His Highness Sheikh Mohammed bin Rashid Al Maktoum, Vice President and Prime Minister of the United Arab Emirates and Ruler of Dubai, has enacted legislative changes in the Dubai International Financial Centre (DIFC) which implements the DIFC Employee Workplace Savings Scheme (DEWS Scheme), which in turn replaces end of service gratuity (EOSG) – a lump sum payment payable to employees upon termination of employment.
The changes brought about by the new legislation (Employment Law Amendment Law, DIFC Law No. 4 of 2020) will come into force on 1 February 2020 (which accords with the previously announced delay that we considered here), amending certain provisions of Employment Law DIFC Law No. 2 of 2019 which we previously considered here. The DIFC Authority has also issued related Employment Regulations (which detail the DEWS Scheme requirements).
Summary of headline points
Two-month grace period for DIFC employers
Although retrospective payments will be necessary to ensure coverage is in place from 1 February 2020, employers have until 31 March 2020 to register their employees in a "Qualifying Scheme".
What is a Qualifying Scheme?
Either the provided DEWS Scheme itself, or another savings scheme that meets certain criteria, including being granted a certificate of compliance by the DIFC Authority. The DIFC Authority has issued a form for employers applying for a certificate of compliance.
Minimum employer contributions to the DEWS Scheme
In line with previous announcements, the minimum contribution is 5.83% of basic salary for employees with less than five years of employment service. This increases to 8.33% for employees with at least five years of service. These percentages effectively mirror the same accrual rates under the existing EOSG regime.
Status of accrued EOSG
The value of accrued EOSG may either be:
- paid out at termination via the normal method (i.e. benefits earned under the existing formula are frozen, but will be calculated and paid out at the end of service based on the employee's final basic salary at that time); or
- transferred by the employer to a Qualifying Scheme. It is only if the employee has consented in writing to this transfer that the employer will be relieved of its obligations to make up any shortfall in regard to the value of any benefits earned, as against the value of the EOSG payment that the employee would have received at termination had the accrued EOSG not been transferred.
Status of EOSG for employees with less than one year of service
Under the draft proposals, there was a concern that employees with less than a year of service prior to implementation of the DEWS Scheme would not have accrued the minimum one year of service that is required for entitlement to EOSG and would, therefore, have no entitlements until the DEWS Scheme was implemented. This has been rectified so that such employees will be paid their EOSG entitlement on a pro rata basis, so long as they eventually accrue at least one year of service.
Penalties for non-compliance
Individual fines of up to US$2,000 per contravention in respect of each employee may be imposed by the DIFC Authority for failure to comply with the DEWS Scheme.
Who is exempt?
The following categories of employees are generally exempt from the requirements of the DEWS Scheme:
- employees on probation – payment can be deferred and then retrospectively contributed if the employee passes their probation;
- employees who are owners or who share an interest in their DIFC employer (e.g. equity partners);
- UAE and GCC nationals who otherwise have a government pension scheme;
- fixed-term employees whose contract will end on or before 1 May 2020;
- employees working a notice period prior to 1 February 2020;
- employees seconded to work in the DIFC;
- employees employed by a local or federal government entity established by decree (or similar instrument) in the UAE, except for those established pursuant to the DIFC Founding Law; and
- employees whose employers are obliged by non-UAE statute to make a pension/retirement contribution for those employees in a non-UAE country.
Action plan for employers
Given the short grace period of two months from 1 February 2020, employers will need to consider the implications for their businesses, especially given the fines for non-compliance. In particular, employers may wish to consider the following:
- whether changes to employment contracts and employee handbooks are needed;
- whether they wish to opt out of the DEWS Scheme and seek a certificate of compliance;
- whether to engage with employees and seek consent to contribute accrued EOSG to the DEWS Scheme;
- the implications for payroll systems; and
- whether to prepare communications for employees who may wish to obtain investment/financial advice.
How Dentons can help your DIFC business
Our UAE-based employment and labour team has an in-depth understanding of local issues and is regularly instructed by local and international clients doing business in the DIFC. We have a diverse practice giving focused, experienced advice and assistance on contentious, non-contentious and advisory employment work.
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