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How Saudi Arabia End-of-Service Benefits Work

Saudi Arabia's end-of-service benefit (also referred to as gratuity or "mukafa'at nihayat al-khidma") is governed by Articles 84-88 of the Saudi Labour Law (Royal Decree No. M/51, dated 23/08/1426H). The system provides a lump-sum payment to employees upon termination of their employment, serving as a form of retirement benefit, particularly for the approximately 11 million expatriate workers who are not covered by the GOSI pension system.

For a side-by-side comparison of how gratuity works in all GCC countries, see our end-of-service benefits guide. The Saudi gratuity system is notably different from the UAE and Qatar in two important respects: first, it uses the "last actual wage" (which can include regular allowances) rather than just basic salary; and second, it applies significant reductions for employees who resign with fewer than 10 years of service.

The Saudi Gratuity Formula

Under Article 84 of the Saudi Labour Law, the end-of-service award is calculated as follows:

• First five years: Half a month's wage for each year of service.
• After five years: One full month's wage for each additional year of service.
• Basis: Calculated on the "last actual wage" received by the employee. Review your contract terms to confirm which wage components apply.
• Pro-rata: Fractions of a year are calculated proportionally.

Resignation Reductions (Article 85)

This is the most critical difference between Saudi gratuity and the systems in the UAE and Qatar. Under Article 85, if the employee resigns (as opposed to being terminated by the employer), the following reductions apply:

• Less than 2 years of service: No gratuity entitlement.
• 2 to 5 years of service: The employee receives one-third of the calculated gratuity.
• 5 to 10 years of service: The employee receives two-thirds of the calculated gratuity.
• 10 or more years of service: The employee receives the full calculated gratuity.

These reductions do not apply when the employee is terminated by the employer (for reasons other than gross misconduct), when the contract expires, or when the employment ends through force majeure.

Example Calculations

Scenario 1: Employee terminated after 8 years, last wage SAR 12 000 (~€2 941)/month

• First 5 years: 0.5 x 12 000 x 5 = SAR 30 000 (~€7 353)
• Next 3 years: 1 x 12 000 x 3 = SAR 36 000 (~€8 824)
• Total: SAR 66 000 (~€16 176) (full amount, no reduction)

Scenario 2: Employee resigns after 8 years, last wage SAR 12 000 (~€2 941)/month

• Full calculated amount: SAR 66 000 (~€16 176) (as above)
• Resignation reduction (5-10 years): two-thirds
• Total payable: SAR 66 000 x 2/3 = SAR 44 000 (~€10 784)

Scenario 3: Employee resigns after 3 years, last wage SAR 12 000 (~€2 941)/month

• Full calculated amount: 0.5 x 12 000 x 3 = SAR 18 000 (~€4 412)
• Resignation reduction (2-5 years): one-third
• Total payable: SAR 18 000 x 1/3 = SAR 6 000 (~€1 471)

Understanding "Last Actual Wage"

The Saudi Labour Law defines "actual wage" in Article 2 as: "the basic wage plus all other entitlements stipulated for the worker in the employment contract, or work rules, or by reason of the employer's practice, regardless of the type or description of such entitlements."

This definition is notably broader than the UAE's "basic salary" standard. In practice, the "last actual wage" for gratuity purposes may include:

• Basic salary
• Housing allowance (if regularly paid and contractually stipulated)
• Transport allowance (if regularly paid)
• Commission (if regular and predictable)
• Other regular contractual allowances

Irregular or discretionary payments such as occasional bonuses, overtime, or one-time awards are generally excluded. The specific components included depend on the employment contract terms and how allowances are structured. Employees should review their contract carefully and, if uncertain, consult a labour lawyer or the Ministry of Human Resources.

Special Provisions for Women (Article 87)

Article 87 of the Saudi Labour Law provides special gratuity provisions for female employees:

• A female employee who terminates her employment contract within six months of her marriage is entitled to the full end-of-service award, without any resignation reductions.
• A female employee who terminates her contract within three months of giving birth is similarly entitled to the full award.

These provisions recognise that some women may need to leave employment due to major life events and ensure they are not penalised financially for doing so. The full gratuity is paid regardless of the length of service (provided the minimum one-year requirement is met).

Gross Misconduct Exceptions (Article 80)

Under Article 80, an employer may terminate an employee without notice, compensation, or end-of-service award if the employee:

• Assaults the employer, manager, or a colleague during work
• Fails to perform essential duties or disobeys legitimate orders despite written warning
• Is proven to have engaged in misconduct or dishonest conduct
• Deliberately causes material loss to the employer
• Commits forgery to obtain employment
• Is absent without valid reason for more than 20 non-consecutive days or more than 10 consecutive days in one year (after written warning)
• Exploits their position for personal gain
• Discloses industrial or commercial secrets

Interaction with GOSI

For Saudi nationals, the GOSI pension system and end-of-service benefits operate in parallel. Saudi employees receive both GOSI pension benefits (based on their contribution history) and end-of-service gratuity. However, in certain cases, employers may argue that GOSI contributions should be considered as partial satisfaction of the gratuity obligation. Employees should be aware of this potential issue and seek advice if their employer attempts to offset GOSI contributions against gratuity.

For expatriate employees, GOSI covers only occupational hazard insurance (2% from employer), and the end-of-service gratuity is the primary financial benefit upon leaving employment. There is no pension component for expatriates under GOSI.

