With many global companies making inroads into the UAE, the institutions governing labor laws and policies are passing laws to govern employment, taxes, payrolling, and benefits. 

From free zones to the WPS system, the UAE payroll process has a number of unique aspects. Understanding these complexities is the key to business success in the UAE. 

Common Payroll Challenges in the UAE

The UAE ranks no.1 for the capacity of its talent to to attract talent for international professionals. The diverse workforce and the complex regulations present a unique set of challenges in managing UAE payroll processes.

1. Navigating regulatory changes

The UAE’s business environment is undergoing frequent changes in labor laws and tax regulations. For instance, the 4.5-day workweek aimed at promoting work-life balance, overtime rules, etc., can significantly impact payroll calculations. 

Additionally, new tax regimes and economic policies might demand changes in tax contributions and mandatory reporting. Understanding and keeping updated on the changing regulations is significant to avoid penalties, legal issues, and reputational damage.

2. Handling payroll discrepancies

Various factors like overtime calculations, leave deductions, and bonuses can be complex and error-prone. Additionally, the introduction of free zones that have distinct labor laws are making payroll management more complex. 

3. Managing multicultural workforce payroll

The UAE is a melting pot of people from different cultures. Managing payroll for expatriate employees requires payroll managers to have knowledge of differences in salary structure, benefits packages, and taxes. For example, your payroll managers possess knowledge about bilateral agreements to calculate tax deductions for employees from countries with tax agreements with the UAE.

Setting Up Payroll in the UAE

If you are looking to expand your business and hire employees from the UAE, you must comply with local laws and regulations. This step-by-step guide will help you set up your payroll in the UAE.

Step 1: Registering with the Ministry of Human Resources and Emiratisation (MOHRE)

Registering with the MOHRE is a mandatory step for all businesses to operate in the UAE. You must provide detailed company information, including the structure, business activities, and location.

Additionally, you must specify the number of employees you intend to hire. The exact process might vary depending on the type of business and the number of employees. 

However, the general process involves:

• Provide essential documents such as lease agreement, contact information, etc.,
• Complete the application form completely and accurately
• Pay the registration fee
• On successful registration, you will receive an establishment card

This establishment card is essential for companies to employ workers in the UAE and obtain certain work permits. 

Step 2: Obtaining necessary licenses and permits

In addition to MOHRE registration, companies need permits to operate legally. A trade license issued by the Department of Economic Development (DED) or a Free Zone authority is mandatory for conducting business. 

Work permits are necessary for employing expatriate workers. This process involves submitting applications, providing required documentation, and meeting specific criteria. Residency visas for foreign employees are linked to employment and require sponsorship by the employer.

Step 3: Setting up employee records

Setting up employee records in the UAE is crucial to remain compliant with labor laws and efficient payroll management. You need to collect the necessary information, like:

• Personal information: Full name, date of birth, nationality, passport number, visa details, and emergency contact information.
• Employment details: Job title, department, date of hire, salary structure (basic, allowances, and overtime), and employment contact details. 
• Payroll information: Bank account details, tax residency status, and social security number.
• Benefits: Insurance, housing allowance, transportation allowance, leave details, etc.
• Documentation: Passport copy, visa, Emirates ID, employment contract, and other relevant documents.

Maintaining accurate and up-to-date employee records is crucial for compliantly setting up payroll management in the UAE.

Step 4: Salary calculation and payment

Accurate salary calculation and on-time payment is crucial for compliance and maintaining employee satisfaction. Here are the detailed methods for calculating salary payments.

1. Methods for calculating salary

Salary calculation depends on the employee’s role and employment contract and involves various components. 

• Basic Salary: This component is the fixed amount the employee is entitled to receive based on what was agreed upon during the hiring process. It forms the basis for calculating other components of the salary and benefits.
• Allowances: Various allowances for housing, transportation, and other job-related expenses. These allowances are either fixed or a percentage of the basic salary.
• Overtime: According to the MOHRE guidelines, overtime is usually calculated at 1.25 times the regular hourly rate, and for weekend overtime, it’s 1.5 times.
• Bonuses and commissions: These are performance-based and are added to the basic salary and allowances to form the gross salary. 

Clearly document the criteria for earning bonuses and commissions to remain fair and transparent. 

2. Payment timeliness and methods

Each country recognizes various payment timelines and UAE labor law mandates payment at least once a month. The exact payment data depends on the employer’s payment cycle. The employee salary is due the first day of the month after the end of the period specified in the employee contract, unless a shorter period is mutually agreed upon.

In the UAE, the Wages Protection System (WPS) mandates electronic salary transfers for most employees. Adhering to the payment frequency and methods is a must to avoid hefty penalties and legal repercussions.

3. Understanding Wages Protection System (WPS)

The WPS is a mandatory electronic salary transfer system introduced by the Central Bank of UAE and MOHRE to ensure that employees receive their wages on time and accurately. The goal is to promote transparency and protect the workers’ rights by avoiding delayed or non-payment of salaries. 

Employers must prepare the Salary Information File (SIF) with details about employees’ salaries and allowances. The banks and the MOHRE conduct compliance checks to ensure accuracy, following which the payments are made. 

Step 5: Taxation and Deductions

Understanding the UAE taxation and deductions requirements is crucial for processing the payroll compliantly and accurately. Here is an insight into taxation, dedications, and end-of-service benefits.

1. Overview of tax regulations in the UAE

The UAE does not impose any personal income tax on individuals, both residents and expats, making it a tax-friendly environment. However, a 5% value-added tax applies to most goods and services, with a few exemptions. VAT does not affect payroll directly, but businesses should comply with VAT regulations for business transactions. 

2. Types of deductions and their impact

In the UAE, there are a range of mandatory and voluntary deductions, with specific regulations for both employees and employers. Pension is one of the major deductions mandated by the MOHRE. 

Both the employer (12.5%) and the employee (5%) have to contribute to the General Pension and Social Security Authority (GPSSA). The contribution is slightly higher for Abu Dhabi. In addition to this mandatory contribution, employees can volunteer for other saving plans. 

3. End-of-service benefits

End-of-service gratuity (EOSG) is a significant benefit for employees in the UAE. It’s calculated based on employees’ salary and length of service. Employees who have completed one or more years of continuous service are entitled to EOSG. 

Calculation method:

• For the first five years: 21 days’ basic salary for each year of the first five years
• Beyond five years: 30 days’ basic salary for each additional year beyond 5 years

The EOSG contribution calculation is based on the employee’s last drawn salary, excluding allowances and bonuses.

Employers must contribute to the EOSG fund or make provisions for payment upon termination. Accurately calculating and managing EOSG is crucial for staying compliant with UAE laws.

Partner with Gloroots to Pay Teams in the UAE Effectively

Understanding and managing payroll compliantly in the UAE can be a daunting task for a global organization with operations in multiple countries. Gloroots offers a unified platform for managing payroll efficiently and compliantly. 

Our expert team simplifies the process, ensures accurate salary calculations, timely multi-currency payments, and maintains 100% compliance. We reduce your administrative burden and free up your time for more strategic tasks.

Contact Gloroots to learn more about our Global Payroll Services.