Important DIFC Employment Client Alert – January 2020
The legislative changes in respect of the new DIFC employee workplace savings scheme (“Scheme”) have now been finalised and enacted by way of the Employment Law Amendment Law (DIFC Law No. 4 of 2020) which amends certain provisions of DIFC Law. 2 of 2019, as amended (“DIFC Employment Law”). The DIFC Authority has also issued Employment Regulations, which set out the Scheme requirements in detail (“Regulations”).
Unless defined in this summary, the capitalised terms below have the meanings given to them under the DIFC Employment Law or the Regulations, as applicable.
The following summarises the key issues, including a number of developments since the draft legislation was released for public consultation last year:
- the new requirements will take effect from 1 February 2020 and accordingly employees will not continue to accrue end of service gratuity after 31 January 2020 (subject to certain exceptions as mentioned further below);
- there will be a two-month grace period for DIFC employers (until 31 March 2020) to register their employees in a Qualifying Scheme, however payment of the employee’s Core Benefits (see further below) will need to be paid retrospectively with effect from 1 February 2020 (save in certain limited exceptions – see further below);
- a Qualifying Scheme means a savings scheme that holds a valid Certificate of Compliance (issued by the DIFC Authority) and meets certain criteria in accordance with the Regulations. In this regard DIFC employers can either use the approved DEWS Plan or an alternative scheme provided that it meets the requirements set out in the Regulations;
- the minimum Core Benefits payable into a Qualifying Scheme on a monthly basis are 5.83% of an employee’s basic salary for that month (for the first five years of employment) and 8.33% of the employee’s basic salary for that month (once the employee has at least five years of continuous employment);
- unless a specific exemption applies under the DIFC Employment Law or the Regulations (as discussed below), an employer and employee cannot agree that the Core Benefits will not be paid into a Qualifying Scheme (any agreement to this effect would be null and void) and it is not possible for an employee to waive their rights in this regard pursuant to a written settlement agreement or otherwise;
- in addition to the Core Benefits, an employee may opt to make voluntary contributions into their Qualifying Scheme, by the employer making the relevant deductions from the employee’s remuneration for this purpose;
- where an individual’s employment terminates part-way through a month, their Core Benefits for that month are calculated on a pro-rata basis and may be paid directly to the employee (rather than into their Qualifying Scheme); and
- DIFC employers can be subject to a USD 2,000 fine (per contravention) for non-compliance with the Scheme requirements as set out in the DIFC Employment Law and the Regulations.
Exceptions to the Scheme requirements
- Employees on Probation: An employer may defer the payment of an employee’s Core Benefits during their probation period, in which case no Core Benefits would be payable to the employee if they do not pass their probation period (which we infer will include termination of employment during the probationary period). However, if the employee does pass their probation period, the Qualifying Scheme Commencement Date for that employee will be the date on which their employment is confirmed, and the employer will be required to retrospectively pay the Core Benefits from the commencement of the employment. If the employer does not defer the payment of an employee’s Core Benefits during probation, the employee would remain entitled to any Core Benefits which were paid into their Qualifying Scheme during the probation period, regardless of whether or not their employment is confirmed;
- Equity Partners: Employees who own a partnership interest, membership interest or shares in their DIFC employer are exempt from the Scheme requirements, provided that they make drawings from a partnership, equity, capital or profit account of their DIFC employer or receive profit distributions or dividends from their DIFC employer;
- Eligible UAE and other GCC nationals who are required to be registered with the GPSSA for the state government pension;
- Employees who are under notice of termination of their employment as at 1 February 2020, or who are employed under a fixed term employment contract that will expire within three months of 1 February 2020 (in which case the employee would simply continue to accrue end of service gratuity until their employment terminates);
- Employees who are employed in the DIFC on the basis of a Secondment;
- Where the employer is under a statutory duty in another country to make pension, retirement or savings contributions into a scheme in such other country in respect of an employee, or where the employer is paying defined benefits to an employee under an existing pension or savings scheme where the defined benefits are in excess of the value of the Core Benefits (subject to certain conditions); or
- Employees who are employed in the DIFC by a local or federal government entity (except for those established pursuant to the DIFC Founding Law) or where the President of the DIFC has exempted their employer from being subject to the DIFC Employment Law.
Impact on end of service gratuity
Provided that an employee has at least one full year of continuous service with their DIFC employer (including before and after the Qualifying Scheme Commencement Date) as at the termination of the employment, the employee is entitled to end of service gratuity in respect of their period of employment prior to the Qualifying Scheme Commencement Date (which would be calculated on a pro-rata basis if less than one year of service had accrued prior to the Qualifying Scheme Commencement Date).
Any end of service gratuity which an employee has accrued prior to the Qualifying Scheme Commencement Date (“Gratuity Transfer Amount”) may either be paid to them directly on termination of their employment or transferred into the employee’s Qualifying Scheme. Provided that the latter is done with the employee’s prior written consent, the employer would not be required to make up for any shortfall between the Gratuity Transfer Amount (calculated on the employee’s basic salary as at the Qualifying Scheme Commencement Date) and what their end of service gratuity entitlement would have been, had it been paid to the employee on termination of their employment (based on their final basic salary) rather than being transferred into the employee’s Qualifying Scheme.
How can we help?
To help you manage the transition process, we would be happy to assist by:
- reviewing and amending employment contracts and HR policies to reflect the legislative changes;
- preparing appropriate employee documentation, including notification letters and consent forms;
- preparing staff communications and attending staff outreach sessions to help explain the relevant changes to employees; and
- advising on the Qualifying Scheme requirements under the Regulations, assisting with the application process for Certificates of Compliance, and providing details of third party providers who are developing Qualifying Schemes as alternatives to the DEWS Plan.
Copies of the DIFC Employment Law and the Regulations are now available in the “Employment” section of the DIFC website: https://www.difc.ae/business/laws-regulations/difc-laws-regulations/