Tim Elliot: Welcome to Lawgical, the U.A.E.’s first, and really the only regular legal podcast. My name’s Tim Elliot. Lawgical comes to you from the Dubai-based legal firm here in JLT, HPL Yamalova & Plewka. And as ever, here is the Managing Partner, Ludmila Yamalova. It’s good to see you again.
Ludmila Yamalova: Good to see you too, Tim.
Tim Elliot: Ludmila, this is hot news today. Really, I think it’s reasonable to say hot off the press. I am going to quote you directly there. This is all about the WPS system. It’s the wages protection system. The DMCC, the free zone in which we are now sitting, has announced that it is going to implement WPS for employee salary payments, and that was a couple of days ago, January the 18th.
Ludmila Yamalova: Indeed, yes. This is truly is hot off the press. It may seem quite nuanced in terms of legal updates, but I would argue that it’s actually quite fundamentally important. We have actually dedicated a specific podcast on the WPS in the U.A.E. previously. WPS stands for wage protection system. It is a system that has already been in existence since 2009 and a system that mainland companies and companies outside of free zones have been part of. This is a communication channel between the U.A.E. central bank system and obviously all of the individual banks, and previously it was the MOHRE, or the Ministry of Human Resources& Emiratisation/DED, that are part of the same system. In other words, all employees that have historically been working on the mainland, on the MOHRE, or licensed by DED, have been part of this WPS system, which means that any company that is based on the mainland, when it makes employee salary payments every month, these salary payments are going through this WPS system. It is a bit of a virtual system and a virtual interface. In practical terms, neither employees, nor companies can really feel the difference once they have registered for the system. It is the same payments which are going through the same bank account, but they just have a different reference number attached to every employee and every company, but ultimately the idea here is just to protect wages for employees. In other words, to ensure that all companies pay their employees timely. The WPS is based on the number of employees that every company has. Once a company has registered with the WPS system, as part of the registration it registers how many employees it has and the salary for each employee with the total monthly salary payments that the company should be making to an employee. When the company makes those payments every month, that data gets populated and transmitted to the central bank and the regulatory authority, MOHRE. If there are any discrepancies or violations, then the authorities get alerted.
Let me give you a specific example. Let’s say there is a mainland company, a restaurant, that is based on the mainland under the Department of Economic Development (DED) and it has 10 employees and it pays 10,000 dirhams for each employee. Now that company, the restaurant is registered with MOHRE that it has 10 employees and on average every employee gets 10,000 dirhams, so every month this company, Restaurant X, must transfer 100,000 dirhams to its employees through the WPS system.
As long as those payments are being made, one of the resolutions that governs the mechanism of the WPS, the Ministry Resolution #788 of 2009 sets the margin at 80%. As long as Restaurant X is transferring 80% or 80,000 dirhams to its employees on a monthly basis, then there are no issues.
But in the event that it pays only 60%, then different red flags appear on the system, not just with the bank, but ultimately also with the regulatory authority, which in this case is MOHRE. At that point, that company’s employee files start getting suspended or flagged, and then there could be penalties that are imposed, or the company might be prevented from hiring more employees, until it basically becomes compliant again with the right payment levels, at least 80%. If the Restaurant X, month after month is making only a 60,000 payment versus the 100,000 it is supposed to pay, that is only 60% and it is below the minimum 80%, and now that company’s file could be suspended. Now if the company wants to hire somebody else, they will not be able to hire. Or, for example, even if they want to terminate an employee, they will have to first become compliant with the system in order for them to be able to transact on the employee file.
That is, at a very high level, how the WPS system works. It was introduced originally to protect employees, in particular at those companies that have a large number of laborers. We have heard complaints before that laborers do not get paid or get paid late because the company does recover money in time from the suppliers or their customers, and so on and so forth. Obviously the company’s troubles is one thing, if they do not get paid by their clients or customers, but when individuals and laborers do not get paid, that is a pretty cumbersome and onerous burden for them to live with because many of them live from paycheck to paycheck.
Basically, this system was introduced to make sure that companies are forced to ultimately make sure they have at least paid the minimum level of salaries to their employees on a monthly basis. Without it, basically, the authorities get involved. That is the idea behind it.
Historically, all mainland companies, and therefore mainland employees, were subject to this system. It has been enforced by the Ministry of Labor, or MOHRE now to ensure that both companies and employees are more or less compliant.
