New DIFC employee workplace savings regime enacted in law

Middle East, UAE

We have previously reported on the incoming changes to the DIFC Employment law to replace end of service gratuity entitlements with a new defined contribution workplace savings regime (https://www.cms-lawnow.com/ealerts/2019/10/difc-employee-workplace-saving-plans-further-developments). Amendments to the DIFC Employment Law (DIFC Law No. 2 of 2019) have now been enacted in their final version through DIFC Employment Law Amendment Law No.4 of 2020 (the “Amended Law”) and the new Employment Regulations (Qualifying Scheme requirements under Article 66 of the Law) (the “Regulations”), both of which will come into effect on 1st February 2020.

The amendments require DIFC employers to enrol employees to whom the new provisions apply into a qualifying savings scheme and pay contributions to such scheme in place of the employee accruing end of service gratuity entitlements. Such scheme can be either the DIFC Employee Workplace Savings Plan (the “DEWS”) established by the DIFC or an alternative qualifying scheme (“AQS”) meeting the criteria set out in the Amended Law and the Regulations (each a “Qualifying Scheme”).

This move is intended to benefit both employers and employees with greater certainty and align the DIFC with pension savings standards globally. From the final version of the Amended Law it is clear that the DIFC have sought to address concerns raised during the consultation process, in particular in respect of employees with less than one year’s service at 1st February 2020, equity partners and employees on notice or probation. Following our previous updates on the proposed amendments, we now summarise the requirements under the Amended Law and advise what steps DIFC employers should take prior to the 1st February effective date.

End of Service Gratuity

After 31 January 2020, DIFC employees’ will no longer accrue end of service gratuity benefits. Instead, with effect from 1 February 2020 (the “Effective Date”), DIFC employers will be required to pay contributions into a Qualifying Scheme for the benefit of their employees.

Entitlements to end of service gratuity accrued prior to the Effective Date will crystallise on 31st January 2020 and can either:

(i) be held by the employer to be paid out to the employee at the time of termination of their employment (in which case the amount will be assessed on the employee’s final basic salary): or

(ii) such amounts may be transferred to a Qualifying Scheme for the benefit of the employee at any time after that employee’s Qualifying Scheme commencement date (see below).

If the accrued entitlements are transferred to a Qualifying Scheme with the relevant employee’s prior written consent, the employer will not be liable to pay end of service gratuity termination on employment or to make up any shortfall between the value of the amount transferred to the Qualifying Scheme at the termination date and the amount the employee would have otherwise been entitled to receive as end of service gratuity. However, if the accrued entitlement is transferred to a Qualifying Scheme without the employee’s prior written consent, the employer takes the investment risk on that amount.

In a change from the draft version of the Amended Law and following the DIFC’s consultation process, employees who do not have one year’s service at the Effective Date will still get the benefit of any period of service prior to the Effective Date and accrue end of service gratuity in respect of that period (pro rata) as long as they do go on to complete one year’s service.

Qualifying Scheme Commencement Date

The Qualifying Scheme commencement date for those employees who are already employed by a DIFC employer prior to 1 February will be 1 February and, for those employed on or after 1 February, will be their employment start date.

The Amended Law provides for a grace period up until 31 March 2020 for DIFC employers to register their existing employees into a Qualifying Scheme. Any new employees from the Effective Date will need to be enrolled into a Qualifying Scheme within 2 months of their employment start date unless it has been agreed between the employee and the employer that the employee’s Qualifying Scheme commencement date will be deferred until after completion of an agreed probation period. In the case of such deferral, where the employee’s employment is confirmed following expiry of the probation period, the employee’s Qualifying Scheme commencement date will be the date of employment confirmation, but contributions will still need to be made with retrospective effect from the employment start date. Where the employee’s employment is not confirmed during or after the probation period, the employer will not have any obligation to make contributions to a Qualifying Scheme for such employee (unless this deferral was not agreed in accordance with the Amended Law).

Contributions and Payments

The minimum “Core Benefits” required to be contributed by DIFC employers into a Qualifying Scheme are to be calculated in line with the previous end of service gratuity entitlements as follows:

  • an amount equal to 5.83% of the employee’s monthly basic wage for the first 5 years of service; and
  • an amount equal to 8.33% of the employee’s monthly basic wage for each additional year of service (after the first 5 years of service), with a pro-rata contribution if employment termination occurs part way through a month.

The contributions are due from the relevant employee’s Qualifying Scheme commencement date without any qualifying period of service and the calculation is based on the employee’s basic wage at the time of the contribution (which must not be less than 50% of the total monthly wage).

