On 14 January 2020, the DIFC published Employment Regulations and amendments to DIFC Law No. 2 of 2019 (the “DIFC Employment Law”) introducing a new defined contributions saving scheme to replace end of service gratuity in the DIFC as of 1 February 2020.
The changes means that employers will no longer have to plan for large end of service gratuity amounts being payable to employees on termination. It will also be welcomed by employers that they can apply for approval to contribute to a qualifying scheme instead of the DIFC Employee Workplace Savings Scheme (DEWS).
Employers need to act now to ensure that they meet the deadline for registration, consider how they will deal with gratuity already accrued and the contractual changes needed. Currently employers are not under an obligation to account for future end of service gratuity liabilities and, as such, employees may face uncertainty with regard to their accrued amount, particularly if an employer faces financial difficulty.
Currently, end of service gratuity is payable to employees on termination of employment (including where an employee is terminated ‘for cause’, as per the changes made to the DIFC Employment Law in 2019). From 1 February 2020, end of service gratuity will be replaced with a defined contribution savings scheme, whereby all DIFC employers will be required to make mandatory monthly contributions into a “Qualifying Scheme” for each eligible employee.
Following a tender process in 2019, the DIFC has established a framework plan, the DIFC Employee Workplace Savings Scheme (DEWS), with Equiom acting as Master Trustee, Zurich as Administrator and Mercer having oversight of asset management. However, if an employer wishes to choose a scheme other than DEWS, it may apply to the DIFC Authority (DIFCA) for a Certificate of Compliance approving another scheme as a Qualifying Scheme.
When determining the minimum monthly contribution which DIFC employers will be required to make for each employee, the DIFC has sought to mirror the minimum accrual rates under the existing end of service gratuity regime as summarised below:
- for each of the employee’s first five (5) years of continuous employment – 5.83% of monthly basic1 wage per month; and
- for each of the employee’s additional years of continuous employment – 8.33% of monthly basic wage per month.
An employee may also elect in writing to make additional voluntary contributions, which the employer can then deduct from the employee’s monthly remuneration.
End of service gratuity
Current employees (whose employment commenced before 1 February 2020) with at least one year of continuous service will still be entitled to ESG in accordance with the current DIFC Employment Law in respect of their period of service up to 31 January 2020 (including where the employee only achieves one year of service following 1 February 2020). Employers can either:
- hold the gratuity until termination, upon which it will be paid to the employee (the employee’s final salary on termination will be used for calculating the gratuity); or
- pay the gratuity into its Qualifying Scheme at any point during employment. If this is done with the employee’s consent, the employer shall be relieved of the obligation to make up any negative difference between the value of the benefits the gratuity amount acquires in the Qualifying Scheme and the gratuity amount that the employee would have been entitled to on termination had the gratuity been held by the employer (in other words, the risk of the investment transfers to the employee). If the gratuity amount is paid into the Qualifying Scheme without the employee’s consent, the risk of the investments stays with the employer.
If an employer wishes to use an alternative scheme, it should be aware that a Qualifying Scheme must:
- provide for the payment of contributions by the employer at no less than the contribution amounts as outlined above;
- provide for the payment of benefits in the event that the employee leaves the company’s employment or service, or is otherwise entitled to withdraw their benefits (including where the individual reaches 65 years of age);
- have in place an operator, administrator, investment advisor and fund manager who must all be regulated by a “Recognised Regulator” (where the regulator is not the Dubai Financial Services Authority (DFSA), the DIFCA will have discretion (in consultation with the DFSA) to determine what will be considered a Recognised Regulator);
- be a DIFC trust established pursuant to DIFC Trust Law if the scheme is established in the DIFC; and
- the funds into which contributions are invested must be established and regulated in a “Regulated Jurisdiction”, which will be the DIFC or any other jurisdiction as determined by the DIFCA and the DFSA (at present no further details of what will constitute a “Regulated Jurisdiction” however it is likely to include key financial centres”).
As above, an employer must obtain a Certificate of Compliance from the DIFC in relation to a Qualifying Scheme that is not DEWS. This must be obtained before 31 March 2020 or, for every year thereafter, between 3 December and 31 January.
Payment into a Qualifying Scheme will be mandatory and any agreement between an employer and an employee to waive payment obligations will be null and void. However, the DIFCA has confirmed a number of exemptions to the arrangements, namely:
- any employee required to be registered with the General Pension and Social Securities Authority (GCC nationals);
- any employee working in the DIFC on secondment as defined by the DIFC Employment Law;
- any employee employed by a local or federal government entity established by decree;
- any employee exempted by the President of the DIFC from being subject to the DIFC Employment Law;
- any employee who is on notice as at 1 February 2020;
- any employee on a fixed term contract where the contract will expire within three months of 1 February 2020; and
- equity partners, provided that an equity partner can make drawings from a partnership, equity, capital or profit account of the employer or receive profit distributions or dividends from their employer.
An employer will be exempted from the requirements to pay into a Qualifying Scheme if it can demonstrate that:
- it is under a statutory duty in another country to make pension, retirement, saving or any substantially similar contributions into a scheme in respect of an employee; or
- the employer, with the employee’s consent, is paying defined benefits regarding an employee to a scheme where the defined benefits are in excess of the value of the benefits required to be contributed to a Qualifying Scheme, provided that the scheme operator is regulated either by the DFSA or a regulator in a Recognised Jurisdiction.
Termination of employment
On termination of employment, an employee will be able to elect whether to receive a pay-out of their accrued benefits in the Qualifying Scheme or alternatively, leave the relevant savings in the Qualifying Scheme for continued investment. As above, any end of service gratuity accrued prior to the implementation of DEWS will be payable to an employee within 14 days of their termination date, in accordance with the DIFC Employment Law, unless it has been paid into a Qualifying Scheme in favour of the employee.
Employers must register their eligible employees by 31 March 2020 (and within two months of commencement of employment for any new employee).
The first payment must be made by 21 April 2020 (and for a new employee, by the 21st day of the month following registration of the employee). Where an employee is on probation, payment may be deferred until confirmation of employment.
In all cases, the first payment must be backdated to the “Qualifying Scheme Commencement Date”. This will generally be 1 February 2020 or the commencement of employment, if later.
We recommend that employers begin:
- preparing communications to employees informing them of the changes and/or amending contracts of employment;
- identifying any exempt employees;
- the process to obtain a Certificate of Compliance for a Qualifying Scheme, if applicable;
- considering who will sign the Deed of Participation (this will need to be completed as part of the digital enrolment process); and
- ascertaining how accrued end of service gratuity is to be treated and seeking written consent if this is rolled into DEWs or a Qualifying Scheme.
Please let us know if we can assist you with preparing for the implementation of the above changes.
1. Please note that, as per DIFC Employment Law No. 2 of 2019, where employees’ salaries are split into basic salary and allowances, basic salary must comprise at least 50% of an employee’s total wage.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.