Saudi Labour Law: Complete Guide to End-of-Service Benefits, Leave & Termination (2026).

Saudi Arabia's labour market is governed by the Labour Law issued by Royal Decree No. M/51 of 2005, as substantially amended by Royal Decree No. M/14 of 2021 (the "Labour Law Amendments"). These amendments — the most comprehensive reform of Saudi employment law in two decades — introduced fundamental changes to employment contracts, termination procedures, end-of-service benefits, and worker protections that affect every private-sector employer and employee in the Kingdom.

This guide, prepared by GSDA Legal Consultants' Riyadh employment law team, provides a detailed analysis of the current legal framework as applied in practice, covering the issues that matter most to employers structuring their Saudi workforce and to employees understanding their rights.

Employment Contracts Under Saudi Law

Saudi labour law recognises two types of employment contract: fixed-term (limited duration) and indefinite-term (unlimited duration). For Saudi nationals, either type may be used. For non-Saudi employees, all contracts are deemed fixed-term — even if the contract does not specify a duration, it is treated as lasting for the duration of the employee's work permit. If a fixed-term contract is renewed three consecutive times, or if the original term plus renewals reaches four years (whichever is less), the contract automatically converts to an indefinite-term contract.

Every employment contract must be in writing, in Arabic (the Arabic text prevails in case of conflict with any translation), and must specify the employer and employee identities, the nature and location of work, the contract duration and commencement date, the wage and payment method, the probation period (if any), and the notice period for termination.

The maximum probation period is 90 days, extendable by written agreement to 180 days. During probation, either party may terminate the contract without compensation, provided the other party receives at least 3 days' written notice. Eid Al Fitr and Eid Al Adha holidays and any sick leave days are excluded from the probation period calculation.

End-of-Service Benefits (Gratuity)

The end-of-service award is the most significant financial entitlement for employees leaving Saudi employment. Under Article 84 of the Labour Law, every employee who completes two or more years of service is entitled to an end-of-service award calculated as follows:

For the first five years of service: half a month's wage for each year of service.

For each additional year beyond five years: one full month's wage for each year.

Fractions of a year are calculated proportionally. The "wage" for calculation purposes is the last basic wage plus all fixed allowances (housing allowance, transport allowance, and any other regular payments specified in the contract). Variable components such as commissions, overtime, and performance bonuses are generally excluded unless the contract provides otherwise.

Step-by-step example: An employee with a basic wage plus fixed allowances of SAR 20,000 per month and 8 years of service:

First 5 years: (SAR 20,000 ÷ 2) × 5 = SAR 50,000

Remaining 3 years: SAR 20,000 × 3 = SAR 60,000

Total end-of-service award: SAR 110,000

The entitlement varies based on how the employment ends:

If the employer terminates the employee, the employee receives the full award if they have at least two years of service. If the employee resigns, the entitlement depends on length of service: no award for less than two years, one-third of the award for 2–5 years, two-thirds for 5–10 years, and the full award for 10 or more years. If the contract expires without renewal, or the employment ends by mutual agreement, the full award is payable.

An important exception applies under Article 81 (see below): if the employee resigns for one of the valid reasons specified in Article 81, they receive the full award regardless of length of service.

Article 77: Unfair Dismissal Compensation

Article 77 of the Labour Law, as amended in 2021, establishes the compensation framework for arbitrary or unfair termination. If the employer terminates an employee without a valid reason under Articles 80 or 81, the employee is entitled to compensation as follows:

For fixed-term contracts: the employee receives their remaining wages for the unexpired term of the contract, or an amount equal to two months' wages, whichever is greater.

For indefinite-term contracts: the employee receives compensation equal to 15 days' wages for each year of service, with a minimum of two months' wages.

This compensation is in addition to the end-of-service award and any accrued but untaken annual leave. Article 77 has been the subject of extensive litigation before the Labour Courts, particularly regarding the definition of "valid reason" for termination and the interaction between Article 77 compensation and other contractual termination payments.

Article 80: Lawful Termination by Employer Without Notice

Article 80 enumerates the specific circumstances in which an employer may terminate an employee without notice or end-of-service payment. These include:

The employee assaults the employer, manager, or a colleague during work. The employee fails to perform essential duties or repeatedly violates legitimate instructions despite written warnings. The employee engages in misconduct or dishonourable conduct. The employee deliberately causes material loss to the employer (the employer must report the incident within 24 hours of becoming aware). The employee commits forgery. The employee is absent without valid reason for more than 30 days in a single year or more than 15 consecutive days (after written warning for absence exceeding 20 intermittent days or 10 consecutive days). The employee exploits their position for personal gain. The employee discloses work-related secrets.

