COVID-19: Job cuts will add to UAE companies’ costs

Dubai: UAE employers carrying out job cuts will need to keep in mind the cost they will have to bear in meeting their gratuity payments. And they will have to do this amidst another downturn and a severe cash crunch.

“There is no doubt that liquidity is drying up in the market,” said Hisham Farouk, CEO at Grant Thornton UAE.

Businesses faced with paying salaries amidst the general slowdown have resorted to layoffs after orders started getting cancelled – both from clients and suppliers. “Reducing the workforce might seem like a quick fix to release liquidity for now,” said Farouk. “However, such hurried decisions with a short-term outlook are usually not a good solution for long-term business continuity.”

For now, the constraints on liquidity will be the biggest challenge posed to businesses in the region. Farouk said the cash crunch will remain as the longevity of the coronavirus outbreak’s repercussions is unknown. All forecasts hint at the effects staying on for the long haul.

Seeking help from banks

In most cases, if an employee is forced to leave work, he or she is entailed the right to compensation, as per UAE Labour Law, via entitlements accruing from salaries, leave and end-of-service benefits.

But with employers being forced to cut more jobs to help their respective companies stay afloat during the latest crisis, a lot of companies are now reaching out to banks to address immediate liquidity problems. This includes requests for more loans to pay employees’ final settlement.

A number of bankers, when speaking to its customers from across sectors during the last couple of weeks said they expressed concerns around the lack of immediate liquidity.

“It’s true that it’s a hardship for corporates paying end-of-service during these difficult times when letting go of employees,” said Shailesh Dash, a UAE-based entrepreneur and financier. “At the same time it’s very painful for employees to not have a job, then how to survive without the indemnity being paid to them while they can’t go out in search for a job.”

Employees feel the heat

With employees heavily reliant on end-of-service payments in the region, this will put further pressure as they are suddenly faced with loss of income and nothing to immediately compensate for it to help keep daily expenses at bay.

“In addition to the end-of-service payments that follow staff layoffs, by letting go of their employees, companies will lose the very essential ingredient they’d need to rebuild businesses once the dust settles,” Farouk said.

“Business leaders should make informed decisions by conducting scenario planning exercises, weighing pros and cons, and remain socially responsible towards their people.”

It is a given that second-quarter financial results for many companies will reflect the business challenges of this period. “It’s a matter that needs to be dealt with humanly and it’s important corporates need to learn to always keep employees’ funds separately without taking a risk on those,” Dash said.

“This is where the new initiative of contribution to an independent government-sponsored pension or provident fund would come handy. Then the risk that we are discussing today would not be a matter of discussion.”