Other BriefingsEnd of Service Benefits: Saudi Labor Law
End of service benefits in Saudi Arabia provide financial security to employees upon contract termination, with entitlements based on service length and termination type. This article explores eligibility, calculation methods, and responsibilities for both employers and employees, highlighting key provisions in Saudi Labor Law.
By Giulia Interesse
End of service benefits (or EOSB) are a critical aspect of Saudi Labor Law, designed to provide financial security for employees upon the termination of their employment. These benefits serve as a safety net for workers, ensuring they have the necessary resources as they transition from one job to another, retire, or leave the workforce for any reason. End of service benefits are not just a right for employees but also a responsibility for employers, who must comply with labor regulations to ensure fair treatment and avoid legal repercussions.
Understanding end of service benefits is essential for both employees and employers in Saudi Arabia. For employees, it guarantees compensation based on the length of their service, which can significantly impact their financial stability. For employers, it is vital to stay informed about the rules and calculation methods to remain compliant with labor laws and avoid potential disputes.
This article aims to provide a comprehensive overview of end of service benefits in Saudi Arabia, covering the eligibility criteria, the methods used to calculate the benefits, and the different types of end of service benefits available.
Eligibility for end of service benefits in Saudi Arabia
In Saudi Arabia, the eligibility for end of service benefits depends on various factors, including the length of service, the reason for termination, and specific scenarios outlined in the Labor Law.
Both Saudi nationals and expatriate employees are entitled to end of service benefits, provided they meet the required conditions.
Minimum service requirements
To qualify for end of service benefits, employees must fulfill certain minimum service criteria, which vary depending on the circumstances of termination. The following table outlines the service requirements based on different scenarios:
| Eligibility Criteria: Minimum Service Requirements | ||
| Termination by employer (no misconduct) | If an employee’s contract is terminated by the employer without any misconduct on the part of the employee, the end of service benefits entitlement is calculated as follows:
Less than one year: No benefit is due. 2–5 years: The employee is entitled to half a month’s salary for each year of service. 5+ years: The employee is entitled to the full end of service benefits, which includes one month’s salary for each year of service after the first five years. |
|
| Resignation | If the employee resigns voluntarily, the eligibility for end of service benefits is more restrictive. The benefits are calculated based on the duration of service, as follows:
Less than two years: No benefit is due. 2–5 years: The employee is entitled to one-third of the total end of service benefits . 5–10 years: The employee is entitled to two-thirds of the total end of service benefits. 10+ years: The employee is entitled to the full end of service benefits. |
|
Moreover, conditions change based on different termination scenarios, including:
- Termination without misconduct : In cases where the employer terminates the contract without any misconduct on the part of the employee, the employee will generally be entitled to end of service benefits, based on the length of their service, as outlined above.
- Termination due to misconduct: If the employee is terminated due to misconduct (as defined in their employment contract or the Labor Law), the employee typically forfeits their entitlement to end of service benefits. Misconduct may include actions such as violation of workplace rules, negligence, or criminal activities. It is important for both employees and employers to clearly understand what constitutes misconduct under the law to avoid disputes.
- Mutual agreement: If the employee and employer mutually agree to terminate the employment relationship, the employee is typically entitled to end of service benefits, based on the terms of the agreement and the length of service. Both parties should ensure that the terms of termination are clearly documented to avoid any misunderstandings regarding end of service benefits entitlement.
Calculation of end of service benefits in Saudi Arabia
The calculation of end of service benefits in Saudi Arabia is primarily based on two factors:
- The half-month salary rule; and
- The length of service.
These elements determine the financial compensation an employee is entitled to upon the termination of their employment contract.
Half-month salary rule
Under Saudi labor law, the calculation of end of service benefits is guided by the half-month salary rule, which applies to employees with unlimited-term contracts. The rule works as follows:
- For the first five years of service, employees are entitled to half a month’s salary for each year
- After completing five years of service, employees are entitled to one month’s salary for each subsequent year of service.
This structured approach ensures that the EOSB is calculated in a way that reflects both the length and value of an employee’s service to the company.
Length of service
An employee’s length of service is a crucial factor in determining their end of service benefits. It refers to the total duration of continuous employment with the same employer, and it includes both full years of service and any additional months worked beyond a full year. The longer the employee has worked for the employer, the higher their end of service benefits entitlement:
- Continuous employment: This refers to the total time an employee has worked without interruption, excluding periods of unauthorized leave or suspension.
- Partial years and months: If an employee has worked for partial years (e.g., more than five years but less than six years), those extra months are included in the end of service benefits calculation and are accounted for proportionally.
Example calculation
To help illustrate how the end of service benefits are calculated, let’s consider an example:
Suppose an employee has worked for a company with an unlimited-term contract for 8 years and 3 months, and his monthly salary is SAR 10,000 (US$2,662.18).
- First 5 years: According to the half-month salary rule, Ahmed is entitled to half a month’s salary for each of the first five years. 5 years × 0.5 × SAR 10,000 (US$2,662.18) = SAR 25,000 (US$6,655.46).