Tim Elliot: Okay. This is protection for employees. It is happening now. It affects you directly. Obviously, you are a DMCC registered entity, a law firm. You have to register by what – the 15th of February?
Ludmila Yamalova: Until recently, it didn’t actually affect me. That’s the thing. Because I’m not a mainland company. I’m a free zone company. We are based in the DMCC, which is the Dubai Multi Commodity Center, which is a free zone. Every emirate has, in addition to the mainland economic zones, free zones. Historically, apart from one free zone, which is the Jafza Free Zone, no free zones have been subject to WPS. That was the case until basically two days ago. Then on January 18, 2023 the DMCC, which is one of the free zones in Dubai, that is the Dubai Multi Commodity Center, which is where my law firm happens to sit. We have been here for the last 13 years. The DMCC announced that the free zone and all of the free zone companies and employees will now be subject to this WPS system.
This is truly fresh off the press, hot off the press and unprecedented. As I said before, only mainland companies and the Jafza have been part of this WPS system, and as of January 18, 2023 now the DMCC companies have been notified that they will also be subject to it and the compliance date is February 15, 2023. We are talking about three weeks from its announcement that all of the DMCC companies need to register themselves and their employees through this WPS system.
Tim Elliot: So, you register. Is there a cost to register?
Ludmila Yamalova: In terms of the cost, there is no fee, but there is a cost in terms your resources that you will need to dedicate as a company to go through the system and to register. For those companies who have not been based on the mainland, this is going to be all new because we have not had to deal with the WPS and we have not had to register our employees or our company files at this level. There will be a learning curve, I am sure. In that regard, there will be some employee and internal resources that will spent to register the company with the WPS and each one of its employees.
The DMCC has already sent instructions on what to do, and these are very detailed instructions on how to register employees and employee numbers, IDs, and the various codes, and company portal account numbers. It is a bit of a coding system almost, like an algorithm that needs to be complied with, but I trust that this sounds more cumbersome and incomprehensible in words than it really will be in practice. At least, that is my hope. Ultimately, apart from the time and the exercise of going and registering the company and its employees, there is no additional cost.
Tim Elliot: Behind the scenes there is going to be stuff to do. There is going to be compliance to run through. You are going to have to get used to the new system. But to an employee, it does not make any difference. If they are being paid on time, they will continue to be paid on time, and that money, every month, will drop into their account.
Ludmila Yamalova: Exactly. It is more virtual. It is a fairly sophisticated system with mechanisms that are built into this system, but from the user experience I think it is going to be more or less invisible in terms of how accounts will be affected or not. It is also interesting because the WPS is a system ultimately that is managed and created with the U.A.E. central bank and obviously tied in with various regulatory authorities, like MOHRE and now the DMCC and then Jafza, but also as part of the central bank system, it is not only linked up to individual banks, but also to the exchange houses. A lot of employees and particularly laborers may not even have a local bank account. They do a lot of the payments or receive payments and then transfer payments at exchanges houses. There are exchange houses that are part of the U.A.E. central bank system and the WPS system. In fact, those employees who previously were getting paid through the exchange houses, equally so, they can continue to benefit from payments through the exchange houses. Nothing has to chance for them just because they are part of the WPS. It is a pretty robust system that has been in existence, at least since 2009, and has been used by many, many companies, employees, and banks. It is just a little bit of a foreign language to those are sitting in the free zones, but not so much for the country and its economy and financial institutions. This is perhaps why the DMCC has such a tight deadline. It announced the introduction of the WPS on January 18, 2023 and it is expecting all of the companies to register by February 15, 2023, about three weeks only.
Tim Elliot: There are a lot of companies. There are thousands of companies.
Ludmila Yamalova: Especially with the DMCC, because the DMCC is one of the world’s largest free zones, and there are tens of thousands of companies. It would be a lot of work. I have to assume that the system, because it has been in existence for a while, it just has not been part of the DMCC interface, that it is fairly tested and easy to incorporate, because otherwise I cannot imagine how they would expect so many tens of thousands of companies to register within three weeks.
Tim Elliot: This is the thing. There is a caveat here as well. You have been told on January 18, 2023 you have to register by February 15, 2023, but there is a caveat in that throughout 2023 they are not going to impose any portal sanctions until next year.
