The Dubai International Financial Centre Authority ("DIFCA") is phasing out the existing end of service gratuity regime and replacing it with a defined contribution savings plan, aligning the DIFC's employment jurisdiction with international best practice and standards. In order to implement this new regime, the DIFCA has enacted the DIFC Employment Law Amendment, amending certain provisions of DIFC Law No. 2 of 2019 (the "DIFC Employment Law"), and has issued the employment regulations, which will come into force on February 1, 2020 (the "Regulations").
Need for Change
Under DIFC law, there is no requirement for DIFC employers to ring-fence or fund statutory end of service gratuity ("EOSG") liabilities. It is common knowledge that the majority of employers pay EOSG from the working capital of the business, as and when employees leave the business.
This current practice undoubtedly poses various risks for employees, which include the non/late/partial payment of EOSG, particularly where there is a dispute on termination, or a business experiences unexpected financial difficulties, which results in the inability to settle EOSG liabilities in accordance with DIFC law. These risks have undoubtedly forced the DIFCA to introduce measures intended to police and find practical solutions to protect EOSG payments for DIFC employees.
As such, the introduction of DEWS is a progressive change aimed at reducing the risks of the EOSG scheme and increasing the DIFC's ability to attract and retain top international talent, while simultaneously bringing the DIFC in line with global and best practice standards.
- EOSG will cease to accrue from February 1, 2020.
- All DIFC employers may commence the enrolment of staff into a qualifying scheme as of February 1, 2020 (the "Qualifying Scheme Commencement Date").
- Employers have a two-month grace period (i.e. prior to April 1, 2020) to register employees into a qualifying scheme, however all monthly payments will need to be back-dated even if employers avail of the two month grace period.
- DIFC employers are obliged to make the following minimum contributions into a qualifying scheme:
- 5.83 per cent of basic salary each month, if the employee has worked for less than five years; and
- 8.33 per cent of basic salary each month for each additional year of service.
End of Service Gratuity
The current entitlement to EOSG upon termination is available to all employees in the DIFC who, before or after the Qualifying Scheme Commencement Date, complete continuous employment of one year or more. In instances where an employee completes a year of continuous service for their employer after the Qualifying Scheme Commencement Date, their EOSG payment will be prorated against their tenure of service completed from the employment commencement date up to the Qualifying Scheme Commencement Date.
The EOSG payment may either be held by the employer until termination of the employee's employment, and in such cases must be paid within 14 days following termination or may be paid into a qualifying scheme with or without the employee's consent. In the event that the EOSG payment is transferred into a qualifying scheme with the employee's consent, whether the investment is profitable or not, the risk falls on the employee and there is no further liability placed on the employer. However, if the EOSG payment is transferred into a qualifying scheme without the employee's consent, the employer will be liable to top up the difference.
A Qualifying Scheme
A qualifying scheme is a money purchase scheme which earns returns made by assets. In order to be deemed a valid qualifying scheme, such scheme must:
- hold a valid certificate of compliance issued by the DIFCA;
- have a provision for an employer to make monthly contributions;
- have a provision that will allow the employee or beneficiaries to withdraw returns; and
- have an operator and administrator regulated by the DFSA or regulated by an alternative recognised jurisdiction.
Qualifying schemes include DEWS, Alternative Qualifying Schemes ("AQS"), or pensions, retirement plans or saving schemes in other jurisdictions which an employer contributes to and which are approved by the DIFCA.
All current and eligible DIFC employees must be enrolled into a qualifying scheme within two months of the Qualifying Scheme Commencement Date. Therefore, employers must ensure that such employees are registered prior to April 1, 2020. Irrespective of the date of enrolment, employers remain liable to make contributions on behalf of such employees for each month from the Qualifying Scheme Commencement Date.
Although all contributions into a qualifying scheme must be made by the employer, the employee will have full control of their investment choices and will have the ability to save an additional amount by making voluntary contributions into their fund. However, an employee's contributions cannot be greater than the employee's overall monthly salary due to compliance requirements.