Edge Cases and Special Situations

Force Majeure Termination

Under Article 83 of the Saudi Labour Law, if the employment contract is terminated due to force majeure (such as a natural disaster, war, or circumstances beyond the control of either party), the employee is entitled to the full end-of-service benefit without any resignation reductions. The COVID-19 pandemic raised questions about whether it constituted force majeure, with the Ministry of Human Resources issuing guidance that terminations solely attributable to the pandemic could qualify. Employees terminated under these circumstances should ensure their gratuity is calculated at the full rate, not the reduced resignation rate.

Probation Period and Gratuity

Saudi Arabia allows a probation period of up to 90 days, which can be extended to 180 days by written agreement. Service during the probation period counts towards the one-year minimum for gratuity eligibility. If an employee is terminated during probation and has completed at least one year of total service (for instance, if the probation is within a renewal contract after previous continuous employment), they may still be entitled to gratuity for the full period of service.

Fixed-Term vs. Indefinite Contracts

Saudi Arabia predominantly uses fixed-term contracts, though indefinite contracts also exist. The type of contract affects how termination is classified. If a fixed-term contract expires and is not renewed, the employee is considered terminated (not resigned), and the full gratuity without resignation reductions applies. This distinction is important for employees on sequential fixed-term contracts: each contract expiry should be treated as an employer-initiated termination for gratuity purposes, unless the employee explicitly refuses a renewal offer.

Transfer Between Group Companies

When an employee is transferred from one entity to another within a corporate group (for example, from a parent company to a subsidiary), the treatment of service continuity depends on whether gratuity was settled at the time of transfer. If gratuity was paid and a new contract was issued, the service period restarts. If no gratuity was paid and the transfer was documented as a continuation of service, the employee's total tenure across both entities should be counted for gratuity purposes. Employees undergoing such transfers should obtain written confirmation from both entities regarding the treatment of their service period.

Long-Term Value of Saudi Gratuity

The financial impact of Saudi Arabia's end-of-service benefit system is shaped by two competing factors: the generous calculation basis (which includes regular allowances) and the significant resignation reductions for employees with fewer than ten years of service.

Consider a senior engineer with a last actual wage of SAR 20 000 (~€4 902) per month (including basic salary and regular allowances). The gratuity at various milestones would be:

• After 3 years, terminated: 0.5 x 20 000 x 3 = SAR 30 000 (~€7 353). Full amount paid.
• After 3 years, resigned: SAR 30 000 x 1/3 = SAR 10 000 (~€2 451). Two-thirds forfeited.
• After 7 years, terminated: (0.5 x 20 000 x 5) + (1 x 20 000 x 2) = SAR 90 000 (~€22 059). Full amount paid.
• After 7 years, resigned: SAR 90 000 x 2/3 = SAR 60 000 (~€14 706). One-third forfeited.
• After 12 years, terminated or resigned: (0.5 x 20 000 x 5) + (1 x 20 000 x 7) = SAR 190 000 (~€46 569). Full amount paid (no reduction after 10 years).

The resignation reductions create strong financial incentives for long tenure. An employee contemplating resignation at the eight-year mark would forfeit one-third of their gratuity, which on a SAR 20 000 wage would mean losing SAR 36 667 (~€8 987). Waiting two additional years to reach the ten-year threshold eliminates the reduction entirely and adds two more years of accumulation at the higher rate (one month per year), making the ten-year milestone a critical financial breakpoint.

For employees who anticipate leaving before the ten-year mark, there is a strategic consideration: it may be more financially advantageous to negotiate for the employer to initiate the termination (for reasons other than misconduct), which eliminates the resignation reduction. Some employers are willing to arrange mutual termination agreements that protect the employee's full gratuity entitlement while managing the administrative aspects of the separation. This should be discussed with the employer and, if necessary, with a labour lawyer.

Financial Comparison: Saudi vs. UAE vs. Qatar Gratuity

For a professional considering where to build their Gulf career, the differences in gratuity systems can amount to significant sums over time. Using a standardized monthly wage of SAR/AED/QAR 15 000 (approximately €3 676/€3 750/€3 778), the gratuity comparison over common tenure lengths reveals important differences:

After five years with termination: UAE provides AED 52 500 (~€13 125), Qatar provides QAR 52 500 (~€13 224), and Saudi Arabia provides SAR 37 500 (~€9 191). Qatar and the UAE are nearly identical, while Saudi Arabia's lower first-five-year rate (15 days versus 21 days) results in 29% less gratuity for the same period.

After ten years with termination: UAE provides AED 127 500 (~€31 875), Qatar provides QAR 105 000 (~€26 449), and Saudi Arabia provides SAR 112 500 (~€27 574). The UAE pulls ahead due to the higher 30-day rate after year five and the cap not yet being reached. Saudi Arabia overtakes Qatar due to its full-month rate after year five. Qatar's flat 21-day rate, while simpler, becomes less competitive for long tenures.

After ten years with resignation: UAE still provides AED 127 500 (~€31 875) as there is no resignation reduction under the 2021 law. Qatar still provides QAR 105 000 (~€26 449). Saudi Arabia provides the full SAR 112 500 (~€27 574) only because the employee has reached the ten-year threshold. Had the employee resigned at nine years, the Saudi payout would be reduced to two-thirds, or approximately SAR 68 333 (~€16 748).

Frequently Asked Questions

Sources

• Saudi Labour Law, Royal Decree No. M/51 (Articles 80, 84-88)
• Ministry of Human Resources and Social Development (HRSD), hrsd.gov.sa
• General Organization for Social Insurance (GOSI), < href="https://www.gosi.gov.sa" rel="noopener noreferrer" target="_blank">gosi.gov.sa