Finance

Guide on Cutting Payroll for Cash Flow

Everyone expects pay raises regularly; however, people never imagine their pay going down. Pay reductions, unfortunately, do happen. More often than not, it is legal for UAE businesses and employers to reduce the pay of employees, but sometimes it is not.

How to cut payroll in UAE for cash flow

Economic and business conditions are the external factors which pose risk to the profitability and solvency of organizations. When looking for ways in improving the cash flow, a lot of employers consider reductions in wages as the solution to imminent problems. But, cutting employee wages can easily backfire unless it is done with a strategic plan.

Step 1: Review the benefits and compensation structure of the organization.

Obtain updated information on wages and salaries. Compare the budget for salaries and wages to the organization’s overall cost for maintaining operations and projected sales. This is to ensure there isn’t any other alternative but to cut company payroll.

Step 2: Consider the options.

Cutting payroll in UAE is a sure-fire way in cutting operating costs of businesses; however, it is almost traumatic not only for employees but employers as well. These are the options you need to consider:

  • Declare a four/three-day work week – transition to four or three days from five will generate immediate payroll deduction of up to forty percent. Unlike lay-offs, this affects employees equally. It is certainly more palatable for majority of businesses in UAE.
  • Outsource payroll processing – a company’s payroll department can be a huge expense to maintain. Payroll outsourcing in UAE will not only cut down a company’s operating costs, it’ll also help ensure all payroll-related compliance obligations are still addressed.
  • Enact furloughs – try asking your employees to take unpaid leave for a number of days or weeks, but make sure this is done under rotation.
  • Make the full-timers part-time employees – in doing so, you will not just reduce the wages, you will also save on vacation time and fringe benefits. Fringe benefits are reduced only when staff work less hours Remember that you will still be obligated in honoring vacation earned that’s from previous full-time employment.
  • Suspend the bonuses – suspend bonuses to generate huge cost savings. For you to remain fair to the employees, announce the suspensions prior to the bonus period.

Obviously, these are going to rough on employees.  With unemployment in UAE rising, majority of the workers will agree that having little is still better than nothing.

Step 3: Make the cut.

As soon as you’ve finalized the emergency action your business will take, determine the tipping point to set the plan in motion. It Is completely up to you in determining the threshold for your business. Every business in UAE has its critical initiation point for enacting an emergency action plan. Items you may want to consider include cash level, inventory level, number of bids, aging outstanding bids, and the backlog in dirhams or hours.


The point is whenever you develop a measurable and objective point of action, you’re effectively removing the emotional upheaval with the process.

How can an employer minimize damage from payroll cuts in UAE?

Whatever form of wages or payroll reductions you choose to make, know that the employees will most certainly be traumatized. It will be up to you in setting the tone. Your best approach is one that’s both upbeat and positive, but also truthful regarding the issues that are faced by the company at present.

When you announce the cutbacks, take a look at each one of the staff members in the eye. Remember to be real and be frank as well. Appeal to a person’s sense of reason. Then, validate what they’re feeling and remind each of the employees of a greater economic picture. You can say, “We know you are all disappointed. We are disappointed as well. However, people who are in the country’s unemployment line suffer greater hardship in comparison to us.”

Leadership begins at the very top. As you ask employees in making financial sacrifices, you also have to make these sacrifices, too. The employees need to see that you’re sharing their pain.

When is a payroll reduction in UAE illegal?

The following situations are illegal pay cuts:

  • When the pay cuts are discriminatory. When all the men are getting pay cuts but the women are left out, then that’s illegal.
  • When pay cuts are a response to a protected activity. An example to this is when a senior management role is harassing you sexually and cutting your pay as retaliation for rejecting sexual advances.
  • When there’s no prior notification given regarding a pay cut.

You may want to know more about payroll outsourcing or payroll processing in UAE. Call experts like Payroll Middle East today to talk seasoned payroll experts!

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