SAUDI ARABIA Law and Practice Contributed by: Dana Halwani and Leanne Farsi, Derayah LLPC
• the Labour Regulation and other applicable laws; • contractual obligations; • social, religious and customary rules; • public policy; • impossibility or frustration of purpose; • the employer’s by-laws and work rules; and • real business considerations. However, anything that appears arbitrary or discrimi - natory will not be accepted by the Labour Courts. Compensation When a fixed-term contract is terminated prematurely without cause, Article 77 of the Labour Regulation requires the courts to award compensation to the end of the contract (however long this may be), with a minimum of two months’ salary. The right to compen - sation applies not only when the employment contract is terminated early by the employer, but also when the employee terminates early without good cause. When an indefinite-term contract is terminated with - out cause, the employee receives 15 days’ salary for each year of service, or pro rata for an incomplete year, with a minimum of two months’ salary, unless compensation for unlawful termination is set out in the employment contract. The compensation is in addi - tion to the end-of-service benefits (ESBs) that are pay - able in any event. Under Article 84 of the Labour Regulation, when an employment contract comes to an end, as a general rule the employee is entitled to: • one-half of one month’s wages for each of the first five years of employment (or pro-rated part thereof); and • a full month’s wages for each year of employment thereafter (or pro-rated part thereof). Where an employee has resigned for reasons other than force majeure, the ESB is calculated as follows: • one-third of the Article 84 ESB for two to five years of employment; • two-thirds of the Article 84 ESB for six to ten years of employment; and
• the full Article 84 ESB for employment of more than ten years. A waiver of the right to ESB is ineffective under Saudi Arabian law. The ESB is calculated with reference to the employee’s gross remuneration, which includes housing and transport allowances, regular bonuses, etc. Where housing and transport are provided to the employee, the actual value or fair market value of such benefits is taken as the basis of the calculation. 4.5 Employee Representations There are no trade unions in Saudi Arabia; employees’ interests are represented by the HRSD. The Labour Regulation sets out rules governing the investigation of complaints by labour inspectors. There is no personal income tax in Saudi Arabia. The government imposes charges on expatriate employ - ees, which are proportional to the term of the employ - ee’s work licence period, and are affected by whether the number of expatriate employees is equal to, few - er than, or exceeds the number of Saudi employees employed by the establishment. Small businesses with a total workforce of nine employees or less, and industrial companies, may receive a certain number of exemptions from paying these charges on expatriate employees. 5. Tax Law 5.1 Taxes Applicable to Employees/ Employers In addition, a monthly charge is imposed on expa - triates’ dependants. While the charges on expatriate employees must be borne by the employer, many employers do not cover the levy on dependants, which is therefore, in effect, a form of income tax. 5.2 Taxes Applicable to Businesses Zakat Saudi Arabian interests pay zakat, which is a religious wealth tax based on the taxpayer’s net worth, not income. The effective rate is 2.5% of the net worth of natural persons and 2.5% of the total capital resourc - es of companies. For companies, the tax base for the
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