Replacement of End of Service Gratuity in the DIFC

From 1 February 2020, the statutory end of service gratuity (EOSG) regime for expatriate workers will be replaced in the DIFC. The DIFC Employment Law No. 2 of 2019 has been amended pursuant to the Employment Law Amendment Law, DIFC Law No. 4 of 2020 and the Employment Regulations 2020 (the Amendment Law) to require employers to make contributions into the DIFC Employee Workplace Savings Plan (DEWS) or that of an alternative qualifying scheme (AQS) (DEWS and AQS together constituting, a Qualifying Scheme). Going forward, this will reduce the risks for employees associated with DIFC employers failing to take account of EOSG liability on their balance sheets and will provide protection against the consequences of insolvency of employing entities.

This article provides an update to our earlier articles with respect to DEWS from 6 November and 10 December 2019 which you can find here.

Key Features

We set out below the key features of the Amendment Law and the resulting changes it will bring about:

• From 1 February 2020, DIFC employers will be required to contribute into a Qualifying Scheme on a monthly basis for all eligible employees at a rate of 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.
• Once funds are paid into a Qualifying Scheme, the sum is then ring-fenced and is no longer a liability of the employer (this protects against employer insolvency).
• Employees will be able to make personal contributions into a Qualifying Scheme in addition to the employer’s statutory contribution rate. However, employee contributions must be transmitted via their employer (such as salary, commission or bonus payments). Employee requests to the employer must be in writing (there is a standard template request form for DEWS available here).
• Employers may transfer accrued EOSG into a Qualifying Scheme with or without employee consent (see further discussion below). For employers who allow a transfer of accrued EOSG with employee written consent into DEWS, an employee consent form as been produced which is available here.
• Employees will be entitled to withdraw accrued savings from a Qualifying Scheme on termination of their employment (however, see discussion on Employee Top-up or DEWS Booster below). Employees may also decide to 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).
• If employers fail to comply with the requirements of the Amendment Law then they may be liable to a fine of USD 2,000 with respect to each employee for whom there has been such a failure.

Key Dates

• 31 January 2020: Accrual of EOSG ceases
• 1 February 2020: Obligation on employers to make contributions into a Qualifying Scheme begins
• 31 March 2020: Deadline for registration of employees into a Qualifying Scheme
• 21 April 2020: Deadline for employers to make first payment into a Qualifying Scheme (covering February and March contributions)

Accrued EOSG

A primary decision for employers will relate to the treatment of accrued EOSG up to 31 January 2020. There are three options open to employers:

Option 1: The default position is that EOSG will accrue up to 31 January 2020 but will only be payable on termination of employment and will be based on the employee’s final salary. This option will require an employer to adjust the EOSG at termination for salary increases notwithstanding that the EOSG stopped accruing on 31 January 2020. EOSG will remain the employer’s liability and therefore the potential risk to employees associated with employer insolvency remain;

Option 2: The employer may decide to transfer the EOSG which has accrued up to 31 January 2020 into a Qualifying Scheme. With this option, provided the employee agrees in writing, the employer’s obligations to their employees in respect of EOSG accrued up to 31 January 2020 will be extinguished in full; and

Option 3: The employer can also transfer the EOSG accrued up to 31 January 2020 into a Qualifying Scheme but without employee consent. With option 3, the risk of the investment stays with the employer. 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 had it not been so contributed.

The transfers of EOSG into a Qualifying Scheme with respect to Option 2 or 3 can take place at any point following the 1 February 2020 provided that the employee’s salary at the date of the transfer is used for the calculation.

Exempted Employees

The Amendment Law confirms the list of persons who work in the DIFC but for whom employers are not required to register for a Qualifying Scheme:

• Employees who are registered with GPSSA (the General Pension & Social Security Authority). This exemption applies to all UAE and GCC nationals and is in line with the previous exemption of such employees from EOSG
• Employees who are working in or from the DIFC on the basis of a qualifying secondment. This applies to employees who are issued with a DIFC Authority (DIFCA) secondment card which is granted by the DIFCA on a temporary basis for up to 12 months (unless a longer period is exceptionally approved by the DIFCA)
• Employees serving their notice period as at 1 February 2020. An employee serving their notice period will instead continue to accrue EOSG until their termination date
• Employees on fixed term employment contracts ending within three months of 1 February 2020
• Equity partners of a DIFC employer. This includes people who own a partnership interest, membership interest or shares provided they make drawings, take dividends or profits from the employer
• Employees who for work for a local or federal UAE government entity
• Employees of an employer who has been specifically exempted from being subject to DIFC Employment Law

It should be noted that any employee, even an employee who is otherwise exempt, who wishes to contribute any part of their remuneration into a Qualifying Scheme can inform their employer in writing of their wish and the employer is then permitted to deduct the agreed amount from the employee’s remuneration to pay into the Qualifying Scheme on behalf of the employee. It is not mandatory for an employer to offer this to otherwise exempt employees. However, provided an employer is already registered with a Qualifying Scheme we see this as something most employers will offer so as not to disadvantage exempt employees.

