How to calculate end-of-service benefits in the KSA | HR Solutions in the KSA

Just like in many countries in the Middle East, employees in Saudi Arabia are entitled to end-of-service and gratuity benefits. Employers must provide these benefits to employees after the termination of their employment contracts as per the Saudi Labor Law. Knowing about the gratuity calculation in the KSA is important if you wish to know how much you must pay your employees or know how much you will receive as a worker.

In this article, you will learn everything you need to know about gratuity calculation in the KSA and all related elements. By learning about the process for calculating this benefit, you will be able to complete this task on your own, and if you are an employer, you will be able to accurately calculate it and provide your employees with the sum of gratuity they deserve. Let us observe:

  1. What is gratuity calculation in the KSA?
  2. Who is eligible for receiving gratuity benefits after the termination of a contract?
  3. What do the end-of-service benefits include?
  4. Key factors in the gratuity calculation process in Saudi Arabia
  5. How should employers in Saudi Arabia calculate gratuity payments for employees?
  6. How can Connect Resources help you accurately calculate gratuity in Saudi Arabia?

1. What is gratuity calculation in the KSA?

In many countries, you can find laws and regulations related to gratuity payment and end of service benefits for eligible employees. Particularly in Saudi Arabia, all employers are required to process these payments by using an accurate Saudi gratuity calculator. Therefore, this monetary token of acknowledgment paid to employees is an important element of the payroll functions in this country.

Gratuity and end-of-service benefits in Saudi Arabia are usually paid after the contract is terminated whether by the employer or the employee. These benefits for the employees’ commitment, efforts, and diligence can be a useful element for financial support for them. In addition, you should know that gratuity benefits in Saudi Arabia are considered a liability to the employer or company.

The Saudi Labor Law mentions the details related to this particular award that employees must receive after their employment ends. More precisely, Article 84 of the KSA Labor Law states that employees are entitled to gratuity payment. Also, regarding the end-of-service calculation in the KSA, certain conditions and circumstances must be taken into consideration when calculating this element.

The Labor Law states that this amount must be calculated as the accumulation of half salary per month for the first 5 years. On the other hand, it can also be full salary per month for the following years of service. Learning how to calculate end-of-service in the KSA is essential for employers and employees to avoid misunderstandings.

2. Who is eligible for receiving gratuity benefits after the termination of a contract?

As per the law, any worker in the country is eligible for getting this benefit of end-of-service in the KSA. Nonetheless, there are certain exceptions to this rule that you should be aware of if you work in this country. The only individuals who are not eligible for receiving end-of-service gratuity benefits are the following:

  • Employees who work in the country without transferring the Iqama sponsorship.
  • Employees who work in the country on a business visit visa.
  • And employees who work in the country on a consultancy contract, like HR consultants.

There are other factors related to the calculation of these essential benefits. For example, the law states that the calculation starts from the first until the last day of service of the worker.

On the other hand, to proceed with the end-of-service benefit calculation, you should consider other elements. Below, we will explain the elements that these benefits include, as well as the ones that affect the calculation.

3. What do the end-of-service benefits include?

As per the Saudi Labor Law, end-of-service benefits include all the fixed benefits that employers pay to employees. Therefore, it includes elements like an employee’s basic salary, housing, transportation, and mobile allowance as well.

Nonetheless, there are other types of benefits that are not included in this case. For example, it does not include benefits that are contingent upon other elements, such as bonuses, sales incentives, and ticket allowance.

3.1. When must employers pay end-of-service benefits to their employees?

The end-of-service Saudi Labor Law, more precisely, Article 88 of the Law, states that employers are obliged to pay these benefits within a particular period. These are the periods to pay gratuity and end-of-service benefits established by the law:

  • In case the employer terminates the worker’s employment contract, the employer must pay within 1 week.
  • In case the employee resigns, the employer must pay their benefits within 2 weeks.

If the employer fails to correctly calculate gratuity or does not pay within the established periods, there will be consequences. For example, the employer may face an SR 10,000 fine (around AED 9,780) for delaying the payment for more than 2 weeks. On the other hand, the employee can protect their rights by filing the case in the Saudi Labor Court.

4. Key factors in the gratuity calculation process in Saudi Arabia

Unlike in the UAE, the type of employment contract does not affect the end-of-service benefits or gratuity calculation in the KSA. In Saudi Arabia, the Labor Law defines two types of employment contracts, which are fixed contracts and open-ended contracts. But, as we just mentioned, the type of contract does not affect the amount of gratuity that the employees receive.

In fact, the circumstances in which the employment contract ended is the main factor that must be taken into account. There are only two cases that employers consider when using a benefits calculator in the KSA; resignation and termination. Let us now take a look at the guidelines that the law states regarding the gratuity calculation in the KSA in these cases.

