"The first mandatory employee savings scheme for expatriates"
Addleshaw Goddard (ME) partner Ben Brown shares insights on DIFC’s amended gratuity law that came into force on 14 January
London-headquartered law firm Addleshaw Goddard has detailed the changes introduced by the DIFC Employment Amendment Law (DIFC Law No. 4 of 2020), which came into force on 14 January, 2020, following an announcement by HH Sheikh Mohammed Bin Rashid Al Maktoum, Vice President and Prime Minister of the UAE, in his capacity as the Ruler of Dubai, who amended the gratuity law in the emirate.
Employers who fail to prepare for the changes introduced by the DIFC Employment Amendment Law will be exposed to potentially significant fines and other penalties, Addleshaw Goddard said in a statement.
The amended law replaces the end-of-service gratuity payment law that has been in place since the DIFC was formed in 2004.
Employers will have until 31 March 2020 to enroll into a Qualifying Scheme, which includes the DIFC Employee Workplace Savings (DEWS) Plan.
DIFC employee workplace savings plan (DEWS)
According to the DIFC Law No.4 of 2020, employees who accrue more than one year’s service with an employer will be entitled to receive a gratuity payment for their period of service with their employer prior to the Qualifying Scheme Commencement Date.
For most employees, their Qualifying Scheme Commencement Date will be 1 February, 2020, and so any gratuity payment should be calculated by reference to the period of service prior to this date.
However, the gratuity payment for employees who are either serving a period of notice as of 1 February, 2020, or are employed under a fixed-term employment contract which expires prior to 1 May, 2020, should be calculated up to the employee’s termination date, the Law states.
An employee’s gratuity payment must be calculated by reference to the employee’s basic wage at their termination date, which could be different from the basic wage that the employee received at their Qualifying Scheme Commencement Date.
Given the financial penalty that may be imposed on employers who fail to pay all of an employee’s remuneration within 14 days of the employee’s termination date, it is essential that employers calculate gratuity payments correctly, the law firm explains.
Sharing his insights on the amended law, partner at Addleshaw Goddard (Middle East), Ben Brown, says: “DEWS is a hugely innovative and exciting initiative by the DIFC. It will help DIFC companies retain the best professional talent in the region whilst giving expatriate employees control and certainty over their savings.”
At any stage subsequent to an employee’s Qualifying Scheme Commencement Date, the employer may transfer an amount equal to the end of service gratuity accrued by the Employee into DEWS (or QAS) – this is referred to in the DIFC Employment Amendment Law as the “gratuity transfer amount”.
For the purposes of calculating the correct amount to be transferred, the employer should use the employee’s basic wage at the time of the transfer.
If the employee consents in writing to the transfer of the Gratuity Transfer Amount, the employer will be relieved of any obligation to make a gratuity payment to the employee on the termination of their employment.
If the Employee does not consent in writing to the transfer of the Gratuity Transfer Amount, on the termination of employment, the employer will be under obligation to make up any negative difference between the value of the money purchase benefits acquired in DEWS (or a QAS), and the gratuity payment that the employee would have been entitled to receive had the employer not undertaken the transfer of the Gratuity Transfer Amount.
Brown explains: “DEWS is the first mandatory employee savings scheme to be implemented for expatriates in the region. It is another steps towards aligning the DIFC with international best practice and creating an attractive business environment for international and local companies and their employees.”
Law firm Addleshaw Goddard states that employers will not be required to make contributions into DEWS (or QAS) for an ‘exempted employee,’ who is required to be registered with the UAE General Pension and Social Security Authority; who is on Secondment or employed by a local or federal government entity; who is serving a period of notice at 1 February 2020; or who is is employed under a fixed-term employment contract which expires prior to 1 May 2020.
In addition, employees who own a partnership interest, membership interest, or shares in their employer; as well as employees who take drawings from the partnership, equity, capital, or profit account of their employer or receive profit distributions or dividends from their employer will be exempt.
Those who are not exempted employees are expected to receive 5.83% of an employee’s monthly basic wage during the first five years of an employee’s service; and 8.33% of an employee’s monthly basic wage during each additional year of the employee’s service.
Where an employee’s termination date occurs part-way through a month, the contributions payable for that month must be calculated on a pro-rata basis; and must be be paid directly to the employee within 14 days of their termination date.
An employer must make the requisite contributions into DEWS (or QAS) by no later than the 21st day of the month following the month in respect of which the contributions are due.
An employer who breaches its obligations under the DIFC Employment Amendment Law will be exposed to a fine of $2,000 for each breach in respect of each employee.
Commenting on the impact of the amended law, Brown adds: “I anticipate DEWS having far-reaching consequences, with governments across the region likely to be monitoring developments closely with a view to implementing similar mandatory employee savings schemes in their own jurisdictions.”