The Basics of Payroll

Payroll is an essential function for any organization. If you are puzzled about how payroll functions, you are not alone. Let’s break down how payroll is processed in the UAE.

What is Payroll?

All companies have a process for paying their employees each month. A person usually working in the finance department of an organization calculates the wages for the entire workforce, records it in the file, then sends it for approval before finally arranging for the amount to be paid into each employee's bank account or via check. Payroll involves performing various tasks to ensure accurate and timely pay-checks and record-keeping compliance. Payroll is a very important topic for all SMEs because it is the most time-consuming process and it follows strict regulatory requirements for on-shore companies in the UAE.

What is Wages Protection System (WPS)?

The Wages Protection System (WPS) is an electronic salary system that permits companies to pay their employee’s wages through banks, bureaux de change and financial institutions authorized and approved by the Central Bank of UAE. By developing this system, the ministry of labor creates a database that records wage payments in the private sector to overlook and guarantee the timely and full payment of agreed-upon wages. This is also an innovative solution for employers to save time and minimize efforts to pay workers’ wages.

Here are some key points to note about the WPS in the UAE

The company must have a bank account with one of the authorized banks operating in the UAE.
All onshore companies plus Jebil Ali Free Zone must comply.
The company should enter into a contract with their bank or financial institution that is authorized by the central government.
Employee salaries must be paid via WPS within two weeks of their due date.
Employee salaries should not be less than what is stated in their labor contracts.
A salary file (.SIF) needs to be sent by companies to their respective banks in order to distribute salaries to employees. A SIF file includes the salary information of all employees.

You can click here to learn more about SIF.

If a company fails to enroll in the WPS or does not transfer employee wages on time, new work permits will be denied until all outstanding payments have been settled. The ministry of labor might also impose heavy fines on the employer which go up to AED 50,000.

The Payroll Process

Every HR or finance person must carry out the following basic steps to calculate payroll: Payroll calculation, Approval Flow and Payroll Processing.

Payroll Calculation

Individuals at an organization use a system to calculate payroll which could be a simple Excel file, a payroll platform or even a fully integrated HR/Finance system or an external third-party vendor that carries out payroll.

An employee’s salary details are added onto the system which includes:

· Basic pay

· Allowances (Housing, Transport, Airfare etc.)

· Variables (Commissions, Bonuses etc.)

· Additions and Deductions

Approval Flow

Every company has an approval process and flow where the employee details are cross-checked and verified. If there are any errors or if any changes are to be made, the file is sent back to the concerned person and goes through the approval flow once again.

Payroll Processing

There are a few methods used to process payroll:

Bank Wire Transfer: Companies who pay their employees via a bank wire transfer will have to adhere to the exact format as provided by the bank. There is a charge to process the payroll for these employees, but the fee is often very low and is dependent upon the bank’s fees.
Exchange House Wire Transfer: Companies who have a mixture of banked and unbanked employees can process their payroll through exchange houses. The company provides the exchange house the payroll file and pays a per person fee. Companies also have the option to pay the exchange house to generate the payroll file on their behalf.
Cash/Cheque: This method is suitable when a company has new residents in UAE who do not have valid documents to open a bank account yet
Mastercard/Debit cards: This method is used by companies who have employees who do not have access to bank accounts. Most exchange houses have this option for companies to pay a fee to process each month. The employees get their salaries loaded on the Debit Card. Employees are also able to pull money out of these accounts via an ATM machine.