When Bahrain moved end of service benefits onto a funded basis in 2024, a lot of employers drew the same conclusion: the liability has left the balance sheet, payroll now handles it, and there is nothing further to think about.
That conclusion is half right, and the half that is wrong is the expensive half.
The reform did move future accruals to the Social Insurance Organization. It did not touch service accrued before it. And the portion left behind is calculated in a way that means it keeps growing, quietly, for as long as the employee stays and their salary rises.
This guide sets out what changed, what did not, and what employers should be doing about the part that stayed.
What changed on 1 March 2024
Under Edict 109 of 2023, effective 1 March 2024, private sector employers in Bahrain became required to pre-fund end of service benefits for their non-Bahraini employees through monthly contributions to the SIO, rather than paying a lump sum at the end of employment.
The mechanics:
- Contributions are paid electronically through the SIO portal.
- They are due by the 15th of each month.
- Late payment is subject to additional assessment.
- At the end of employment, the employee claims the accrued benefit directly from the SIO, not from the employer.
That last point is the genuine administrative relief. For post-reform service, the employer is out of the settlement conversation entirely.
The contribution rates
Two rates, keyed to length of service with that employer:
| Period of employment | Monthly contribution | Equivalent accrual |
|---|---|---|
| First three years | 4.2% of monthly wage | about half a month’s wage per year |
| After three years | 8.4% of monthly wage | about one month’s wage per year |
The rates were set to mirror the accrual pattern of the old gratuity formula, which is why they look like odd percentages. They are simply half a month and one month per year expressed monthly.
The practical consequence for payroll is that the rate steps up automatically on an employee’s third anniversary. If your payroll system is not tracking that date per employee, it will under-contribute, and the shortfall accumulates silently.
What did not change
Here is the part that gets missed.
Service accrued before 1 March 2024 did not transfer to the SIO. It remains a direct obligation of the employer, payable to the employee when they leave, under the previous system.
That legacy entitlement is calculated on the old formula:
- Half a month’s pay for each of the first three years of service, plus
- One month’s pay for each year after that.
And under Article 116 of the Labour Law it is calculated on the employee’s last basic wage, meaning the wage at termination rather than the wage they were earning during the period in question. Basic wage excludes allowances, other than the social allowance.
Why the legacy liability keeps growing
This is the point worth slowing down on, because it is counter-intuitive.
No new service accrues under the old system. The number of years is frozen at whatever the employee had accumulated by 29 February 2024. But the multiplier is the last basic wage, and that keeps moving.
An illustration, using basic wage throughout. Take an employee who joined in January 2020 on a basic wage of BHD 800 per month.
Their pre-reform service runs from January 2020 to the end of February 2024, which is four years and two months:
- First three years at half a month each: 1.5 months
- Remaining one year and two months at one month per year: about 1.17 months
- Total entitlement: about 2.67 months of last basic wage
If their basic wage is BHD 1,200 when they leave, that legacy portion is roughly BHD 3,200.
If they stay several more years and reach a basic wage of BHD 1,500, the same frozen 2.67 months is now worth roughly BHD 4,000.
The service did not change. The liability grew by 25% because the basic wage did.
An employer who calculated this provision once in 2024 and has not revisited it since is under-provided, and the gap widens with every pay review.
What this means for your accounts
Three practical consequences.
The provision needs re-measuring, not just carrying. The legacy end of service provision should be recalculated at each reporting date using current basic wages, not left at its 2024 figure. For businesses preparing IFRS financial statements, this is a measurement question, not a disclosure one.
Most employees have a split entitlement. Any expatriate employee hired before March 2024 and still in post has two pots: an employer-paid portion for pre-reform service and an SIO-paid portion for everything after. Final settlements need to reflect both, from two different payers.
Final settlements are where this surfaces. Leave balances, notice and gratuity are already the most common source of payroll disputes. Adding a split-regime calculation makes them more so, and the employee is entitled to understand which part comes from where.
A separate change that is often confused with this one
On 1 January 2026, employer social insurance contributions in Bahrain rose from 17% to 18%. Under the phased reform they are scheduled to rise by one percentage point a year, reaching 20% by January 2028. The employee deduction remains at 8%, being 7% for pension and 1% for unemployment.
This is a different obligation from the end of service scheme, covering pensions and social insurance rather than gratuity, and it applies on a different basis. The two get conflated in conversation constantly, usually when someone says “our SIO costs went up” without distinguishing which one moved.
Both are administered by the SIO. That is the extent of the connection.
What employers should actually do
Confirm the third-anniversary logic in payroll. Make sure the step from 4.2% to 8.4% triggers on the correct date for every expatriate employee, and check historically that it did.
Re-measure the legacy provision at current basic wages. If it has not been touched since 2024, it is understated. Do this at year end at minimum, and before any significant pay review round.
Reconcile SIO contributions to payroll. Contributions paid should agree to wages processed, employee by employee. Gaps here are usually joiners and leavers processed late.
Document the split for each pre-2024 employee. Frozen service months, and the date the SIO record starts. Doing this once, calmly, is much cheaper than reconstructing it during a resignation.
A note on scope
This guide describes the position for non-Bahraini private sector employees, who are the population the 2024 scheme addresses. Bahraini and GCC nationals fall under the social insurance scheme rather than this end of service arrangement, and their treatment differs. Rates, thresholds and administrative requirements are set by the SIO and have been changing in phases, so the current position should be confirmed against SIO guidance before a payroll or provisioning decision is made.
SRR runs outsourced payroll in Bahrain, including WPS processing, SIO submissions and end of service administration, and prepares the supporting calculations for IFRS financial statements. If you are unsure whether your legacy provision is current, that is usually a short piece of work with a clear answer at the end of it.