- Next 3 years: For the following three years, the employee is entitled to one full month’s salary for each year. 3 years × 1 × SAR 10,000 (US$2,662.18) = SAR 30,000 (US$7,986.55)
- Partial year (3 months): For the additional three months, the employee is entitled to half a month’s salary. 0.5 × SAR 10,000 (US$2,662.18) = SAR 5,000 (US$1,331.09)
Total end of service benefits calculation
Combining the amounts from the first 5 years, the next 3 years, and the partial year:
- Total EOSB = SAR 25,000 SAR (US$6,655.46) of the first 5 years + SAR 30,000 of the next 3 years (US$7,986.55) + SAR 5,000 (US$1,331.09) of the partial year = SAR 60,000 (US$15,973.10).
Thus, the employee’s total end of service benefits would amount to SAR 60,000 (US$15,973.10)
This example highlights how end of service benefits are calculated based on both the length of service and the salary, ensuring that employees are fairly compensated for their time spent working with the employer.
Types of end of service benefits in Saudi Arabia
End of service gratuity
The end of service gratuity is the primary form of compensation provided to employees upon the termination of their employment. It is calculated based on the employee’s total length of service with the employer and their monthly salary. The longer an employee has worked, the higher the gratuity they are entitled to, following the structure laid out in Saudi Labor Law. This benefit is designed to recognize and reward the employee’s years of service, providing financial support as they transition out of the workforce.
Accrued leave pay
Another important component of end of service benefits in Saudi Arabia is accrued leave pay, which compensates employees for any unused annual leave days.
If an employee has not taken all of their allotted vacation days during their employment, they are entitled to payment for those unused days. The amount is typically calculated by multiplying the number of unused leave days by the employee’s daily or monthly wage, depending on the terms of their contract.
This ensures that employees are fairly compensated for their leave entitlements, even if they do not utilize them before leaving the company.
Employer and employee responsibilities
Employers play a crucial role in ensuring that end of service benefits are calculated accurately and paid on time. This includes adhering to the specific rules set out by Saudi Labor Law for end of service benefits, considering the employee’s length of service, salary, and any accrued leave days.
Employers must also ensure compliance with any deadlines set for end of service benefits payment to avoid penalties or legal disputes. Proper record-keeping and transparency throughout the employment period are essential for seamless end of service benefits processing when the employment contract ends.
On the other hand, employees have an important role to play in the end of service benefits process as well. To ensure they receive their full entitlements, employees must understand their rights under Saudi Labor Law and their employment contract. This includes knowing the calculation methods for end of service benefits and ensuring that they fulfill any procedural requirements, such as providing necessary documentation.
Additionally, employees should notify their employer within the stipulated time frame if they intend to resign or terminate their contract to allow sufficient time for end of service benefits processing. Clear communication and timely actions are key to ensuring a smooth transition.
FAQs regarding end of service benefits in Saudi Arabia
What does Saudi Labor Law say about contract termination?
Saudi Labor Law outlines specific provisions for the termination of employment contracts. Both employers and employees have rights and responsibilities when ending a contract, and these must be followed to ensure compliance with the law.
If an employer terminates a contract without a valid reason, or if the termination is due to misconduct, it may impact the employee’s entitlement to end of service benefits.
Additionally, employees are generally required to provide notice of resignation unless the employer breaches the contract. The law also specifies the timeframes and procedures for terminating contracts based on the type of employment and the circumstances involved.
End of service benefits for domestic workers: What are their entitlements after 4 years of service?
Domestic workers in Saudi Arabia are also entitled to end of service benefits.
According to Saudi Labor Law, domestic workers who have been employed continuously for at least four years are entitled to receive end of service benefits equal to one month’s salary upon the termination of their contract.
This is a simplified entitlement compared to other employment categories, but it provides essential financial support as domestic workers transition to new employment or retirement.
What are the key Saudi labor law articles related to end of service benefits?
Saudi Labor Law includes two articles directly related to end of service benefits in the Kingdom. These are:
- Article 74: This article outlines the general grounds for terminating a work contract, specifying that both employers and employees must follow certain procedures, including providing written notice. The law also details the notice periods based on salary payment frequency and emphasizes the need for a valid reason for termination.
- Article 81: Article 81 allows an employee to terminate their contract without notice and still receive full legal entitlements, including EOSB, if the employer breaches the employment contract or creates an intolerable work environment. This provision is designed to protect employees from unfair treatment by employers.
About Us
Middle East Briefing is one of five regional publications under the Asia Briefing brand. It is supported by Dezan Shira & Associates, a pan-Asia, multi-disciplinary professional services firm that assists foreign investors throughout Asia, including through offices in Dubai (UAE), China, India, Vietnam, Singapore, Indonesia, Italy, Germany, and USA. We also have partner firms in Malaysia, Bangladesh, the Philippines, Thailand, and Australia.
For support with establishing a business in the Middle East, or for assistance in analyzing and entering markets elsewhere in Asia, please contact us at dubai@dezshira.com or visit us at www.dezshira.com. To subscribe for content products from the Middle East Briefing, please click here.
