Amendments to Saudi Labor Law - An overview

The amendments to the Saudi Labor (Royal Decree No. M/46 of 05/06/1436) were published in the official gazette No. 4563 dated 24 April 2015. It has been announced by the Ministry of Labor that these will be implemented six months after the date of its publication and therefore it is expected that these will be implemented on the 24 October 2015.

The reforms have been designed to encourage the employment of Saudi nationals in the private sector and the new amendments include an increase in leave entitlements, doubling of notice periods in respect of unlimited term contracts and severer penalties which can be imposed in the case of labor violations. However, there also appears to have been a recognition of market practices and the needs of businesses and there is also a recognition of redundancy (albeit with restrictions); ability to agree in advance compensation in the contract of employment for invalid terminations and removal of right to claim reinstatement; doubling of probationary periods and extension of period of fixed term contracts for Saudi nationals.

The major reforms to the working hours including a reduction in the working week to five days are currently still being debated and we will have to wait and see if and when this is implemented.

Employers in the Kingdom should act now to ensure that they start to update their contracts of employment and policies now to benefit from some of these amendments and to be mindful of the increased costs in some circumstances. Employers should also be mindful of the continuously evolving Nitaqat scheme with changes announced as to the calculation of the Saudization percentage. A Saudi employee will now be calculated after 24 hours from his registration in GOSI (previously there was a waiting period of three months from registration). However, the Nitaqat level will be based on the average Saudization percentage during the preceding 26 weeks. This means that the hire or termination of a Saudi employee will not have such a strong impact on companies in terms of their Nitaqat implications.

Some of the key amendments of the Labor Law that employers need to be aware of and take action now to ensure they are ready when the amendments come into force.

Key amendments: Internal Regulations/work organization rules

All employers must now develop internal regulations whereas previously this was only required if employers had more than ten employees. It is not yet clear whether the Internal Regulations will required to be approved by the Ministry of Labor and it is expected that this will be confirmed in the coming months. The requirement for the regulations to conform to the Model issued by the Ministry still exists but an employer may now include additional terms and conditions provided these do not contradict the provisions of the law.

Training of Saudi nationals

Employers with 50 or more employees must train on an annual basis Saudi employees which amount to not less than 12 per cent of the total workforce (previously this was six per cent). This includes Saudi employees who are studying and where the employer is paying their study fees (i.e. course fees).
Probationary period
Currently, an employee can be subject to a probationary period of no more than 90 calendar days and during this period the contract can be terminated without notice. Subject to the employee's consent, this period can be extended up to 180 calendar days (i.e. six months in total). This allows employers more flexibility in establishing whether the employee is suitable for the role. An employee can now also be placed under a second probation period with the same employer if more than six months have passed since the employee was previously terminated by the employer.

Conversion of fixed term contracts for Saudi nationals

If a Saudi national is engaged in three consecutive fixed term contracts or if the continuous employment of the Saudi national reaches four years (whichever is less) and both parties to continue to perform the contract then the contract will be automatically converted to an unlimited contract. Previously the maximum term was three years or two consecutive renewals of the fixed term contract (whichever is less).

This will provide more certainty for employers in engaging Saudi nationals given that a fixed term contract will be automatically terminated on its expiry (unless both parties continue to perform the contract) whereas an unlimited term contract can only be terminated for a valid reason to avoid a finding of arbitrary dismissal.

Transfer of work location

An employer cannot assign an employee to another location if this requires them to move house, without obtaining the employee's prior written consent. Previously, this was not permitted where there was a "grave disadvantage" to the employee and the employer did not have justifiable work reasons for the move. In an emergency an employer can temporarily assign employees to another work location for a maximum period of 30 days per year without obtaining their consent. There is no definition of what would amount to an "emergency" but it does suggest that an employee cannot be assigned for convenience.

Service certificate/employee reference

On termination employers are currently required, on request, to provide a service certificate (free of charge) which sets out details of the employee's employment (date of joining and leaving, salary details and profession). Employers are now expressly prohibited from including anything in this certificate that may be harmful to the employee's reputation or may 'reduce his employment opportunities'. Previously, this could be included in the certificate if the employer included reasons for the same.