4.1. What happens in the case of resignation?

In case a working relationship ends due to the employee’s resignation, the employee will receive one-third (1/3) of the award after a service of between 2 and 5 consecutive years. If the employee served between 5 and 10 consecutive years, they will receive two-thirds (2/3). But if the employee worked for 10 years or more, they will receive the full award.

To understand these rules stated by the Labor Law, let us summarize them like this:

  • If an employee served for a company for less than 2 years, they will not receive the gratuity benefit.
  • If they served for more than 2 years and less than 5, they will receive one-third (1/3) of the gratuity payment.
  • The employer must entitle the employee to two-thirds (2/3) of the payment if they served for more than 5 years but less than 10.
  • If an employee served from 10 years onwards, they shall receive the complete gratuity payment.

4.2. What happens in the case of the termination of the contract?

The end-of-service Saudi Labor Law states that, as an exception to the provisions of Article 85, employees must receive the full award. As long as an employee leaves the work due to a force majeure beyond their control, they will receive full payment. These are the key rules regarding gratuity benefits in case the employer terminates an employee work contract:

  • The employer will not pay any gratuity benefit if the employee worked for less than 1 year.
  • If the employee provided their service for more than 1 year and less than 5, they will receive half salary per month per year.
  • The employee will be entitled to the full gratuity payment if they served for more than 5 years.

In all cases, it is imperative to use an effective end-of-service benefit calculator in the KSA. In this way, there will be no mistakes regarding the amount of money that the employee will receive.

5. How should employers in Saudi Arabia calculate gratuity payments for employees?

To fully understand how employers should complete the gratuity calculation in the KSA, let us use an example. In this example, the monthly salary of an employee is SR 10,000. The first thing we need to do is identify the employee’s wage per day, which is SR 333.33. Also, we must take into account the number of years worked, and in this case, the employee worked for 7 years.

  • For the first period (the first 5 years), the gratuity payment will be SR 25,000 (5 years × 10,000 / 2 = 25,000).
  • Then, we use a Saudi end-of-service calculator to calculate the gratuity payment for the next period (the remaining 2 years). The result will be SR 20,000 (2 years × 10,000 = 20,000).
  • Lastly, we calculate the total sum, which will be SR 45,000 (25,000 + 20,000).

Now, if the employee resigned and worked for less than 5 years, the calculation is different. In the following example, an employee’s salary is SR 10,000, and worked for 4 years. We use an end-of-service calculator in Riyadh and the KSA to calculate the following:

  • 10,000/2 × 4 × 1/3 = 6,667. Therefore, the employee will receive SR 6,667.

In case the employee resigned and worked between 5 and 10 years, they will receive 2/3 of the gratuity payment. So, the formula to calculate end-of-service benefits will be ½ salary for X years + full salary for each next year. For example, if the employee resigned after working for 7 years:

  • The first period (the first 5 years): 10,000/2 × 5 × 2/3 = 16,667.
  • The next period (the remaining 2 years): 10,000/2 × 2 × 2/3 = 13,333.
  • Therefore, the total sum will be SR 30,000 (16,667 + 13,333).

If the employee resigned after working for more than 10 years, we can use an end of benefits calculator in the KSA to calculate the following: ½ salary per year for the first period and full salary per year for the next period. For example, if the employee resigned after working for 11 years:

  • The first period (the first 5 years): 10,000/2 × 5 × 1/2 = 25,000
  • The next period (the remaining 6 years): 10,000 × 6 = 60,000.
  • Then, the total sum, which is SR 85,000.

As you can see, learning how to compute end-of-service in the KSA is essential. But using an updated calculator to complete the end service benefits calculation in Saudi Arabia can be a more efficient method.

6. How can Connect Resources help you learn more about gratuity calculation in the KSA?

Do you work in Saudi Arabia or are you a member of a company’s HR department? Then you should learn about the formula to calculate end-of-service benefits to know how much you or your company’s employees will receive after the termination of the employment contract. Additionally, if you contact Connect Resources, our experts will provide you with all the information and guidance you need.

But if you own a company in any of the countries we list below, we can help you manage several HR functions.

For example, HR tasks like payroll processing are one of the many operations we can carry out on your behalf. And if you are looking forward to expanding your business, our EOR and PEO services will help you significantly. Do not hesitate to request more information! Our team works hard to provide you with all the answers and solutions you need in a fast way.

Do you wish to learn more about the gratuity and other end-of-service benefits in Saudi Arabia? Connect Resources can provide you with the guidance you need on this particular matter regardless of your location in the Middle East. If you desire to talk to one of our specialists about gratuity calculation in the KSA, make sure to call us at +971 43 316 688 or send us an email at contact@connectresources.ae.

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