An employer is allowed to withhold contributions made on behalf of new employees for the duration of their probationary period. Upon successful completion of the probationary period, contributions must be back-dated to the commencement date of the employee's employment. Similarly, those employees who are serving their notice period as of February 1, 2020 will not be required to be registered with DEWS; however, their end of service gratuity will continue to accrue up until their termination date.
Employees cannot waive their right to receive monthly contributions from their employers into the qualifying scheme. Employers who fail to comply with making their mandatory payments are subject to a fine of USD2,000 (per breach per employee), trade licence suspension by DIFCA, and run the risk of employees filing a civil claim against them.
In the event an employee is terminated partway through a month, the employer must make pro-rated contributions into the qualifying scheme.
DEWS will allow employees enrolled in the plan to choose how their contributions are invested, which will largely be dependent on the employee's risk appetite.
All contributions made into DEWS may be calculated in AED but will always be paid into DEWS in USD at a rate of USD1 to AED3.675. This is primarily because all investment funds chosen under DEWS are USD denominated. There will be eight profile investment options for employees to choose from, three of which will be Shari'ah compliant.
Upon termination, an employee can either cash out their investment, or leave it invested in the qualifying scheme. If the employee subsequently starts employment with another DIFC employer, the new employer and the employee may be able to make contributions into the employee's existing scheme; however, if the employee leaves the DIFC, they will not be able to make any further contributions into the qualifying scheme. Moreover, it should be noted that an employee who joined prior to the Qualifying Scheme Commencement Date will be entitled to both an end of service gratuity for the service completed up to the Qualifying Scheme Commencement Date, as well as contributions into their qualifying scheme.
An Alternative Qualifying Scheme (AQS)
The Regulations provide employers with the option to opt-out of the DEWS scheme and seek an AQS. An AQS will require DIFCA board approval. In order to be deemed an AQS, the scheme provider will need to provide the following components:
- supervisory function;
- regulated (either the DFSA, or a regulator approved by the DFSA);
- operator function;
- administrative function;
- investment advisory function; and
- investment platform.
Once these requirements are satisfied by the DIFCA, the DIFCA will issue a certificate of compliance. Subsequently, the DIFCA will annually open a window, during the period of December 3, 2020 – January 31, 2021 (and each subsequent year), for DIFC employers to submit their request for a certificate of compliance.
An AQS may be either a:
- Employee Money Purchase scheme in a common law jurisdiction; or
- Employee benefit plan (retirement plans, e.g. 401k).
The DIFCA have confirmed that the following parties will be exempt from a qualifying scheme:
- an individual registered with the General Pension and Social Security Authority ("GPSSA");
- an individual working within the DIFC holding a valid secondment card;
- an individual serving their notice as of the Qualifying Scheme Commencement Date;
- an individual employed under a fixed term contract that will end on or before the April 30, 2020;
- an individual employed in the DIFC by a local or federal government entity established by decree;
- an individual who serves as an equity partner, thereby receiving returns from a partnership, equity, capital account or profit distributions, or dividends from their employer; and
- an individual who is exempted by the President of the DIFC from being subject to the DIFC Employment Law.
An employer may also be able to gain an exemption where it can demonstrate, and the DIFCA is satisfied, that:
- the employer is under a statutory obligation in another country to pay pensions, retirement, savings or make a similar contribution for an employee; or
- with the consent of the employee, makes a contribution into an alternative scheme that meets the requirements set out in the Regulations.
The introduction of a defined contributions scheme paves the way for the future of termination liability for employers within the DIFC and possibly the UAE. As you begin to prepare for the transition to DEWS, the DWF (Middle East) LLP's employment team have devised a "5 Step Plan" for employers to consider:
- decide whether the company will enter into DEWS or considering a qualifying alternative scheme;
- review employment contracts and staff handbooks to reflect legislative changes;
- draft DEWS policy, notification letters (such as salary deduction) and consent forms;
- host consultation meetings with all employees to explain relevant changes to employees; and
- decide on a corporate approach on whether to transfer or fund the EOSG or maintain it in the company account as an accrual to pay out as employees exit the company from time to time.