Termination of employment

Redundancy

It is now expressly recognized in the amendments that an employment contract can be validly terminated where the employer is (i) closing down the establishment completely; or (ii) terminating the business activity where the employee is employed. This recognition of a redundancy does not goes as far as to extend to situations where there is a reduction in work requirements that requires a reduction in the workforce or a reduction in a particular role. It may therefore be difficult to justify individual redundancies or smaller scale restructures.

Notice period

The notice period for monthly paid employees on unlimited contracts has doubled from 30 days to 60 days and not less than thirty (30) days for others. If either party has not given the required notice to terminate the contract, the parties can agree what compensation is payable.

Compensation for invalid terminations & removal of the right to claim reinstatement

The parties can expressly set out in the contract of employment what compensation is payable if either party terminates the contract for an unlawful reason. If no compensation is agreed in the contract then the compensation payable will be as follows:
- 15 days' per year of service in case of unlimited term contracts
- The wages for the residual period of the contract in the case of fixed term contracts.
The default compensation must not be less than two months' wages and it is therefore highly recommended for employers in the Kingdom to expressly include in the contract the compensation for early termination to avoid the uncertainty of uncapped compensation or buying out the residual period of the contract. Interestingly, an employee's right to claim reinstatement has also been removed from the labor law.

Right to time off work to look for alternative employment

Employees now have a right to paid time off work to look for alternative employment where notice was served by the employer. This is limited to one full day or eight hours per week and applies throughout the notice period.
Summary termination for unlawful absences from work
An amendment has been made to article 80 (which sets out the only circumstances when an employee can be terminated without notice and without end of service gratuity). An employer can now only terminate for unlawful absences where an employee has been absent for 30 days a year or 15 consecutive days (previously 20 and ten days respectively). The requirement to have given a previous written warning is needed now after an employee's absences of ten non-consecutive days or five consecutive days.

Wages

Wages will be required to be paid into employee's bank accounts via approved banks. This gives recognition in the Labor law to the Wages Protection System which is being implemented in stages in KSA and currently companies with 170 employees and more must be in compliance with Wage Protection System starting from 1 June 2015.

Working hours

The total hours an employee can be required to stay at his place of work has now increased from 11 to 12 hours per day. The requirement to give rest breaks and the normal weekly limit of 48 hours currently remains the same although as noted above the working hours weekly limit is currently being debated before the Shoura Council.

Leave

Leave has been increased as follows:
Paternity leave: three calendar days
Marriage leave: five calendar days
Compassionate leave: five calendar days

Increased paid compassionate leave for a female Muslim employee whose spouse dies from 15 days to the Eddah leave of four months and ten days. A non- Muslim employee is still entitled to 15 days' compassionate leave
The above leaves are all paid leaves. A female employee now has an entitlement to extend her maternity leave for one month without pay (ie maternity leave is now ten weeks' paid with an option of an additional four weeks unpaid leave). A female employee can now also start her maternity leave when she wants provided this is no earlier than four weeks before the expected delivery date. In addition if a female employee gives birth to an ill or disabled baby whose heath condition required a permanent companion then she will be entitled to an additional paid one month of maternity leave starting from the end of the maternity leave.
There are no changes to annual leave requirements.

Labor violations

For breaches of the labor law or its regulations, one or more of following penalties can be imposed:
Fines for labor violations have been increased to a maximum of SR 100,000 (currently the maximum fine is SR 30,000) and this can still be multiplied by the number of employees in respect of whom the violation is committed
Closing down the establishment for a maximum period or 30 days or closing the establishment completely
A Ministerial Decision is to be issued setting out when the above penalties can be imposed. An establishment may only be closed down completely after a court action is successfully raised by the Ministry against the employer.

Whistleblowing

Employees of the Inspector's department or others who assist in detecting any violations of the law may now be rewarded by up to 25 per cent of the collected fine imposed by the Ministry, subject to the discretion of the Minister.