What Parent Companies Need to Know About Severance Pay & Termination Laws in Saudi Arabia

Expanding operations into new markets, such as Saudi Arabia, requires parent companies to familiarise themselves with local labour laws to maintain compliance and foster positive employee relationships. The Saudi Labour Law, governed by Royal Decree No. M/51 (2005) and its amendments, outline critical rules regarding severance pay, termination, and employer-employee obligations. This essential guide helps parent companies navigate these regulations effectively.

Importance of Employment Contracts

Employment contracts form the foundation of the employer-employee relationship in Saudi Arabia. These contracts are generally classified into two types:

• Fixed-term Contracts: With a defined start and end date, these are particularly relevant for project-based roles.
• Indefinite-term Contracts: Continuing until termination, these are common for ongoing positions.

Understanding the nature of the contract is vital, as applicable termination laws vary depending on the agreement. For example, ending a fixed-term contract prematurely may require financial compensation.

Termination Laws in Saudi Arabia

Termination is regulated to ensure fairness and legal compliance. Employers must understand when and how they can terminate an employee:

1. Valid Reasons for Termination

• Probation Period: If specified in the contract, employees may be terminated without severance pay during their probation.
• Misconduct: Severe misconduct, such as fraud or harassment, may lead to termination without severance.
• Economic or Operational Reasons: Layoffs due to financial or structural changes must follow specific legal procedures.

1. Notice Periods

• For indefinite-term contracts, employers must provide a 60-day notice if the employee is paid monthly.
• For fixed-term contracts, termination before the end may result in compensation equivalent to the remaining contract period.

Saudi Arabia End of Service Pay Rules

Severance pay—also known as “end-of-service gratuity”—is a mandatory requirement under Saudi Labour Law. Employees are entitled to compensation upon termination, except in cases of gross misconduct.

Severance Pay Calculation:

• For the first five years of service, employees receive half a month’s salary for each year.
• Beyond five years, employees receive one month’s salary for each additional year.

Employers must calculate severance pay carefully to ensure compliance and avoid disputes.

Legal Protections for Foreign Employees

Foreign employees, who represent a significant portion of the workforce in Saudi Arabia, are entitled to the same labour protections as Saudi nationals. However, unique factors apply:

• Foreign employees may need to exit the country upon contract termination unless new employment is secured.
• Employers are responsible for exit permits and ensuring final severance pay settlements.

This underscores the importance of maintaining proper documentation and adhering to legal requirements.

Navigating Redundancy and Collective Terminations

While Saudi labour regulations do not explicitly define redundancy, large-scale terminations due to restructuring must adhere to strict guidelines:

• Advance Notification: Employers must notify the Ministry of Human Resources and Social Development (MHRSD) before mass layoffs.
• Severance Compensation: All affected employees must be compensated in accordance with end-of-service pay rules.

Addressing Disputes and Compliance

Disputes over termination or severance are addressed by Labour Dispute Settlement Committees. To minimise risks, companies should:

• Keep detailed records of employment contracts, notices, and severance calculations.
• Conduct transparent termination processes to avoid legal challenges.

Understanding Saudization Requirements

The Nitaqat program emphasises the employment of Saudi nationals, affecting termination policies for both expatriates and locals. Employers must ensure that workforce reductions align with Saudization requirements, as non-compliance can result in penalties such as visa issuance restrictions.

Best Practices for Parent Companies

To effectively navigate severance pay laws and termination regulations, parent companies should:

• Conduct Regular Audits: Review contracts and policies to ensure compliance with labour laws.
• Train HR Teams: Equip HR personnel with up-to-date knowledge of employment contracts and local regulations.
• Engage Legal Experts: Seek guidance for complex termination scenarios and legal translation for accurate documentation.
• Document All Processes: Maintain comprehensive records to demonstrate compliance.

Innovation-SA: Your Partner in Seamless Business Operations

As a leading provider of integrated business solutions, Innovation-SA supports parent companies in navigating Saudi Arabia’s complex labour landscape. With over 20 years of expertise, we help businesses streamline operations and ensure compliance with local regulations such as severance pay laws and other employment requirements.

Our services extend beyond advisory roles—we manage day-to-day operations to optimise efficiency and reduce administrative burdens. From setup advisory and legal translation in Saudi Arabia to payroll services, PRO services, and comprehensive workforce management, we offer tailored solutions for businesses of all sizes.

Get Started with Innovation-SA

Ready to simplify your business operations in Saudi Arabia? Contact us today to explore our tailored solutions for company setup, workforce management, and legal compliance. Let Innovation-SA handle the complexities while you focus on growth and success.