The employer must follow the prescribed disciplinary procedure before invoking Article 80: the employee must be notified of the charges, given the opportunity to respond, and the decision must be documented in writing. Failure to follow this procedure may invalidate the termination even if the substantive grounds exist.

Article 81: Employee Resignation With Full Rights

Article 81 protects employees who resign due to the employer's breach of obligations. An employee may leave without notice and retain full end-of-service rights if:

The employer fails to fulfil essential contractual or legal obligations. The employer or their representative commits fraud regarding work conditions. The employer assigns the employee work that is substantially different from the agreed-upon work without the employee's consent. The employer, a family member, or manager assaults or behaves immorally toward the employee. The employer treats the employee with cruelty, injustice, or humiliation. The workplace presents serious health or safety hazards that the employer was aware of but failed to remedy. The employer's actions compel the employee to appear to have resigned (constructive dismissal).

Annual Leave

Employees are entitled to 21 calendar days of paid annual leave per year. After five years of continuous service with the same employer, the entitlement increases to 30 calendar days per year. The employer sets the leave schedule and may split the annual leave into two periods, but no single period may be less than 5 consecutive days. Leave may not be carried forward for more than 90 days, and the employee may not waive their annual leave (any such agreement is void). Upon termination, the employee is entitled to payment for any accrued but untaken annual leave, calculated on the basis of the last wage.

In addition to annual leave, Saudi law mandates the following special leave entitlements: 5 days of paid leave upon marriage (once during employment), 3 days of paid leave upon the birth of a child, 5 days of paid leave upon the death of a spouse or an ascendant or descendant, and paid leave for Hajj pilgrimage of 10–15 days (once during employment for employees who have not previously performed Hajj, after completing at least two consecutive years of service). Employees are also entitled to up to 120 days of sick leave per year: the first 30 days at full pay, the next 60 days at 75% pay, and the final 30 days without pay.

Working Hours and Overtime

Standard working hours in Saudi Arabia are 8 hours per day or 48 hours per week. During the month of Ramadan, working hours for Muslim employees are reduced to 6 hours per day or 36 hours per week. The working week may not exceed 6 days, and Friday is the default weekly rest day, though the employer may substitute another day with MHRSD approval.

Overtime requires the employee's consent and is compensated at the basic hourly rate plus 50%. The total working hours — including overtime — may not exceed 11 hours per day. Employers must maintain records of overtime hours worked by each employee.

The Labour Law also restricts working hours during extreme heat. Ministerial Decision No. 3337 of 2014 prohibits outdoor work between 12:00 PM and 3:00 PM during the summer months (June 15 to September 15). This provision is particularly relevant for the construction sector, where violations carry fines of SAR 3,000–10,000 per worker and may result in temporary or permanent licence suspension.

Notice Periods and Termination Procedures

For indefinite-term contracts, the party wishing to terminate must provide written notice. If the employee is paid monthly, the minimum notice period is 60 days. For other payment arrangements, the minimum is 30 days. Either party may request that the notice period be served as "garden leave" (the employee is released from duties but continues to receive salary). If the terminating party fails to provide the required notice, they must pay the other party compensation equal to the wage for the notice period.

For fixed-term contracts, the contract terminates automatically at the end of the specified term. If either party wishes to terminate before expiry, they must either rely on the grounds specified in Articles 80 or 81, or pay compensation under Article 77.

Saudization (Nitaqat) Compliance

Saudi Arabia's Nitaqat programme mandates minimum Saudi national employment ratios for all private-sector employers. The programme classifies companies into bands (Platinum, High Green, Low Green, Yellow, and Red) based on their Saudization percentage relative to their economic activity and company size. Companies in the Platinum and Green bands enjoy full access to government services including visa issuance, licence renewals, and government contract eligibility. Companies in the Yellow and Red bands face progressive restrictions.

The Saudization ratios vary significantly by sector and are updated periodically by the Ministry of Human Resources and Social Development (MHRSD). As of 2026, key ratios include 100% Saudi employment in certain government-adjacent roles, 70% in retail, and sector-specific ratios in construction, hospitality, manufacturing, and professional services. Non-compliance results in blocked visa applications, inability to change employee professions, and potential fines.

GSDA Legal Consultants' Riyadh office advises employers on all aspects of Saudi employment law, including contract drafting, workforce restructuring, Saudization strategy, termination procedures, and representation before the Labour Courts and the Primary Committee for Settlement of Labour Disputes. Contact our Riyadh team for a consultation.