed Business Communities

You have considered the benefits on offer and want to drive through your expansion plans into the UAE. Now it’s time to focus on how to run your payroll in the right way.

Payroll in the UAE, Dubai, and Abu Dhabi

Calculating payroll in any foreign country requires local knowledge of rules, regulations and legislation. It can be a complicated process and mistakes can result in penalties, fines, and damage to business reputation.

In the UAE it is essential to demonstrate full compliance with payroll rules so that employees within an organization are paid on time and in the right currency and that all deductions, allowances, bonuses and benefits are accounted for.

Many US businesses expanding to the UAE may lack the knowledge and resources to process payroll themselves and prefer to outsource their payroll function to an experienced global payroll provider.

Your payroll provider will understand the common challenges you will face during international expansion into the UAE such as language barriers, currencies, and payroll laws. They will possess expert knowledge of local payroll procedures in that country so that your payroll is accurate and fully compliant.

How Do US Businesses Pay Employees in the UAE?

US businesses operating in the UAE private sector must subscribe to the UAE Wages Protection System (WPS). WPS is an electronic salary transfer system for paying employees through banks, exchange bureaus, and financial institutions approved by the UAE Central Bank.

WPS was introduced in 2009 and ensures the salaries of private sector employees are correctly paid on time and in full under the jurisdiction of the Ministry of Human Resources and Emiratization (MOHRE). Failure to comply could result in expensive fines and penalties and even lawsuits, reputation damage and, in extreme cases, the closure of your overseas business. It should be noted that, at the same time, all UAE government entities and public sector departments are exempt from WPS compliance.

Does the UAE Have a Minimum Salary?

There is no minimum salary in the UAE. Additionally, there are no defined statutory components that should make up an employee’s salary under UAE Labor Law. However, the UAE Labor Law broadly mentions that salaries must cover the basic needs of employees, so American employees can expect to receive similar benefits as they did when they worked in the US.

In What currency are Employees in the UAE Paid?

Salaries are paid in the UAE currency Dirham or any other currency that has been agreed upon between both parties involved in an employment contract.

What Statutory Deductions are Made to Employees in UAE?

UAE Labor Law does not define specific components that should make up an employee’s salary. UAE payroll is not subject to income tax either so there are no mandatory tax deductions. However, UAE nationals must make mandatory contributions to the national pension plans as highlighted in the section below.

How are UAE Pension Contributions Calculated?

Monthly pension contributions are deducted from UAE nationals’ total fixed salaries up to a maximum of 50,000 Dirhams. In Dubai, private sector workers contribute 5% of the total salary, the employer 12.5% and the government 2.5%. In Dubai, employees contribute 5% and the employer 15%.

Are There Common Pay Components in the UAE?

Fixed pay components may include basic salary, property rental allowance and transport allowance. Variable pay components may include bonuses, overtime, relocation allowances and smartphone allowances which are all discretionary.

UAE Compensation Laws also include payment of overtime for extra hours worked beyond normal working hours. In the UAE this means the employee is entitled to remuneration equal to their basic salary plus at least 25% for extra hours worked. If overtime falls between 9pm and 4am on a working day the employee is entitled to their basic wage plus an extra 50%. Employees who work on a Friday, which is a statutory day off, are entitled to an increase of 50% or more in income of another day off in lieu.

What Does UAE Gratuity Mean?

Full-time foreign workers including those from the US who have completed one year or more in continuous service are entitled to end-of-service benefits under Article 51 of the UAE Labor Law.

This gratuity is a lump sum monetary payment paid by the employer based on 21 days’ pay for every year of the first five years of service and 30 days’ pay for every additional year. The total amount of remuneration should not exceed two years’ full pay.

Is Employee Medical Insurance Mandatory in the UAE?

Paying medical insurance for employees depends on the Emirate in which your company operates.

In Dubai and Abu Dhabi, it is a mandatory requirement for all companies to provide health insurance for their employees for the duration of employment. In Abu Dhabi, companies are also required to provide health insurance for employees as well as four dependents (one spouse and up to three children under the age of 18; expats with four or more children must take out their own medical insurance policy).

However, in northern Emirates including Sharjah, Umm Al Quwain, Ajman, Fujairah, and Ras Al Khaimah there is no legislation that obligates companies to pay health insurance for employees.

Although private healthcare in UAE is expensive, the quality of healthcare is high for both expats and local people. It is important that businesses should factor in the cost of private healthcare when expanding into UAE and its effect on employee salaries and payroll.

What Happens to Businesses Who Fail to Pay Employees in the UAE?

The UAE government imposes far-reaching penalties for companies that fail to pay employee wages when they are due, making it even more important to adopt a strict payroll process.

For example, any business, corporation, or establishment guilty of non-payment of salaries on an agreed date will immediately be electronically monitored. If the situation remains unresolved, notifications will be sent on the third and tenth day.

By the 17th day after the due payment date, any new work permit applications relating to the non-compliant establishment will be suspended. Businesses with 50 or more workers will be added to an electronic monitoring and inspection system and can expect a visit from an inspector.

As you might expect, penalties become increasingly severe the longer the problem continues and staff salaries go unpaid. By day 30 from non-payment, legal action will proceed against establishments with 500 or more workers, or from day 45 for companies employing between 50 and 499 staff.

Ultimately, the UAE government will continue to suspend the issuing of work permits and could downgrade the offending establishment’s rating, and also impose a range of financial penalties.

Next Steps for Running Payroll in the UAE, Dubai, and Abu Dhabi

The UAE, Dubai and Abu Dhabi are favoured destinations for US businesses expanding to the Middle East. A strong economy, endless growth opportunities, tax breaks, and high living standards all contribute to the area’s attraction.

Any US business looking to expand to the region must have a safe and reliable payroll function in place. However, understanding the different laws, cultures and complexities is not always easy without sufficient knowledge of payroll legislation in that country.

The fact is many foreign businesses are unlikely to possess the expertise required to run payroll in the UAE from within their own ranks. This is why many prefer to outsource their payroll function to an expert global payroll provider in order to avoid costly penalties, fines, and potential lawsuits.

A global payroll provider will act as a single point of contact for businesses expanding to the UAE to ensure their entire payroll function is fully compliant at all times.