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UAE’s Company Categorization Rules Poised to be the Game Changer for the Region

Date published: 7/7/22

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The UAE’s new company categorization system effectively caters to the needs of businesses and protects the rights of employees and skilled workers in the country. The new system divides companies into three tiers based on their compliance with the laws and best practices that govern the business environment. It also rates companies of all sizes on their adherence to the wage protection system and their alignment with the UAE’s policy of promoting cultural and demographic diversity.

The government of the UAE is taking a different approach to promoting governance among businesses. It’s using the well-known ‘carrot and stick’ approach. Unlike the common tradition where governments punish those who don’t follow the rules, the UAE government decided to think differently and reward those who do.

The new company categorization system is part of a wider group of initiatives taking place within the UAE. These include changes within the UAE labor law that strengthen employee rights, ESR reporting which was introduced in 2019 to ensure that enterprises are legitimately operating in the country, and improvement in overall accounting standards.

The company categorization system will also create more clarity and governance within the SME sector. This will, in turn, enable relevant government bodies to direct their support and resources to healthy and fully committed businesses.

The new method for classifying private sector enterprises and companies will promote long-term growth, increase competitiveness, make starting a business easier, and encourage innovation. It establishes clear and transparent standards and will motivate companies committed to improving the UAE’s business environment and increasing its overall business appeal.

What does the company categorization system entail? 

The new system employs simple but effective procedures that track a company’s efforts to follow the rules. These include hiring diverse people, paying them on time, and protecting their rights such as correct gratuity computation and timely gratuity release. The system will automatically raise or lower classification, depending upon company performance on the following criteria.

Tier one companies

The first tier as per the new company categorization system will include enterprises and institutions that pledge to abide by the labor market rules and decisions while meeting all other general requirements. They must also meet at least one of the following criteria: 

  • Increasing their Emiratisation rate by at least three times the target and collaborating with the ‘Nafis’ program to train at least 500 citizens annually, 
  • Being a venture owned by a young citizen and meet approved standards.
  • A training and employment center that supports Workforce Planning Policy by promoting cultural diversity in the UAE, or 
  • Being active in the targeted sectors and activities determined by the Council of Ministers based on the MoHRE’s recommendations.

Tier two companies

All newly formed companies, regardless of their size, will fall into the second category as per the company categorization system unless they fail to comply with the laws governing the labor market. They need to showcase their commitment to the law and the Wage Protection System, protect workers’ rights, and promote cultural and demographic diversity internally. 

Tier three companies

Enterprises that do not follow rules, laws, or decisions regulating the labor market or standards that protect workers’ rights or fail to encourage cultural and demographic diversity in the labor market will fall into the third category according to the new company categorization system.

Companies committing violations such as human trafficking, using workers without obtaining relevant work permits, providing inconsistent or incorrect data or information to relevant government authorities, etc will also fall within the third category and will be penalized. 

Benefits for businesses that are highly ranked as per UAE’s company categorization rules

This new classification system is built to reward companies that are compliant with the rules. In return, they get significant discounts on the cost of government services and fees for conducting business reflecting directly on their profitability and the “bottom line”.

One of the major benefits for the top-ranking companies is that the service fees for work permits will not exceed Dhs 250 for two years per employee. In contrast, companies in the two lower categories will have to pay higher fees. Tier two companies will pay Dhs1,200 for a period of two years. Companies in the third category will not get any fee reductions and will have to pay Dhs3,450 every two years to obtain or renew a work permit. 

How does the new company categorization system affect the business ecosystem?

The company categorization system is likely to have far-reaching effects on the overall business ecosystem. The move is in line with the UAE’s long-term vision and strengthens the country’s position as a global hub for people, businesses, and investments. 

It also supports the country’s goal of creating a knowledge economy based on sharing experiences, building capacity, and launching new industries that are aligned with the future economy while improving socioeconomic growth at the macro level. For example, it will help boost the labor market’s efficiency and stability. In addition, this will provide a clear roadmap for companies operating in the country to improve their classification and increase investor predictability. The system will also have a positive impact on the following areas;

  1. Attract and retain top talent from around the world 

In the coming months and years, the ministry’s decisions will enable strategic economic security. The system also reinforces the Emirates’ ability to attract global competencies and skills and launch new economic sectors that contribute to diversifying sources of income. In addition, the company categorization system will help top-performing organizations to be on par with global standards and better equip them to retain top talent from around the world.  

  1. Protection of employee rights 

The new system will go a long way towards safeguarding employee rights. 

Wage protection system

Company categorization will look at organizations’ commitment to the Wage Protection System which ensures that employees in the UAE are paid in full and on time. The technology allows MOHRE to manage a database that records salary disbursements in the private sector and ensures that the agreed-upon sums are being paid consistently. 

Gratuity protection

As per the updated labor laws in the UAE, if an employee has worked for a company for less than 5 years, their gratuity is calculated at 21 days each year, and if they have worked for more than 5 years, their gratuity is calculated at 30 days per year. This is a major upgrade from the previous labor law and is a big increase in the number of gratuity days due each year.

This adjustment can have a significant impact on a company’s ‘Total Gratuity Liability’ on their balance sheet – a general jump of around 32% per employee. In addition, an employee is entitled to full gratuity compensation regardless of the cause – whether its termination or resignation. 

Related: Understanding Gratuity Liability under the UAE’s New Labor Law

Workplace saving plans

The recently announced workplace savings scheme showcases the government’s commitment to enabling expats working in the public sector to invest and grow their savings. The employer will start the process by contributing the worker’s total end-of-service gratuity to the scheme and allow workers to benefit from automatically growing their income.

Related: New workplace savings scheme for expats working for Dubai government

Conclusion

The UAE is quickly establishing itself as a top global destination for both workers and entrepreneurs. While adapting to change is never easy, companies that keep up with the new company categorization rules will benefit massively over the long term. Adhering to the latest developments will also give them a competitive advantage in the months and years to come.