Recent Reforms and Future Trends: The UAE’s Wage Protection

The UAE's Wage Protection System ("WPS") has proved to be a game changer for the UAE's payroll industry. This article will cover the introduction of WPS in the UAE, examine recent reforms to the system, and discuss anticipated future trends.

Background: What is WPS?

Firstly introduced via Ministerial Decree No.788/2009 ("Decree No.788/2009"), WPS came about as a product of collaboration between the Ministry of Human Resources and Emiratization ("MOHRE") and the Central Bank of the UAE ("CBUAE"). While the system was originally mandated only for onshore companies, Jebel Ali Freezone ("JAFZA") was the first freezone to opt into the system in 2012.

WPS acts as an electronic wage transfer system that facilitates the payment of employee salaries in an effort to ensure they are paid accurately and in a timely manner. The system requires companies to transfer employee salaries through WPS agents, who are financial institutions authorized by CBUAE. After companies submit a salary information file ("SIF") to the WPS online database, the WPS agent sends the SIF to CBUAE and MOHRE (if the company is located onshore) for approval. Upon receiving approval, the WPS agent oversees the salary transfer to employees.

The benefits of WPS extend not only to employees but also to companies. By streamlining salary disbursement, WPS minimizes the effort needed from companies to manage employee salaries. Furthermore, abiding by WPS and its requirements enables companies to build trust between themselves and their workforce, which may lead to lower turnover rates and higher levels of productivity- both of which are key to a company's growth.

Recent Reforms

WPS has seen numerous reforms since its inception, with the most recent being brought about through the issuing of Ministerial Decision No.598/2022 Concerning the Wage Protection System ("Decision No.598/2022") on 20 December 2022. Decision No.598/2022 introduced key changes regarding the repercussions companies may face for failing to pay employee wages by their due date.

Under the now repealed Ministerial Resolution No.346/2022 Regarding the Amendment of Certain Provisions of Ministerial Resolution No.43/2022 Regarding the Wages Protection System ("Resolution No.346/2022"), the following penalties were imposed:

Days after due date of unpaid wages	Penalties to be imposed
17th day following due date of unpaid wages:	Offending companies will not be issued new work permits, significantly affecting their ability to recruit new employees. For companies with more than 50 employees: Companies will also be listed in the electronic monitoring and inspection system & inspection visits schedule and face subsequent inspection.
30th day following the due date of unpaid wages:	For offending companies with more than 50 employees, the public prosecution will be notified, and the company's information will be sent to the relevant federal and local authorities for legal action.
4 months following the due date of unpaid wages:	The work permit ban will extend to other companies exclusively owned by the offending company's owner.
For repeating violations within 6 months:	The offending company will be downgraded to category (3) in accordance with Ministerial resolution No.209/2022 On the Classification of Establishments Under the Third Category.

In contrast to the above, Decision No.58/2022 adopts a less restrictive approach, such as:

Removing the penalty of prohibiting the issuing of new work permits to other exclusively owned companies by the owner of an offending company once 4 months from the due date passed.

Stipulating that the public prosecution will be notified 45 days after the due date has passed for offending companies with more than 50 employees, rather than 30 days.

Rather than imposing the penalty of downgrading to category 3 on all companies who repeated violations within 6 months, only apply it to companies who have wage-related complaints referred against them. This is especially significant, given that companies within category 3 pay substantially higher fees for renewing work permits.

Previously, the penalty of being downgraded to category 3 applied to all companies who repeated violations within 6 months. Now, this penalty only applies to companies that have repeated violations and also have wage-related complaints made against it.

While some may caution softening penalties puts employees at risk, it may create balance and ensure penalties upon companies are not overly harsh. Furthermore, the penalties under Decision No.598/2022 are supported by the fines that may be simultaneously imposed upon non-compliant companies under Cabinet Resolution No.21/2020 Concerning Services Fees and Administrative Fines in The Ministry of Human Resources and Emiratization ("Resolution No.21/2020"). Resolution No.21/2020 states that companies who fail to pay their employees within the specified period will face fines of AED 1,000 per employee, with a maximum of AED 20,000. Furthermore, it also stipulates that if a company forces employees to sign false documents stating they received their wages or attempt to insert false data into WPS, a fine of AED 5,000 per employee will be imposed with a maximum of AED 50,000.

Future Trends

The UAE was the first country in the Middle East to implement WPS. The system quickly gained popularity in the MENA region, with multiple countries following suit, with Bahrain in 2019 being the latest. However, WPS has not been utilized in the majority of UAE free zones despite its regional popularity. The absence of WPS or of a similar system in the majority of free zones may leave employees vulnerable.

However, this may soon change, as some free zones have begun to opt into WPS or have chosen to utilize similar schemes. For example, The Dubai Multi Commodities Centre ("DMCC") chose to implement WPS in February 2023, while the Dubai Airport Freezone ("DAFZ") recently announced its adoption of an employee payroll system. The payroll industry may continue to see more free zones follow suit, meaning that it is important for payroll professionals to understand how WPS works, the benefits it presents to both employees and companies, and the consequences of non-compliance.