End of Service Indemnity: A closer look

Employees who are excluded from the scope of application of the Social Insurance Law are entitled on the expiry or earlier termination of their employment contracts, to receive an end-of-service indemnity calculated in accordance with the provisions of Article 116 of Legislative Decree No. 36 of 2012 with respect to promulgating the Labour Law for the Private Sector (the Labour Law).

A practice has however developed over time in the private sector wherein employees would request their employers to make interim payments towards their leaving indemnity entitlements at times when such entitlement has not actually materialised. One key question which arises as a result of this practice which is not regulated by the provisions of the Labour Law is whether any future indemnity payment(s), interim or final, would be adjusted to account for any increase in wages which was not accounted for in the earlier interim leaving indemnity payment made to an employee. In the absence of a legal provision regulating this issue, it was left to the Bahraini Court of Cassation to shed some light on the uncertainty surrounding such practice.

In this article, we will attempt to clarify the doubt surrounding interim leaving indemnity payments in light of recent decisions of the Bahraini Court of Cassation. This will, however, necessitate that we first establish an understanding of the leaving indemnity as prescribed in Article 116 of the Labour Law.

Article 116 of the Labour Law

The Bahraini Labour Law regulates the leaving indemnity entitlement of employees in Article 116 and provides that:

“An employee who is not subject to the provisions of the Social Insurance Law shall, upon termination of his contract of employment, be entitled to a leaving indemnity at the rate of half  a month for each of the first three years of employment and one month for each subsequent year. The employee shall be entitled to a gratuity for the fractions of the year pro rata the period of service”.

Considering the above text of Article 116, the entitlement to receive a leaving indemnity only arises upon cessation of the employment relationship  (for any reason) and not at any point in time prior to that and limited to those employees who are excluded from the scope of application of the Social Insurance Law (Decree Law No. 24 of 1976) as has been repeatedly confirmed by the Bahraini Court of Cassation in its rulings and more recently in Challenge No. 623 J.Y. 2008 wherein the Court held:

“It is established by this Court that while in principle, the entitlement to leaving indemnity only arises at the end of the employee’s employment, there is nothing in the law that prevents the employer from agreeing with the employee to pay it in any manner including advancing part of it subject to the balance being satisfied on completion of the employee’s services without prejudicing his legal established rights”.

It is therefore established in Bahraini jurisprudence that although the text of Article 116 of the Labour Law does not explicitly accommodate the concept of interim leaving indemnity payments, such interim payments may still nevertheless be made by employers to employees given that such payments are not prohibited under Bahraini law.

The End-of-Service Indemnity Wage

Unlike the Labour Law, the old labour law (Decree Law No. 23 of 1976) did not describe the components of the employee’s wage which will be considered for the purpose of calculating an employee’s entitlement to the leaving indemnity.  Under the old law, end-of-service indemnity was payable on the gross salary, which included all the employees’ monthly allowances, in addition to their basic pay.

The Labour Law, however, provides that an employee’s entitlements in relation to the calculation of his leaving indemnity payment are to be calculated only on the basis of the employee’s most recent basic wage, in addition to any social allowance paid to the employee. It provides in      Article 47 that:

“The employee’s rights related to the end of service indemnity and the compensation for the annual leaves balance specified in Article 59 as well as the compensation due in accordance with the provisions of Article 99 paragraph (b) and Article 111 of this Law, shall be calculated on the basis of the last basic wage of the employee in addition to the social allowance if any …”.

Notwithstanding Article 47 limiting the components of the employee’s wage to be considered for the purposes of calculating the end-of-service indemnity to the last basic wage and social allowance (if any), Bahraini courts recognise that such indemnity may extend to include other components of an employee’s wage as a result of any agreement or custom that has emerged as has been confirmed by the Bahraini Court of Cassation in its decision in Challenges No. 97 and 170 J.Y. 2002 wherein it was stated that:

“The employer’s obligation to pay the end-of-service remuneration stipulated in Article 111 of the Labor Law for employees subject to the provisions of the Social Insurance Law is an obligation relating to public order, and as such, it is not permissible to agree any reduction thereto except as provided in the law. If it is established that an agreement was concluded to increase the end-of-service indemnity in value beyond that which is legally stipulated, such agreement is valid and has legal effect pursuant to paragraph (1) of Article 153 of the Labour Law”.

I do note that this judgment is rendered under the abolished labour law of 1976, but the principle captured by this judgment survives and remains unchanged under the Labour Law. It follows that where an agreement is in place or a custom has developed over a period of time within an establishment of paying the end-of-service indemnity based on other wage components – i.e., not only the basis of the employee’s basic wage and social allowance – such agreement will be upheld by the courts in Bahrain and the end-of-service indemnity will be calculated in accordance with the said agreement or the custom in place.

