Employee dismissal and termination of services according to Saudi labor law - A comprehensive guide

Termination may hurt the feelings of a valued but unproductive employee; it may subject a hardworking employee to a severe financial setback when the company can no longer afford his salary; and the employee may react violently to the news of his termination. All of these scenarios accompany the decision to terminate an employee, making it one of the most difficult decisions a company can make. However, the issue of termination is not limited to these psychological considerations; it also has legal implications that must be carefully considered to avoid the risk of violating the Saudi Labor Law in its most recent amendments. For example, when is termination lawful? What are the consequences for the company if it terminates an employee for an unlawful reason? And when can a company terminate an employee immediately without notice or severance pay?

What constitutes lawful termination of an employee?

A lawful decision to terminate an employee is one that does not violate the Saudi Labor Law; this means it must be based on legitimate grounds recognized by the law, excluding those grounds explicitly deemed unlawful. Examples include terminating a private-sector employee due to illness before they have exhausted their accrued leave, or due to the death of the company owner—provided the owner is not a party to the employment contract.

The Law distinguishes between cases of termination that require the employee to receive their full entitlements and be given prior notice, and those that do not. It also differentiates between fixed-term and indefinite-term contracts. It should be noted that all provisions regarding termination in the Saudi Labor Law apply to every employer—whether a natural or legal person—who employs one or more workers for wages; that is, its provisions apply in the event of the termination of a private-sector employee’s employment.

What are the lawful grounds for dismissing an employee from a company?

The Saudi Labor Law lists the circumstances under which an employee in the private sector may be terminated, as set forth in Article 74, which states: “The employment contract shall terminate in any of the following cases:”

• Mutual agreement between the parties to terminate the employment, provided that the employee gives written consent to do so.
• The company’s desire to terminate the employee’s service under an indefinite-term contract based on a legitimate reason, which the company must specify in a written notice sent to the employee at least sixty days prior to termination if wages are paid monthly, and if wages are not paid monthly, the company must provide the employee with written notice at least thirty days prior to the termination date.
• The employee reaching retirement age in accordance with the provisions of the Social Insurance Law.
• Force majeure.
• Permanent closure of the establishment.
• Cessation of the business in which the employee is engaged, unless otherwise agreed.
• The issuance of a final decision or judgment by the competent court to terminate the employee’s contract in any bankruptcy proceedings initiated under the Bankruptcy Law.
• Any other circumstance provided for by another law.

What rights does the company owe to a dismissed employee?

If the company dismisses an employee for an unlawful reason, it must compensate the employee with 15 days’ pay for each year of service if the contract is indefinite; if the contract is for a fixed term, the company must pay the employee’s salary for the remaining duration of the contract.

If the reason for termination is lawful, the employee is entitled to a severance payment calculated based on half a month’s salary for each of the first five years of service and one month’s salary for each subsequent year, with the employee’s final salary serving as the basis for the calculation.

In both cases, whether the reason for termination is valid or invalid, the company must settle the employee’s financial entitlements within one week at the latest from the termination of employment. To learn more about an employee’s rights from the moment they join the company until their last day of work, read The Employee Rights Handbook, which discusses in detail all the rights enjoyed by employees in the Saudi private sector.

Does a company have the right to terminate an employee without any benefits or notice?

Yes, the Saudi Labor Law outlines cases in which an employee in the private sector may be terminated without entitlement to severance pay or notice. These constitute legitimate grounds for termination, as detailed below. It is important to note that, according to the law, the employee must be given the opportunity to state the reasons for objecting to the termination:

• If the employee assaults the employer, a manager, or other employees while on the job.
• If the employee fails to perform his or her essential duties in accordance with the employment contract, or disobeys orders and deliberately disregards instructions despite having been given a written warning.
• If the employee engages in misconduct or commits an act that violates honor or integrity.
• If the employee intentionally causes financial loss to the employer, and the employer reports the incident within 24 hours.
• If it is proven that the employee resorted to forgery to obtain employment, or if it is proven that the employee exploited his or her position in an unlawful manner to gain personal benefits.
• If the employee discloses the industrial or commercial secrets of the company.
• If the employee is absent without cause for more than 30 days in a year or 15 consecutive days; this means that terminating an employee for absenteeism in the private sector is lawful provided the company has issued a written warning to the employee before the entire period of absence has elapsed.
• If the employee is on probation.

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Termination of an Employee During the Probationary Period

If the contract includes a clause regarding a probationary period, and the contract is terminated during that period, neither party to the contract is entitled to claim financial compensation, nor is the employee entitled to claim end-of-service severance pay. It should be noted that, under the Labor Law, the probationary period must be clearly specified in the employment contract and may not exceed ninety days; it may be extended to one hundred and eighty days provided the employee gives written consent. Termination must be preceded by a written notice from the employer to the employee following an absence of twenty days in the first case and ten days in the second case.

How can a company protect its legitimate interests after terminating an employee?

If an employee’s job allows them to gain knowledge of the company’s clients, the Saudi Labor Law takes the company’s legitimate interests into account and permits the employer to require the employee not to compete with the company, subject to specific conditions regarding time, place, and type of work, provided that the duration does not exceed two years. The same applies if the employee has gained access to trade secrets by virtue of their position, in which case the employer may require the employee not to disclose trade secrets within a specified timeframe, geographical area, and type of work.

What are the most important considerations to keep in mind when terminating an employee?

If a company decides to terminate an employee, it must take the following measures to ensure a smooth and secure termination of employment and avoid penalties for violating any provision of the Labor Law:

1. Keep a complete employee record that includes performance evaluations,  absences, disciplinary actions and warnings, and training and skill-development efforts, including relevant dates and details so that they can be referred to during the exit interview.
2. If the employee has their own office, it’s best to inform them of the termination decision in their office. Keep the meeting brief—about 15 minutes—and begin by addressing the matter directly without any small talk. Then leave the room, giving them some time to process the news before they inform their colleagues or continue their meetings with clients.
3. Prepare answers to all questions the employee is likely to ask, such as: When will they receive their financial entitlements? When does the termination take effect? How will they wrap up ongoing projects that haven’t been completed yet?
4. Once the decision takes effect, make sure the employee has turned in any work-related keys or devices, and be sure to coordinate with their colleagues so they can complete the tasks the employee left behind.

Finally, the preceding discussion has shown the extent to which the decision to terminate an employee involves various dimensions that require sufficient attention—both in terms of the employee’s rights and the company’s obligations toward the employee—which makes every termination decision unique, and requires careful consideration of its consequences and how the company can implement it with minimal risk while safeguarding the legitimate rights and interests of both parties.