Saudi Arabian Law Overview

Employment Law

The main Saudi Arabian statute governing employer-employee relationships is the Labour Regulation, Royal Decree No M/51 of 23 Sha’ban 1426 Hejra (corresponding to 27 September 2005), which entered into force on 26 April 2006, superseding the Labour and Workmen Regulation, Royal Decree No M/21 of 6 Ramadan 1389 Hejra (corresponding to 15 November 1969). The new regulation introduced only changes of detail, leaving the main framework of the old legislation in place. Since its entry into force, the Labour Regulation has received multiple amendments, many of which boost the government’s efforts of Saudization (the official Saudi nationalization scheme) and bolster employee rights. In 2019, the Ministry of Labour and Social Development was merged with the Ministry of Civil Service into a new ministry called the Ministry of Human Resources and Social Development (the HRSD). The HRSD is the primary organization presiding over labour related affairs.

Having experienced a population explosion in the last forty years, with birth rates continuing to grow at a rate of 1.63% per year, and an expatriate population which in 2018 stood at 30% of the total population of 34 million, creating employment opportunities for its citizens has long been a high priority of the Saudi Arabian government. The Labour Regulation provides that the percentage of Saudi workers employed by an employer shall not be less than 75% of his total workers, but gives the HRSD the authority to decrease this percentage in the case of unavailability of Saudi workers with technical expertise or academic qualifications, or if it is difficult to fill a given post with a Saudi citizen.

From 1969 to 2018, employment disputes came under the jurisdiction of the Commission for the Settlement of Labour Disputes, which operated under the auspices of the Ministry of Labour and Social Affairs. In late 2018, this jurisdiction was transferred to newly formed Labour Courts, which are administered by the Ministry of Justice. Although past decisions of the Labour Commission and its appeal court may give an indication how the Labour Courts may decide certain issues, it is too early to be certain until some decisions of the Labour Courts have been published.

The Nitaqat Programme

Since 18 June 2011, the Saudization programme known as Nitaqat has been in effect. The concept is that, based on the percentage of Saudi Arabian employees, businesses are classified into Red, Low Green, Green, High Green or Platinum categories, and an employer will receive privileges or be subject to sanctions connected with the employment of foreign staff depending on the category it falls into. In general, employers in the Green, High Green and Platinum categories will find it easy to obtain work permits for foreign staff, while employers in the Red category will not, eventually, even be able to renew existing work permits. Part of the Nitaqat programme is a detailed list of quotas which are determined by the business sector and size of the business entity.

Women may be employed, and there are no restrictions on the employment of Saudi women, provided that the appropriate working environment is provided.

Article 8 of the Labour Regulation states that an agreement whereby the employee waives any rights established in his favour by law is null and void, and that he may not forsake any rights which he has acquired in the course of his employment. Schedule No 5 of the Implementing Rules of the Labour Regulation provide the standard form for a contract of employment. Employment contracts must be in writing, but the employee’s rights are not prejudiced if his employer has failed to execute a written agreement. Employment contracts must state whether they are for a fixed term or an indefinite term, specify the employee’s salary and whether he is paid monthly or otherwise, list the employee’s benefits, if any, and state whether or not a probationary period applies. Otherwise, most aspects of the employment relationship, such as working hours, holidays and rights of termination, are governed by the Labour Regulation and need not be set out in the employment agreement. In 2014, the minimum wage for employees in the private sector was established at SAR 3000 for Saudi nationals. In November 2020, the HRSD announced plans to raise this to SAR 4000.

Normal working hours are eight hours per day for six days a week. Work in excess of 48 hours per week must be compensated at overtime rates, except for certain categories of work, primarily of relevance in the catering trade. Saudi Arabian public holidays are set by the HRSD. During Ramadan, the month of fasting, the maximum working hours for Muslim employees is reduced to six hours per day for six days a week for a total of thirty-six hours. It is common for Muslim employees to receive a thirteenth month’s salary on the occasion of the Eid Al Fitr public holiday, which marks the end of Ramadan.

GOSI

A workers’ compensation plan exists under the direction of the General Organization for Health and Social Security (GOSI). For both Saudi employees and expatriate employees, employers must contribute an amount equal to 2% of their salary towards a workers’ compensation and disability plan administered by GOSI, which is regulated in some detail in the Social Insurance Regulation, Royal Decree No M/22 of 3 Ramadan 1421 Hejra (corresponding to 29 November 2000). The retirement scheme is administered by GOSI, but covers only Saudi nationals. Contributions on behalf of Saudi employees equal 18% of an employee’s wages, with the employer contributing 9% and the employee contributing 9%. Private sector companies must provide health insurance to their Saudi and expatriate employees and their dependents, which includes spouses, unmarried daughters and male children who are under the age of 25.

