Dubai Introduces End of Service Savings Plan

Dubai Introduces End of Service Savings Plan

Dubai recently amended its DIFC employment legislation to introduce a new employee end-of-service savings plan: what should employers know?

In January, the ruler of Dubai, Sheikh Mohammed bin Rashid Al Maktoum, enacted the Dubai International Finance Centre (DIFC) Employment Law Amendment No.4 of 2020, introducing a new end-of-service savings plan for employees working in the city-state’s special economic zone. In effect from 1 February 2020, the amendment law introduces a number of requirements for employers in Dubai when implementing the new savings scheme.

Regulatory Changes

The DIFC Employee Workplace Savings (DEWS) plan replaces the end-of-service gratuity payments that have been in place since 2004 when the DIFC was established. Under the amended DIFC Employment Law, employers are required to contribute to their employee savings scheme each month - as opposed to the accrual of end-of-service benefits under the previous regime (currently the prevailing type of end-of-service plan in the rest of the UAE).

The DIFC board of directors has set out a range of requirements for Qualifying Schemes in order to reflect Dubai’s commitment to implementing robust employment regulation. Employers must ensure the scheme in which they enrol meets the relevant criteria.

Qualifying Scheme Requirements

To comply with the amended Employment Law, employers must enroll in a suitable Qualifying Scheme. They may choose the DEWS plan or an alternative plan which meets DIFC-approved qualifying criteria.

Under DIFC regulations, Qualifying Schemes must have an oversight body with the authority to appoint and dismiss scheme operators, and the authority to review governance, fees, and charges applied to the scheme. Both employers and employees must be represented on scheme governance, and schemes must maintain independent oversight to ensure employee interests are protected.

Qualifying Schemes must also satisfy the following criteria:

Contribution Rates: Employer mandatory contributions to a Qualifying Scheme should be set at the following rates,

  • 5.83% of basic monthly wages for employees with up to 5 years of service
  • 8.33% of basic monthly wages for employees with over 5 years of service

Voluntary Employee Contributions: Employees should be allowed to make voluntary contributions to their Qualifying Scheme in addition to the mandatory contributions that employers make.

Employee Exemptions: Savings plans should make exemptions for certain employees, such as short-term workers, equity partners, and employees working on secondment in the DIFC. Exemptions should also be made for employees working for government organisations.

International Exemptions: The Qualifying Scheme should make exemptions for international organisations that have to pay pension or retirement contributions in other territories. Similarly, exemptions should be made for institutions that provide defined benefit schemes to employees which exceed the DIFC Employment Law contributions.

Existing Benefits: The Qualifying Scheme should make provisions to retain employees’ end-of-service gratuity (EOSG) benefits already accrued under the previous regime (in place prior to February 2020). Employers have three options for dealing with EOSG:

  • Continue to manage the previous scheme until the 31 January 2020 changeover date, and pay the accrued gratuity at service termination based on the employee’s last drawn salary.
  • Transfer an agreed amount of the EOSG to the DEWS plan. Employers must obtain the employee’s written consent and ensure the amount transferred is not less than an entitlement calculated for a termination payment under DIFC Employment Law. The employee takes over responsibility for ongoing EOSG investment risk.
  • Transfer the accrued EOSG without consent. Employers take responsibility for ongoing investment risk and for settling the accrued benefit entitlement when the employee leaves their service.

Savings Plan Implementation

Employers must enrol in a Qualifying Scheme by 31 March 2020 while the first contribution must be made on or before 21 April 2020.

The amended Employment Law will affect over 24,000 employees working in the DIFC and is intended to set a legislative example for the rest of the UEA. DIFC governor, Essa Kazim, commented on the goals of the new regime for Dubai: “Amending DIFC Employment Law further demonstrates our position as a forward-thinking international financial hub aligned with global best practice.”

For more information on Dubai’s tax and payroll landscape, check out activpayroll’s UAE Global Insight Guide which also offers background on the emirate states’ economic profiles, major industries, and business practices.

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