Bahraini Jurisprudence

The decision of the Bahraini Court of Cassation in Challenge No. 623 J.Y. 2008 referred to earlier in this article leaves the door wide open for the practice of making interim end-of-service indemnity before the cessation of employment to continue but made such practice conditional upon such interim payment not resulting in a reduction in the employee’s total end-of-service indemnity entitlement prescribed in the Labour Law in respect of the employee’s entire period of employment with the employer. This has also been confirmed by the Bahraini Court of Cassation in an earlier Challenge which fell for the Court’s consideration, namely Challenge No. 20 J.Y. 2000 wherein the Court stated that:

“Whereas the end-of-service indemnity is an independent right of a special nature, the legislator regulated the entitlement and quantum thereof compulsorily as a matter of public order. Whereas the employer is required, pursuant to Article 111 and 112 of the Labour Law, to pay this gratuity to the employee or his legal heirs at the cessation of the employment relationship if he is not amongst the categories benefiting from the provisions of the Social Insurance Law in the amount and on the terms established therein, then it is not permissible to agree to reduce it [end-of-service indemnity] or substitute with another system which does not secure receipt by the employee or his legal heirs of the indemnity in its prescribed quantum”.

Pursuant to Article 116 of the Labour Law the end-of-service indemnity is calculated at the rate of half month’s wage for each of the first three years of employment and one month’s wage for each of the following years in service. The issue that arises with interim indemnity payments and which requires careful consideration is that interim indemnity payments to employees may not necessarily be paid based on the last basic wage and social allowance paid to the employee. In other words, the end-of-service indemnity payment to an employee will require to be adjusted to account for any shortfall not paid to the employee in any preceding interim indemnity payment in order to ensure compliance by the employer with the provisions of Article 116 of the Labour Law which remains a matter of public order. The requirement to make such an adjustment has also been advocated by the Bahraini Court of Cassation in its ruling in Challenge No. 20 J.Y. 2000 referred to earlier in this article.

End-of-Service Indemnity Adjustment

We have established earlier in this article that an adjustment must be made to account for any difference between the basic wage and social allowance at the time of making any interim indemnity payment and the last basic wage and social allowance at the time of expiry of the contract of employment or the earlier termination thereof, as the case may be. How is this adjustment made?

The adjustment which an employer must make when calculating the end-of-service indemnity to take account of any difference in the basic wage and social allowance amounts may be illustrated in the following example:

Scenario 1

James’ contract of employment with ABC Co. has expired having served the company for 6 years. His monthly wage (including social allowance) at the expiry of his employment contract was BD1,000. Earlier during his employment with ABC Co., James requested ABC Co. to advance to him an interim indemnity payment at the end of year 4 of his employment. His monthly wage (including social allowance) at the time of advancing the interim indemnity payment to him was BD800.

Considering the difference between James’ monthly wage in years 0-4 to that which he was entitled to at the expiry of his employment with ABC Co at the end of year 6, an adjustment must be made when making the end-of-service indemnity payment at the end of year 6 to account for such difference to ensure that the end-of-service indemnity payment complies with the requirements of Article 116 of the Labour Law which may not be deviated from as a matter of public order. The adjustment will need to be carried out as follows:

Interim indemnity payment (years 0-4)

Leaving indemnity years 0-3 (BD 400 x 3)               =  BD 1,200

Leaving Indemnity year 4                                           =  BD   800

________

Total interim indemnity payment (years 0-4)        =  BD 2,000

Adjusted end-of-service indemnity payment (years 5-6)

Leaving indemnity years 5-6 (BD 1000 x 2)             =  BD 2,000

Adjustment for years 0-4

–  years 0-3 adjustment (BD 100 x 3)                   =  BD     300

–  year 4 adjustment (BD 200)                             =  BD     200

________

Total adjusted end-of-service indemnity               =  BD 2,500

The above Scenario 1 considers the situation where there is a difference between the employee’s wage at the time of making any interim indemnity payment to him/her and that to which he/she is entitled at the cessation of his/her employment. It goes without saying, no such adjustment will be required to be made by the employer where no such difference exists.

Article 118 of the Labour Law

The earlier considerations and opinions expressed in this article assumed that the employee was employed by the employer continuously with no interruptions to the employment period. Nevertheless, it is not uncommon for employers in Bahrain to terminate their employees’ employment and re-hire them under new contracts of employment with the aim of controlling the accrual of their employment entitlements including that of the end-of-service indemnity and compensation, a practice which was very common in the years preceding the coming into force of the Labour Law.