As set out in more detail below, exempt employees who are permitted to pay into DEWS will be able to request a pay out from DEWS at any point and there is no requirement to wait until their termination of employment.

Employee Top-up or DEWS Booster

As set out above, employees will be able to make personal contributions into a Qualifying Scheme in addition to the employer’s statutory contribution sum. Employees whose employer is registered with DEWS and who choose to top-up or use what is known as the DEWS Booster are able to remove such sums from DEWS at any time and in advance of their termination of employment. Statutory contributions from employers and employee top-up /DEWS Booster contributions will be separated within DEWS. This will enable an employee to choose to remove their contribution before termination and separate it from the employer statutory contribution which must remain in DEWS until the date of termination of employment.

Again, employers may choose not to offer the option of a top-up or DEWS Booster to their employees and can set policies which regulate the number of times that an employee can change their contribution amount or the percentage that is to be contributed by an employee. A number of employers are considering creating such polices in order to regulate the administrative burden on their finance and HR teams in dealing with such employee requests.

The extent to which employee contribution sums can be removed from other Qualifying Schemes will depend on the terms of those schemes.

New Starters and Probation

Following 1 February 2020, new starters must be registered with a Qualifying Scheme within 2 months of commencement of employment although the employer must back pay to the employee’s commencement date once the employee is registered.

However, there is a key exception to this when a new starter is placed on a probation period. An employer may defer the payments into a Qualifying Scheme for an employee on probation until their permanent employment is confirmed. If the employee’s employment is not confirmed then the employer will not be obliged to make any payments into a Qualifying Scheme. Alternatively, if employment is confirmed then the employer will need to retrospectively pay into a Qualifying Scheme from the commencement of employment. However, to the extent that the employer elects to pay into a Qualifying Scheme irrespective of the fact the employee is on probation, then even if the employment is not confirmed, the employee will still be entitled to the sums already within the Qualifying Scheme.

If employers wish to take advantage of this exception for new starters with probation periods and to avoid potential disputes, we would recommend including an express provision for this in the employment contract.

In addition, the Amendment Law confirms that current employees with less than 1 year service as at 1 February 2020 will receive EOSG on a pro rata basis on condition that the employee ultimately completes a full year of employment.

What constitutes a Qualifying Scheme?

In addition to DEWS, a Qualifying Scheme can include an AQS which meets the following key criteria:

• it is an employee money purchase scheme for which the employer has obtained a certificate of compliance from the DIFCA;

• the employer pays into this AQS on a monthly basis at least the minimum amounts (5.83% or 8.33% of basic salary);

• the employee is entitled to withdraw the sums in the AQS following termination of employment;

• the operator and administrator of the AQS are regulated by either the Dubai Financial Services Authority (DFSA) or by a regulator in a Recognised Jurisdiction (to be confirmed). The list of Recognised Jurisdictions has not yet been published by the DIFCA but it is likely to include the Isle of Man, Jersey and Guernsey or other jurisdictions which the DIFCA considers are regulated and supervised to an equivalent level as the DIFC; and

• the operator must also have a supervisory board or satisfy the DIFCA that its oversight function provides similar protections to a supervisory board. The supervisory board’s role must include the power to appoint and remove the operator, have oversight of fees and charges and be constituted to protect the interests of members, have independent oversight and ensure the operator applies high standards of corporate governance.

If a scheme meets either of the following criteria and the employer obtains an exemption from the DIFCA, then it will also be deemed a Qualifying Scheme for the purposes of the Amendment Law:

• the employer is under a statutory duty in another country to make pension, retirement, savings or similar contributions in another country with respect to the employee; or
• with prior written employee consent, the employer is paying defined benefits to an employee under a scheme where the defined benefits are in excess of the core benefits (in excess of employer contribution rates of 5.83% or 8.33% of basic salary) and the operator of the scheme is regulated by the DFSA or a regulator of a Recognised Jurisdiction.

For employers who do not want to join DEWS and instead use a different Qualifying Scheme, a certificate of compliance or exemption must be obtained from the DIFC in advance of 31 March 2020 for the first year. Alternatively, employers who start with DEWS in 2020 may choose to move away from DEWS for subsequent years and must obtain a certificate of compliance for an exemption in advance of 31 January for the relevant year.

Next Steps

There are a number of immediate practical steps that employers should take which includes signing a deed of participation for either DEWS or an AQS. Employers will also need to work with their payroll team to ensure that monthly contributions can be made to a Qualifying Scheme. However, the key decisions that will need to be made quickly by employers will be what to do with accrued EOSG and whether to opt for DEWS or another Qualifying Scheme.

We can advise employers about the implications of these decisions and update employment terms and policies accordingly. In addition, employee education about DEWS or another Qualifying Scheme will also be important in the coming months. This may include preparing communications, internal updates and presentations to employees. Should you require assistance with compliance with these developments, please contact David McDonald.