10 Apr 2018

The DIFC Pension Trap – don’t get caught out!

Authored by: Alaa Momtaz

In Brief

  • DIFC companies must enrol their UAE and GCC nationals into the applicable pension scheme in accordance with the applicable laws.
  • UAE and GCC nationals are eligible for pensions and other retirement benefits after reaching the retirement age.
  • UAE and GCC nationals are not entitled to end of service gratuity in the DIFC.

Background

The General Pension and Social Security Authority (‘GPSSA’) was established by virtue of Federal Law No. 6 of 1999. The GPSSA is mandated to apply the pension and retirement benefits for the United Arab Emirates (‘UAE’) and Gulf Cooperation Council (‘GCC’) nationals in accordance with the provisions of Federal Law No. 7 of 1999 on pension and social security and its amendments ('Pensions Law').

UAE and GCC nationals working in both government and private sectors are eligible for pensions and other retirement benefits after reaching the retirement age.

GCC nationals employed in the UAE are entitled to pension benefits in accordance with the schemes established in their home countries.

The Pensions Law mandates that all eligible employees (UAE/GCC nationals) must be registered with the GPSSA within the first month following the commencement of their employment.

DIFC Employment Law

The Pensions Law applies to all employees including both government and private sectors but originally there was no basis on which it could be said to apply to Dubai International Financial Centre (‘DIFC’) companies.

Prior to the introduction of DIFC Employment Law No.3 of 2012 (‘DIFC Employment Amendment Law’) the position under DIFC Employment Law No. 4 of 2005 (‘DIFC Employment Law 2005’) was that all employees must, within the first month of their employment, elect whether to join the employer’s pension scheme or to receive end of service gratuity on termination of their employment.

DIFC Employment Law 2005 was amended on 24 December 2012 by the DIFC Employment Amendment Law and the DIFC Employment Amendment Law is at present the applicable law in relation to all employment affairs in the DIFC.

Article 61 of the DIFC Employment Amendment Law addresses pension entitlements for UAE and GCC nationals who are working in the DIFC and states that:

“Where an employee is a UAE or GCC national, the employer shall enrol him in the employee’s UAE pension scheme in accordance with applicable Federal legislation and he shall not be eligible to receive end of service gratuity as prescribed in Article 62 on termination of employment.”

Article 61 clearly imposes an obligation on DIFC employers to comply with the applicable federal law and legislation in relation to pensions for UAE/GCC nationals. Additionally, this provision disqualifies UAE and GCC nationals from being eligible to receive end of service benefit following the date on which the DIFC Employment Amendment Law came into force.

Although the DIFC Employment Amendment Law came into force in 2012, it is apparent that many employers/companies are not aware of their obligations. As a result, they may be fined for incompliance.

The employer is responsible for registering the company with the GPSSA and also making the relevant payments and contributions for the employer’s/company’s contribution to their respective pension fund.

It is worth noting that the DIFC Authority have published a draft new Employment Law (No.6 of 2018) (the ‘DIFC Proposed Employment Law’) which has recently completed its period of consultation. The DIFC Proposed Employment Law proposes to clarify and amend Article 61 of the DIFC Employment Amendment Law. The proposed amendments bring the DIFC Proposed Employment Law in line with the provisions of the Pensions Law. The amendments do not change the position as set out in this article, but are mentioned here for completeness.

Non-compliance and limitation

Under the Pensions Law, there are two main penalties that can be imposed against employers who fail to comply with its requirements:

  1. A fine of AED 5,000 can be imposed on a private sector employer by the GPSSA for every eligible employee who has not been registered with the authority for the pension scheme; and
  2. where there is a delay in the payments of the contribution amounts, an additional sum amounting to 0.1% of the due subscriptions shall be imposed [on the employer] for every day of delay without a need for a warning or notification.

Additionally, employers who have not deducted the subscriptions of all or some of the employees, or who have not paid the subscriptions based on the real salaries, shall be ordered to pay an additional sum amounting to 10% of the value of the due subscription without any warning or notification.

In addition to the monetary penalty, the General Manager (in DIFC terminology, the Senior Executive Officer) could be criminally liable and may face imprisonment in the event he/she deliberately provides false data or refrains from providing data to the GPSSA to avoid paying the relevant entitlements due to the GPSSA. Article 59 of the Pensions Law states that the General Manager may “be sentenced to imprisonment and a fine not exceeding AED 5,000 or to either penalties”.

There are limitations under the Pensions Law in respect of qualifying periods of service during which contributions may or may not be payable. Article 3 details the periods of service that are not to be included in the calculations and the periods of employment that shall be included under Article 4 as part of the service calculations.

Registration

The process of registering companies and employees can take a considerable amount of time particularly if the company employs GCC nationals, as not only do they need to register with the GPSSA but the GCC national must be also registered with the pensions authority in their home country. Therefore, it is advisable that employers proceed to register employees immediately to avoid incurring and accumulating more fines.

Conclusion

All private sector companies including DIFC companies are required to: (i) register with the GPSSA; (ii) enrol their UAE/GCC national employees; (iii) settle all previous unpaid contribution from the joining; and (iv) continue to pay the employer contributions on monthly basis.

A failure to do so may have severe consequences for both the employer and the employer’s General Manager/Senior Executive Officer.

In order to avoid such consequences, we recommend that employers who employ UAE or GCC nationals should conduct an internal audit to ensure that they are compliant with their obligations under the DIFC Employment Amendment Law and take legal advice on the outcome of that internal audit where required.