Bahrain: Employers must start pre-funding the mandatory end-of-service benefits

Employer Action Code: Act

Effective March 1, 2024, Edict 109/2023 requires employers of non-Bahrainis to start immediately paying monthly contributions to the Social Insurance Organization (SIO) to pre-fund end-of-service benefits (EOSBs) for future service for these employees. Before this change, employers generally would accrue the EOSB liability on a book-reserve basis. In mid-2023, non-Bahrainis made up nearly 80% of the total workforce, according to the Labor Market Regulatory Authority.

Key details

• Currently, employees who are not citizens of Bahrain (or of another Gulf Cooperation Council country) do not participate in the social security retirement program and instead receive a lump sum EOSB from their employer. This lump sum is calculated as one-half month’s final pay for each of the first three years of service plus one month’s final pay for all additional years. Before the edict, there had been no requirement to externally pre-fund these EOSBs, and employers typically have not done so.
• Starting in March 2024, employers must pay monthly contributions to the SIO for future EOSB accruals for all eligible employees, equal to 4.2% of current monthly wages for employees in their first three years of employment with the employer and 8.4% of current monthly wages thereafter. Wages include base pay plus any social allowance (as described in Article 47 of the Labor Code). Contributions must be paid electronically by the 15th of each month, subject to additional assessments if late. Employers will retain the EOSB liability for service before March 2024.  
• Employers must provide employee wage details to the SIO to support the contribution amount, otherwise the SIO will determine the contribution amount using the higher wage basis found under its workers compensation program.
• When an eligible employee terminates employment, the EOSB related to service from March 1, 2024, will be paid by the SIO directly to the employee. While not entirely clear (further regulations are expected), it appears that the amount of this EOSB will still be calculated based on the formula noted above and that the employer may bear potential financial liability for the difference between this amount and the contributions paid by the employer (e.g., for the effect of wage increases since March 1, 2024).

Employer implications

Employers should prepare to pay the required new contributions and consider how the new arrangement will affect their EOSB cash planning and accounting treatment. Employers will also want to ensure that employees understand the change in how future EOSB accruals will be paid out (i.e., no longer directly by the employer). Future regulations hopefully will clarify any potential employer EOSB liabilities in respect of future service.

Contact

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Michael Brough

Senior Director, Integrated & Global Solutions

email Email phone +971 50 189 5816

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