The Kingdom of Saudi Arabia (KSA), once known for its oil-driven economy, is now on a path of unprecedented economic growth, leading to an influx of foreign businesses into the KSA. For a foreign business, there are various factors to be considered in deciding to establish in a new jurisdiction, one such factor being employment.
As with any case of expansion into a new jurisdiction, it is important to understand the peculiarities of operating in the jurisdiction and ensure strict adherence to applicable laws, to successfully establish a presence in the region. The KSA market is distinctive in its operation, and it is imperative that businesses understand these aspects before operating in the jurisdiction. Employment in KSA is mainly regulated by the Labour Regulation, Royal Decree No M/51 of 23 Sha’ban 1426 Hejra (corresponding to 27 September 2005), as amended from time to time (Labor Law), under the control of the Ministry of Human Resources and Social Development (MHRSD).
This article provides a brief overview of the employment regime in KSA, highlighting the considerations for businesses operating in the jurisdiction especially considering the Saudization rules in place.
Important considerations for employers in KSA
- All employees must be registered with the MHRSD and General Organization for Social Insurance (GOSI).
- Expatriate employees require necessary immigration approvals and a valid work and residence permit (known as Iqama).
- Medical Insurance has to be mandatorily provided to all employees (both Saudi and expatriate) and their dependents.
- Companies receive a rating (Red, Low Green, Medium Green, High Green, Platinum) depending on the level of Saudization achieved. Companies with higher Saudization percentage are conferred benefits such as participation in governmental programs, access to governmental contracts, employment and visa processing privileges etc.
- As an incentive to hire Saudi nationals, additional levies are payable on each foreign employee employed and their dependents, making it more expensive to hire expatriates.
Brief Overview of the Labor Law in KSA
Expatriate employees | Saudi employees | |
Type of employment contract | Only fixed-term employment contracts | Either fixed term or unlimited term employment contracts. |
Minimum Wage | No minimum wage | Minimum wage of SAR 4,000 |
Social Security/ payments to the GOSI
|
· Occupational hazard- contribution of 2% of the wage by the employer. | · Occupational hazard- contribution of 2% of the wage by the employer.
· Unemployment Insurance- contribution of 1% of the wage each from employer and employee · Pension- contribution of 9% of the wage each from employer and employee |
Annual Leave | Up to 5 years of service- 21 days of annual leave
More than 5 years of service- 30 days of annual leave |
|
Termination | · Definite contracts can be terminated for ‘cause’ or by mutual consent, provided that employee’s consent is in writing.
· In the case of an employer, ‘cause’ would include acts such as misconduct, forgery etc as provided in Art. 80 of the Labor Law. · In the case of an employee, ‘cause’ would include a workplace hazard, cruelty, unjust treatment etc. as provided in Art. 81 of the Labor Law. |
· An unlimited term contract may be terminated by either party for a valid or legitimate reason with 60 days’ notice.
· The valid reason is determined on a case-to-case basis by the Saudi Labour Courts |
Severance pay | If termination is not in accordance with the provisions of the Labor Law, an employee is entitled to compensation amounting to their wage for the remaining period of the contract, or two months’ wage, whichever is greater. | If termination is not in accordance with the provisions of the Labor Law, an employee is entitled to compensation amounting to their 15 days’ wage for each year of service, or two months’ wage, whichever is greater. |
End of service | · Half a month wage for each of the first five years of service and one-month wage for each of the following years to be paid by the employer.
· If an employee resigns, his end of service award is reduced depending on the number of years of service. |
Compliance with Saudization and Nitaqat
Saudization is not a recent development, and policies have been in place for years to promote the employment of Saudis. In 2011, a revamp of the existing system was undertaken by introduction of the Nitaqat system, which imposes Saudisation requirements on companies referring to the size of the workforce and sector of business.
As a general rule, companies with 5 employees should have at least 1 Saudi employee. For companies with more than 5 employees, the specific rules based on the profession and sector will apply. The long-standing rule in KSA is that at least 75% of the workforce should comprise of Saudi nationals. However, these targets are not achieved in practice, as the Law provides that these levels may be waived if skilled Saudi workforce is unavailable in the particular sector, which is currently the case. To ensure that Saudis are trained adequately, mandatory vocational trainings for Saudis are prescribed under the Labour Law.
In a recent update to the Nitaqat system, certain professions or roles are exclusively reserved for Saudi nationals, quotas for specific sectors have been increased and minimum wages have been fixed for specific professions (mostly ranging from SAR 5,000 to SAR 7,000). The Saudization requirements being dynamic, businesses must ensure that they are in compliance with the percentages as applicable to their business.
In general, the business environment in KSA is welcoming to foreign investors, providing flexibility to operate within the confines of the KSA legal system. Saudization can prove to be beneficial for foreign businesses, who benefit from the local expertise and understanding of the culture provided by the Saudi workforce. At the same time, businesses have the flexibility to bring in foreign talent. The harmonization of both foreign and local talent will provide optimum business growth to businesses in KSA.
Authors
Dr Bader AlBusaiyes
Founder and Managing Partner
AlSuwaiket & AlBusaiyes Lawyers and Legal Consultants Co.
Al Khobar Saudi Arabia
Email: dr.bader@sbsaudilawyers.com
Mob: +966 50 5945306
In collaboration with
Dr. Lura Voda
Partner
Fichte & Co Legal
Dubai, United Arab Emirates
Email: laura.voda@fichtelegal.com
Mob: +971 50 5827667