From the Effective Date, contributions must be made monthly and in respect of any given month, no later than the 21st day of the following month. In all cases, employers are required to backdate contributions to the relevant employee’s Qualifying Scheme commencement date (i.e. 1 February 2020 or the employment start date if later) and those backdated contributions should be paid at the same time as the contributions in respect of month in which the employee was enrolled in a Qualifying Scheme. Qualifying Schemes must also make provision for employees to elect to make additional contributions into the scheme as a deduction from payroll.

Qualifying Scheme Requirements

In order to be an AQS, schemes must either meet the requirements set out in the Regulations or be exempted from meeting those requirements.

The Qualifying Scheme requirements under the Regulations provide that the scheme must:

  • be an “Employee Money Purchase Scheme” i.e. an arrangement where the main purpose is to provide money purchase benefits to members in respect of their employment and such money purchase benefits are payable on termination of employment or on the occurrence of another specified event;
  • make provision for the payment of employer contributions at a level no less than the Core Benefits set out in the Amended Law;
  • make provision for the payment of benefits in accordance with the Regulations;
  • have an operator and administrator regulated by the DFSA or in a recognised jurisdiction; and
  • obtain a Certificate of Compliance from the DIFC.

The Regulations also include requirements in respect of the legal structure of the scheme, the scheme supervisory body, operator, administrator and investment advisor, the scheme rules, the investment platform, membership, member accounts, contributions and payment and transfer of benefits, investment requirements and scheme fees and charges.

Alternatives to DEWS may be exempted from the Qualifying Scheme requirements under the Regulations where the employer applies for an exemption and can demonstrate to the DIFC that either:

  • the employer is under a statutory duty in another country to make pension, retirement, saving or any similar contributions to a scheme in such country in respect of an employee; or
  • the employer, with the prior written consent of the employee, is paying defined benefits into a scheme where the defined benefits are more than the minimum required by the Law and the scheme operator is regulated by the Dubai Financial Services Authority (the “DFSA”) or another regulator recognised by the DFSA as being equivalent to it in another jurisdiction.

Certificates of Compliance

Employers opting for a Qualifying Scheme other than the DEWS must apply for a Certificate of Compliance for the relevant AQS from the DIFC Authority prior to 31 March 2020 and thereafter, apply for renewal annually in the period from 3rd December – 31st January prior to each anniversary of the Effective Date.

At the time of writing, the application process and requirements for obtaining a Certificate of Compliance have not been made available by the DIFC but we continue to monitor updates in this regard.

Exempted Persons

DIFC employers are not required to make contributions into a Qualifying Scheme in respect of the following categories of exempted employees:

  • any employees registered with the General Pension and Social Security Authority (i.e. UAE and GCC nationals);
  • any employees on secondment working in the DIFC;
  • any employees employed by a local or federal governmental entity established by decree, working in the DIFC;
  • any employees exempted by the President of the DIFC from being subject to the DIFC Employment Law;
  • any employee serving notice as at 1 February 2020;
  • any employee on a fixed term contract with a termination date on or before 30 April 2020; and
  • any employee who is an equity partner in the employer (through ownership of a partnership interest, membership interest or shares) to the extent that they make drawings from a partnership, equity, capital or profit account of the employer or receive profit distributions or dividends from their employer.

Liabilities

The obligations under the Amended Law and regulations are mandatory and employees and employers cannot agree to opt out of this new regime, any agreement purporting to do so will be void and unenforceable.

Employers are not liable to employees for their choice of Qualifying Scheme and employees shall have no claim against their employer in that regard provided that, where the employer has opted for an AQS, the employer takes reasonable steps at least once a year to ensure that their choice of Qualifying Scheme continues to satisfy the requirements for a Certificate of Compliance.

Employers who fail to comply with their obligations under the new regime are liable to a fine of USD 2,000.

Action points for DIFC Employers

With the Effective Date and requirements for a Qualifying Scheme now finalised, employers must start to make arrangements, including:

  • identifying which employees the new requirements apply to and any exempt employees;
  • considering whether any existing company pension or savings schemes meet the Qualifying Scheme requirements;
  • deciding whether to enrol employees into the DEWS or an AQS and executing the required participation deeds;
  • applying for a Certificate of Compliance or exemption for an AQS where required;
  • calculating accrued end of service gratuity liabilities as at the Effective Date and identifying whether these amounts are fully funded or what level of provision has been made for them;
  • deciding whether accrued end of service gratuity entitlements will be held by the employer or transferred to the selected Qualifying Scheme and obtaining employee consent where relevant;
  • arranging consultations with employees to explain the changes being brought in, their rights and entitlements and the features and processes of the chosen Qualifying Scheme;
  • making any changes required to payroll processes to enable the required monthly contributions; and
  • considering amendments to employment terms and conditions and policy documents.

If you would like any assistance with any of these items required to prepare your company and your employees for the introduction of the new DIFC workplace savings regime, please do get in touch with us.