Bahrain courts, when considering such common practices prior to the enactment of the Labour Law, were faced with the task of determining whether the said termination of employment was a genuine one, or superfluous aimed at circumventing the provisions of the labour laws aimed at protecting the rights and entitlements of employees. The approach adopted by the Bahraini courts can be seen in the decision of the Bahraini Court of Cassation in Challenge No. 121 of 1998. In the said Challenge, the appellee company argued that each of the appellants’ contracts of employment was for a fixed term with a time gap separating each contract from the one following it in the case of each appellant. In upholding the appellants’ Challenge the Court of Cassation stated:

“Whereas it is evident – from the appellants’ contracts of employment, the entitlements transfer forms and the actual periods of employment spent by them as confirmed by the expert in his report to the Court – that the employment relationship continued uninterrupted with the appellee until its expiry, and that the interruptions were merely leaves given to them, as such, that does not lead to the cessation of the employment relationship. Accordingly, the appellants’ employment entitlements towards end-of-service indemnity and annual leave should have been calculated considering it as one continuous period of employment. Whereas the Challenged judgment deviated from the above in considering the said leaves as interruptions to the employment period, it erred in applying the law and should be set aside”.

With this background in mind, the reasons which prompted the legislator to include Article 118 in the Labour Law become more understandable. In its attempt to deter such practices, it introduced certain parameters which must be observed in order for a subsequent period of employment with the same employer not to be considered a continuation of the earlier period stipulating that:

“It shall be deemed one integral contract, any contract concluded by the employer with the same employee if there is no time difference between the end of the old contract and the beginning of the new contract, or if this difference is less than 30 days. If the new contract includes better benefits or conditions, they shall be deemed an amendment to the previous employment contract”.

Considering the entitlement to end-of-service indemnity in light of Article 118 of the Labour Law, we are of the view that this Article has left the door wide open for employers to control the accrual of employment entitlements by concluding successive contracts of employment with the employee while leaving a gap of at least thirty days between each contract and the one that followed it.

Article 118 in Practice  

Employers who are keen to retain their key employees but who are alco conscious of the fact that the longer their period of employment is the greater their end of service entitlements will be, may resort to entering into successive contracts of employment with their employees with several advantages gained from such approach, including:

• Reduction of end-of-service indemnity resulting from the restart of the count of years and the entitlement being reduced to half the wages for the first three years of employment.
• Reducing the period of employment which in-turn will reduce the entitlement to compensation for unjust termination of the employment contract provided for under Article 111(b) of the Labour Law in the case of contracts of employment concluded for an indefinite term.
• Preventing successive definite term contracts of employment that are entered into with the same employee from converting to indefinite term contracts of employment if the collective period of employment under the contracts exceeds five years as provided for under Article 98(2) of the Labour Law.

For the purposes of this article, we will limit our consideration of the impact Article 118 has on the computation of the end-of-service indemnity entitlement. To do so, we will consider the same facts given in Scenario 1 above, with a slight change as can be seen in Scenario 2 below.

Scenario 2 

James’ contract of employment with ABC Co. has expired having served the company for 2 years. His monthly wage (including social allowance) at the expiry of his employment contract was BD1,000. Under an earlier contract which expired 30 days prior to concluding the current expired contract and which lasted for 4 years, James received from ABC Co. his end-of-service indemnity in full. His monthly wage (including social allowance) at that time was BD800.

Unlike Scenario 1, the period of employment in Scenario 2 is not a continuous one and also appears to be in compliance with the requirements of Article 118 of the Labour Law rendering James’ subsequent contract of employment not a continuation of the earlier contract. Let us now consider how this impacts James’ end-of-service indemnity entitlement.

End-of-service indemnity entitlement – first contract

Leaving indemnity years 0-3 (BD 400 x 3)               =  BD 1,200

Leaving Indemnity year 4                                           =  BD   800

________

End-of-service indemnity entitlement                    =  BD 2,000

End-of-service indemnity entitlement – second contract

Leaving indemnity years 1-2 (BD 500 x 2)               =  BD 1,000

________

End-of-service indemnity entitlement                    =  BD 1,000

Scenario 2 clearly demonstrates the impact which Article 118 can have on the end-of-service indemnity entitlement. While James was entitled to receive a total indemnity amount of BD4,500 in Scenario 1, his entitlement was reduced significantly in Scenario 2 down to BD3,000. With the saving which may be made by employers under Scenario 2, it is not surprising to see more and more employers opting to take this route given also the other benefits highlighted earlier in this article.

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