Injuries at Work

The Labour Regulation provides for prevention against major industrial accidents in high-risk facilities and vocational injuries. A high-risk facility is defined as one that produces hazardous substances or a facility that handles, removes, or stores such hazardous waste. Employers have to coordinate with the HRSD to determine the status of their facilities based upon guidelines issued by the Minister. Furthermore, the HRSD issues decisions that set forth the necessary safety arrangements to be made by the employer and the employer’s obligations in this regard including prevention of major accidents and limiting the risks of major accidents.

Under the Labour Regulation employers are responsible for any vocational injury that an employee may sustain while working. Article 137 of the Labour Regulation provides that employees who suffer work injuries are entitled to compensation in the form of their full pay for sixty days, and 75% of their pay thereafter for the period of their treatment, for a year. If the treatment lasts longer than one year, the employee is classified as disabled and is eligible for compensation.

Salaries and Benefits

It is generally accepted, and has been ruled in the past by the Commission for the Settlement of Labour Disputes, that the salary and benefits under a fixed term contract, as well as the employee’s status, may not be reduced during the contract term. However, at the end of a fixed term contract the parties may re-negotiate their respective positions, provided that the employee is given a clear choice whether or not he wishes to accept the new employment conditions. In the past it was also accepted that an employee enjoyed the same protection under an indefinite term contract. However, if an indefinite term contract is terminated upon proper notice, it may be possible to “re-hire” the employee on new terms with reduced wages and benefits, particularly where the employer can demonstrate that there are valid reasons for such change.

The Labour Regulation sets out provisions concerning end-of-service awards, to which most employees are entitled in principle unless they are dismissed for cause. Pursuant to Article 84, when a fixed term employment agreement comes to an end, or when an employer terminates an indefinite term agreement other than for cause, the employee is entitled to one-half of one month’s wages for each of the first five years of employment and a full month’s wages for each year of employment thereafter, in both cases pro-rated for part of a year’s service. An employee who resigns during the term of a contract receives no end-of-service award for the first two years of employment. There are further detailed rules concerning the end-of-service award payable to an employee who resigns in the course of a contract for periods exceeding two years. The wages by reference to which an end-of-service award is calculated includes base salary, overseas service premiums, regular bonuses and additional benefits which are paid on a regular basis, such as housing and transport allowances. The only payments which are excluded from such calculations are extraordinary bonus or incentive payments like commissions and percentages on sales, which have been identified as such by an express written agreement between the parties. The wage is calculated by adding the last three payments which the employee received and dividing them by three, to arrive at a monthly average. In accordance with Article 8 of the Labour Regulation, an employee cannot contract out of his right to an end-of-service award.

Dismissal

The Ministry of Labour published Model Disciplinary Rules, pursuant to which non-summary dismissal must follow written warnings in respect of transgressions committed by the employee. Summary dismissal is regulated by Article 80 of the Labour Regulation, which lists nine reasons for which an employment agreement may be cancelled without notice or payment of the end-of-service award. These include acts of physical violence, the commission of offences, and sabotage at the workplace. An employee can contest his dismissal by lodging a complaint with the Labour Office, and, if an amicable settlement is not achieved, the matter is referred to the Labour Courts. It is common for employees who have been found to be dismissed unjustly to receive the equivalent of three months’ wages as compensation.

COVID-19 Consequences and Future Labour Regulation Amendments

The HRSD issued Resolution No 142906 of 13 Shaban 1441 Hejra (corresponding to 6 April 2020) to amend the Implementing Rules of the Labour Regulation in light of the ongoing COVID-19 pandemic. The newly inserted Article 41 allows employers and employees to agree to the following for a six-month period:

1. a decrease in salary provided that there is a corresponding decrease in working hours;
2. placing the employee on paid annual leave (as part of their holiday entitlement);
3. the implementation of a period of unpaid leave.

Article 41 is only applicable in circumstances where the government has taken measures in connection with a situation which warrants precautionary measures to prevent the worsening of the situation, such as the current pandemic.

The HRSD is planning to ease contractual restrictions on foreign workers from 14 March 2021. The proposed amendments to the labour laws would allow expats to transfer jobs following the expiry of an existing work contract without the employer’s consent and allow employees to leave the kingdom after the end of the work contract without having to receive consent from their employer.