DIFC DEWS Update – 6 November 2019

The Dubai International Financial Centre Authority (DIFCA) is on the cusp of implementing the first employee savings scheme for expatriates in the Middle East – the DIFC Employee Workplace Savings Scheme (DEWS). From 1 January 2020, DIFC employers will no longer accrue end of service gratuity (EOSG) for their expatriate employees and will instead be required to fund DEWS or an alternative qualifying scheme on a monthly basis. The Consultation Paper, together with the suggested amendments to the DIFC Law No. 2 of 2019 (the Employment Law) (and related documentation) can be found here.

This article outlines two key aspects which we identified in the Consultation Paper that DIFC employers should be aware of.

Please note that these proposed changes do not relate to employees who are registered with the General Pension and Social Security Authority (GCC national employees). In addition, this article does not deal with those employers opting for an alternative qualifying scheme other than DEWS.

We set out below what we consider are some of the main differences between EOSG and DEWS:

• employers will need to contribute into DEWS from 1 January 2020 on a monthly basis. There will no longer be a one year employment threshold for an employee to qualify (as applied to EOSG under the current Employment Law);
• the contribution rates will be either 5.83% or 8.33% of an employee’s basic salary depending on whether the employee has been employed with the employer for less or more than 5 years. These employer contribution rates replicate the EOSG contribution obligations;
• once funds are paid into DEWS, the sum is then ring-fenced and is no longer a liability of the employer;
• employees will be able to make personal contributions into DEWS in addition to the employer’s statutory contribution rate;
• it is proposed that DEWS will initially offer employees five funds with different risk ratings depending on their risk appetite, although the default selection will be low to moderate risk;
• employees will be entitled to withdraw their accrued savings in DEWS only after their employment is terminated. Although this is similar to EOSG termination in that payment of EOSG is made on termination, with DEWS employees may leave their savings in the scheme and withdraw at a later date (including after they have left the DIFC or are no longer a UAE resident); and
• employers will be subject to fines if they fail to comply with the laws and regulations in respect to DEWS (or an alternative qualifying scheme).

Key Considerations for Employers

What to do with accrued EOSG on 1 January 2020?

We believe that one of the primary decisions for DIFC employers to consider in advance of 1 January 2020 is related to the treatment of accrued EOSG. In this regard, employers will be given two primary options:

Option 1: The default position is that EOSG will accrue up to 1 January 2020 but will only be payable on termination of an employee’s employment and will be based on their final salary. This will require an employer to adjust the EOSG notwithstanding that the EOSG stopped accruing on 1 January 2020.

Option 2: Alternatively, employers may decide to transfer the EOSG which has accrued up to 1 January 2020 into DEWS (or an alternative qualifying scheme). With this option, provided the employees agree in writing, the employer’s obligations to their employees in respect of EOSG accrued up to 1 January 2020 will be extinguished in full.

Many DIFC employers have historically failed to set aside funds for EOSG purposes. For such employers it would likely be preferable to select option 1 to avoid potential large liability on 1 January 2020 which could affect cash flow.

Whereas option 2 is likely more attractive for employers that have made provisions for EOSG or have the available cash. Employers selecting option 2 will be able to transfer and remove the EOSG liability from their balance sheet and avoid any subsequent adjustments due to salary changes. However, it is important that employers selecting option 2 seek and obtain each employee’s written consent.

If written consent is not obtained, our understanding based on the Consultation Paper is that employers will be obligated to compensate employees in the event the DEWS payment on termination with respect to the EOSG amount contributed is equal to less than the EOSG amount which the employee would have otherwise been entitled to (as adjusted to account for salary changes) had it not been so contributed. The proposed amendments do not provide guidance on instances where employees withhold written consent.

How to treat employees who have been employed for less than one year on 1 January 2020?

Under the current Employment Law, expatriate employees only become eligible for EOSG after one year of continuous employment. However, when an employee crosses this threshold, the employee is entitled to EOSG on termination which is then taken to have accrued throughout that first year of employment.

As it stands, the suggested amendment to the Employment Law in the Consultation Paper does not provide guidance on employees that have not completed one year of continuous employment prior to 1 January 2020. As currently proposed, these employees will not be entitled to any EOSG even if they remain employed continuously after 1 January 2020 and past their one-year anniversary. In contrast, under the current Employment Law, employees are entitled to 21 days of basic salary in relation to EOSG upon completing their first year of continuous employment.

These proposed changes could still be seen as being unfair to employees that commenced their employment after 2 January 2019 and will, therefore, lose any entitlement to EOSG. Whereas an employee who commenced employment just a few days earlier on 31 December 2018 will have accrued a full year of EOSG on 1 January 2020 and will be entitled to receive this accrued EOSG on termination.

We expect this proposed amendment to be under heavy scrutiny through the consultation due to the potential unfairness to employees who have been employed for less than one year on 1 January 2020. However, it should be noted that the Employment Law only ever sets minimum standards. On this basis an employer could always compensate employees to deal with any perceived unfairness caused by the proposed changes to the Employment Law.

Next Steps

Although the consultation is ongoing, the key aspects of DEWS are likely to remain the same. Finance, legal and human resource departments should take steps to consider the likely changes. We have not discussed alternative qualifying schemes in this article, however, DIFC employers will also need to decide whether they opt for DEWS or an alternative qualifying scheme (once the regulations for an alternative qualifying scheme are clear).

More generally, employers should take this opportunity to review and perhaps update their employment contract templates and also their employee handbooks or policies in advance of 1 January 2020.

Please note that the DIFCA are holding several town hall meetings in November and December as part of the consultation process before amending the current Employment Law.

We would welcome any comments or feedback that you would like us to raise to the DIFCA – please submit any comments you may have to David McDonald by 13 November. If you would like to provide feedback directly to the DIFCA the deadline is 18 November. The consultation paper and proposed amendments may be found here.

For further enquiries, please feel free to contact James Coleman or David McDonald.