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Replacement of End of Service Gratuity – The DIFC Employee Workplace Savings Scheme (DEWS)

Published: 28/10/2019

The Dubai International Financial Centre Authority (“DIFCA”) proposes to amend the current DIFC Employment Law (DIFC Law No. 2 of 2019) in order to replace the existing end of service gratuity (“ESG”) regime with a defined contribution scheme. Draft new Regulations have also been published in respect of the administrative aspects of the proposed changes.

The DIFCA has released a consultation paper together with the proposed legislative amendments and is seeking public feedback by 18 November 2019. Al Tamimi & Company will be submitting a response to the DIFCA and is able to collate feedback from our clients if doing so would be helpful.

Capitalised terms below have the definitions given to them under the draft new Regulations and the proposed amendments to the DIFC Employment Law.

We have prepared the following summary based on the consultation paper and the draft legislative amendments and accordingly certain aspects may be subject to change, including on the basis of any feedback provided to the DIFCA during the public consultation process.

 

What is the change and why has it been proposed?

Broadly speaking, the DIFCA proposes to replace the current ESG regime with a funded defined contribution regime whereby all DIFC employers will be required to make mandatory monthly contributions into a “Qualifying Scheme” (discussed below) for each eligible employee.

The proposed new arrangements intend to provide employee benefit security and to allow an employee’s benefits to be professionally managed and invested by a third party. This is in line with international best practice and the DIFC’s aspirations to be a leading international financial centre.

 

What are the relevant contribution amounts?

For continuity, when determining the minimum contribution which DIFC employers would be required to make into a Qualifying Scheme for each eligible employee (referred to as the “Core Benefits”), the DIFC has sought to mirror the minimum accrual rates under the existing ESG regime, as summarised below:

 

  ESG accrual under the current DIFC Employment Law Mandatory employer contributions into a Qualifying Scheme (under the proposed new arrangements)
For each of the employee’s first five (5) years of continuous employment 21 calendar days’ basic wage 5.83% of monthly basic wage
For each of the employee’s additional years of continuous employment 30 calendar days’ basic wage 8.33% of monthly basic wage

 

Any agreement between a DIFC company and an employee to circumvent the company’s payment of an eligible employee’s “Core Benefits” into a Qualifying Scheme would be null and void.

In addition to the DIFC employer being required to pay the “Core Benefits” into a Qualifying Scheme for each eligible employee, the employee may also elect in writing to make additional voluntary contributions, in which case the relevant amounts can be deducted by the employer from the employee’s remuneration.

 

What is a “Qualifying Scheme”?

Following a tender process earlier this year, the DIFCA has established a framework DEWS plan whereby Equiom (a DIFC-licensed trustee) will be the master trustee, Zurich are the administrator and Mercer will have oversight of the asset management.

However, if a DIFC employer wishes to use a scheme other than the framework DEWS plan, the company can apply to the DIFCA for a “Certificate of Compliance” in order for a different scheme to be certified as a “Qualifying Scheme”.

Accordingly, the framework DEWS plan, or any alternative scheme which satisfies the various requirements below and accordingly receives a Certificate of Compliance from the DIFCA, would therefore constitute a “Qualifying Scheme”.

A Certificate of Compliance will only be issued by the DIFCA if the scheme satisfies the key requirements of a Qualifying Scheme, including that:

  1. the scheme must provide for the payment of contributions by the DIFC company for each eligible employee at no less than the Core Benefits (as shown in the table above);
  2. the scheme must 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);
  3. the Operator, Administrator, Investment Adviser and the Fund Manager of the scheme must 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” for this purpose); and
  4. if the Qualifying Scheme is established in the DIFC, it must be a DIFC trust established pursuant to the DIFC Trust Law.

In terms of the investment funds into which contributions may be invested under a Qualifying Scheme, each fund must be established and regulated in a “Recognised Jurisdiction” – meaning in the DIFC or any other jurisdiction determined by the DIFCA (in consultation with the DFSA) to be a recognised jurisdiction for this purpose.

Each Qualifying Scheme must have a Supervisory Body (to appoint and oversee the Operator), an Operator (to be responsible for the overall management operation of the Qualifying Scheme), an Administrator (to be responsible for the technical, operational and administrative functions of the Qualifying Scheme), and an Investment Advisor (to advise the Operator in relation to investment options and risk profiles, and to help the Operator establish and maintain an appropriate investment platform).

 

When does it start?

For current employees of DIFC companies, the “Qualifying Scheme Commencement Date” will be a specific date to be determined by the DIFCA, which at this stage is expected to be 1 January 2020. For any individual who commences employment with a DIFC company at a later stage, they will need to be enrolled in a Qualifying Scheme by the 15th day of the month following the commencement month of their employment (for example, if an individual commences employment on 3 March 2020, their DIFC employer will need to enrol them in a Qualifying Scheme no later than 15 April 2020).

 

What will happen to an existing employee’s accrued ESG?

Employees with at least one year of continuous service with their DIFC employer (prior to the Qualifying Scheme Commencement Date) will still be entitled to ESG in accordance with the current DIFC Employment Law, in respect of their period of service up to the day before the Qualifying Scheme Commencement Date. This will be calculated in accordance with the employee’s final basic wage at the time their employment terminates.

The employee’s accrued ESG pursuant to the current DIFC Employment Law can either be paid to the employee on termination of their employment, or alternatively it can be transferred into a Qualifying Scheme in favour of the employee at any time following the Qualifying Scheme Commencement Date (in which case any potential residual liability for the employer would depend on whether or not the employee had provided their written consent for their accrued ESG to be paid into a Qualifying Scheme on their behalf).

 

What happens when an individual’s employment terminates?

On termination of their employment with a DIFC company, the individual can choose 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 mentioned above, any ESG which had accrued prior to the Qualifying Scheme Commencement Date, provided it had not already been paid into a Qualifying Scheme in favour of the employee, would be payable to the employee within 14 days of their employment terminating.

 

Access to the consultation paper and draft legislative amendments

The consultation paper and the proposed legislative amendments have been made publically available and can be accessed online: https://www.difc.ae/business/laws-regulations/consultation-papers/

 

Key Contacts:

Samir Kantaria
Partner, Head of Employment & Incentives
s.kantaria@tamimi.com

Gordon Barr
Partner, Employment & Incentives
g.barr@tamimi.com

Anna Marshall
Senior Associate, Employment & Incentives
a.marshall@tamimi.com