Monday, November 14, 2016

Payment of Allowances – An Overview of Financial Publication No.5 of 2016

As part of a cost cutting initiative, earlier this year, the Government of Oman, through the Ministry of Finance (“MOF”), made efforts to reduce various benefits provided to employees of companies with more than 50% government ownership (the “Affected Entities”). In other words, the Government of Oman sought to curtail a wide array of benefits currently enjoyed by employees of Affected Entities, in addition to their salaries, in order to make them more uniform and performance dependent.

Financial Publication No. 5 of 2016 (the “MOF Publication”) on the rationalisation of expenditure of Affected Entities, was issued by the MOF on 21 February 2016. The MOF Publication urges all Affected Entities to curb expenses on the basis of a non-exhaustive list which includes bonuses, insurance policies, loans, financial rewards, education allowances and financial reimbursements of any kind (the “Allowances”). Annual salary increments are not included in this list and performance related bonuses are also explicitly excluded.

The stated aim of the MOF Publication is to reduce the disparity between the number and nature of Allowances given to employees in the Affected Entities, and to implement the spending review made necessary by the drop in oil prices.

The decision to reduce or cease the payment of Allowances was issued by the MOF through a “Publication” and not by way of Circular or Ministerial Decision. Publications from the MOF have been, in the past, used as means of communication from the MOF.

The Publication is issued pursuant to Article 6 of the Financial Law (RD 47/98) which authorises the Minister of Finance to undertake certain functions, one of which is to guide and coordinate ministries and government units in respect of financial affairs. Article 6 also includes the right to intervene in the recovery of payments made without justification for salaries, wages, allowances, remunerations or their equivalents in cases and under conditions specified by the executive regulations of the law. However, the content of the MOF Publication may pose legal issues, in particular, considering its interaction with the provisions of the Labour Law (RD 35/2003 as amended).

Individual employees of the Affected Entities are employed in the private sector and therefore subject to the Omani Labour Law. The MOF publication appears to be in contradiction with some provisions of the Labour Law concerning employees’ benefits. Particularly, Article 6 provides that the employer has the option to establish schemes from which his employees may obtain benefits in addition to what is prescribed by the Labour Law. Once these benefits are formalised, usually in an employment contract, the employer is forbidden from unilaterally reducing or revoking such benefits. An amendment to the Labour Law, or a new Law in the form of Royal Decree could override such provisions but, in the case of the MOF Publication, the hierarchy of laws provides otherwise. A Royal Decree will take precedence over a Publication in accordance with Article 80 of the Basic Law of the State (RD101/1996), which states that no authority in the State shall issue regulations, by-laws, decisions or directives that contradict the provisions of the laws and decrees in force, or international treaties and agreements that are part of the law of the country. Thus, where a contradiction arises the Royal Decree will prevail.

Most employees working in Affected Entities have open-ended employment contracts (i.e., for an unlimited term). Such employment contracts include different types of Allowances and the Affected Entities will find it difficult to revoke the Allowances that an employee is entitled to and has been receiving since the commencement of his/her employment. A revocation of such benefits would constitute a breach of the employment contract, opening the door to complaints to the Ministry of Manpower and subsequent litigation whereby the Affected Entities, as employers, may be sued for not adhering to contracts between them and their employees. As a consequence, Affected Entities may face legal and financial issues by cutting Allowances originating from existing contracts. Affected Entities should review and evaluate the potential impact that implementing the MOF Publication would have on the company and its operations to assess the possible effects of such implementation as board members and other company officials should ensure that the policies and plans to be adopted in relation to the company’s operation are in the best interest of the company and its shareholders. Finally, Affected Entities may consider offering more limited benefits in future employment contracts.

The MOF Publication does not provide for sanctions or penalties that may arise in the case of failure to comply with its provisions and does not specify dates with reference to its implementation. Thus, the MOF Publication appears to be structured substantially as a communication and a recommendation to the Affected Entities in the framework of the MOF’s general endeavour to reduce public spending. The MOF may issue further clarifications and take further measures in the matter in the near future, as stated in the MOF Publication in the following terms: “We are currently working on the amendment of the regulations and measures applicable in regard to what is mentioned…”. If and when such amendments to the existing regulations are issued, the matter will have to be reconsidered in the light of the interaction of such amended regulations with the Labour Law and other applicable laws.