Ludmila Yamalova: Exactly. I think that is the grace period that we are given, about a year ultimately. There is a requirement to start registering. There is definitely a requirement, if you were, as a DMCC company, anytime you register a new employee, or renew an employee, then you are forced to register that employee and your file through the WPS. But it terms of becoming completely compliant for all of the employees and for all of the companies for the year 2023, there will not be any sanctions. DMCC companies, because we are all in the DMCC and all of the companies work through the DMCC portal, which is a very sophisticated and quite efficient interface portal between member companies and the authorities, so anytime you apply for an employee, either to renew their visa or to cancer their visa, or to renew a license, everything is done through the DMCC company portal. When there is noncompliance by a company of one law or another, then what the DMCC does is it starts sanctioning the portal. There will be flags on the portal that prevent the company from doing one activity or another. What you referred to, and rightfully so, Tim, is that the DMCC has announced that while we have this deadline of February 15, 2023 to register, there won’t actually be any penalties or sanctions on the company’s portals until January 2024. In other words, those companies that don’t manage to register right away with the WPS, they will, technically speaking, be noncompliant, but in practical terms, they will not be affected because they will be able to continue to transact in terms of renewals and audits and their employee files, and it will be business as usual without any repercussions of these sanctions being in effect. But as of January 2024, that will definitely change, and at that point, this will immediately affect the company’s ability to operate if they continue to either not register with the WPS or if they are noncompliant with the overall payments.
I think it is a little bit of a minefield for those companies and businesses, though perhaps less so for employees, that have not dealt with it, but at a high level I think it is great step forward because ultimately it is a wage protection system and it is to protect employees and in particular it will ensure that employees get their wages paid on a regular basis. That is the overall objective. Honestly, I have seen this historically here in my own time here in the U.A.E., and it is a very effective and needed system because a lot of the time companies, particularly that would hire many laborers, they often either pay them later, underpaid them, or would change their payments, left, right, and center, and there wasn’t much accountability. Then you have so many people here that are stranded without a salary and not able to afford, nor do they know, what to do in how to challenge and how to get paid.
I think the system was obviously put in place to protect those employees and it has been very effective. We have seen how effective it has been. Part of this now, also my own speculation of perhaps why the DMCC has followed suit so quickly, or all of a sudden, is as part of unemployment insurance. We have dedicated a separate podcast to unemployment insurance, but unemployment insurance is currently basically also being enforced through the WPS system.
Employees have to pay their unemployment insurance and for any kind of failure to pay or a late payment of subscriptions, they will be penalized through the WPS system. If they subscribe to the system, but do not pay, then the authorities will be able to subtract the penalties from their end of service or from their salaries. Or if they want to renew or cancel their work permit and apply for a new one, they will first have to pay that penalty through the WPS before they will be able to update their status.
Basically, I am speculating that the DMCC is moving so fast because the unemployment insurance for now is not made available for free zone employees because free zone employees are not subject to the WPS, and I think it is linked up with a WPS. I would assume that once the DMCC companies become compliant and integrated into the WPS system, then that will allow the free zone employees that are based in the DMCC at least to start registering and subscribing for unemployment insurance through the WPS system. That is my personal prediction as to why, all of a sudden, the DMCC has embraced the WPS and why it has done it so fast.
The unemployment insurance just kicked in on January 1, 2023 and on January 18, 2023 the DMCC leads in with the WPS. By the way, the unemployment insurance, and we talked about it in a separate podcast, the federal law on unemployment insurance does not exclude free zones. It actually includes all employees, private and public sector, and yet, in practical terms, now that the subscription for the unemployment insurance has become available, free zone employees have not been able to register, and we are speculating it is because free zone employees have not been part of the WPS. We are assuming that this is a system that, again, goes to further advance the U.A.E. goal of protecting employees and, in particular, the regular payment of their salaries and also to enforce and facilitate the subscription enrollment into unemployment insurance scheme.
Tim Elliot: There is more to come on this, I think. WPS introduced in the DMCC free zone here in Dubai, the wages protection system, registration by February 15, 2023. That’s another episode of Lawgical. Ludmila Yamalova is our expert, and as ever, the Managing Partner here at Yamalova & Plewka. Thank you.
Ludmila Yamalova: Thank you, Tim.
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