Allowance

What are allowances?

Allowances can be defined as additional sums of money added to an employee’s base salary to compensate them for specific expenses or risks they may face while performing their job duties. Allowances vary by company and industry and are part of the employment agreement between the two parties.

What are the benefits of allowances?

Allowances are an important part of the compensation package received by employees across various sectors and play a significant role in providing numerous benefits and advantages, such as:

• Improved Quality of Life: Providing a financial allowance to employees helps them achieve a better work-life balance by enabling them to better meet their needs and enhancing their purchasing power and well-being.
• Attracting and Retaining Talent: Companies that offer attractive allowances are better able to attract qualified employees and retain them for longer periods, enhancing the value of their job offer and increasing the organization’s ability to build an outstanding and high-performing team.
• Enhancing Market Competitiveness: Benefits enhance the company’s image and positive reputation as a supportive work environment, making it more attractive to employees and more highly regarded by the community and customers, strengthening its market presence, and positively impacting its market share.
• Increased Job Satisfaction: Allowances help boost employee morale and a sense of appreciation, which strengthens their loyalty to the company, reduces employee turnover, and increases employee retention.
• Motivating Performance and Increasing Productivity: Allowances boost employees’ enthusiasm to perform at their best, encouraging them to put in more effort and dedication to their work and to commit to achieving the company’s goals.
• Fairness and Equity in Compensation: Allowances play a role in ensuring that employees are treated fairly and equally, reduce disparities in compensation among them, increase the sense of fairness and equity, and boost morale.

Are allowances mandatory?

Under the Saudi labor system, allowances are additional financial compensation provided by companies and employers to employees in addition to the base salary they receive for their work. Allowances are not mandatory, which allows for greater flexibility in determining them according to the needs of both the employee and the company, in accordance with the employment contract, the organization’s policy, and the agreement between the two parties.

Types of Allowances in the Saudi Labor Law

The Saudi labor system includes several types of allowances that companies provide to their employees to cover specific costs or compensate them for additional efforts. Some of these allowances are provided to government sector employees, while others are provided to private sector employees. The most notable of these include:

• Housing Allowance: This is granted to compensate employees for housing and accommodation costs when the company does not provide free housing, and it is part of the incentives specified in the employment contract or internal work regulations.
• Transportation Allowance: This allowance covers fuel costs or transportation expenses, with the aim of facilitating the employee’s commute to the workplace and reducing the financial burdens associated with commuting.
• Cost-of-Living Allowance: Helps employees cope with rising living costs; it is often specific to government employees and is granted monthly based on inflation rates and price changes.
• Hazard Pay: Granted to employees working in difficult or hazardous work environments as compensation for the risks or extra effort required by their work, such as jobs that involve significant physical exertion, exposure to dust, or extreme weather conditions.
• Overtime Allowance: Calculated based on the hourly wage rate, with an additional percentage bonus added for employees who work hours beyond the official working hours specified in their employment contract.
• Family Allowance: Provided to Saudi government employees to support them in raising their children and covering their daily needs; it is calculated as a lump sum for each child and for a non-working spouse.
• Meal allowance: Covers the cost of meals required by the employee during working hours, particularly for employees who work long hours or in locations far from their homes.
• Representation Allowance: Granted to employees in senior management positions or those who represent the company at specific events or meetings.
• Travel and Transportation Allowance: Covers travel, lodging, and daily expenses for employees who travel to perform work-related tasks, whether outside the Kingdom or to work locations distant from their primary workplace.
• Training Allowance: Compensation for the financial costs and effort expended by the employee in training and developing job-related skills, in accordance with the training plans provided by the company as part of job requirements.

What percentage of the base salary do allowances represent?

Allowances are calculated in several ways; some are paid to employees as a percentage of their salary, while others are a fixed amount regardless of salary. The calculation of allowance percentages and amounts is influenced by several factors, including:

• Type of allowance and nature of work.
• Local laws governing the payment of allowances, such as the Saudi Labor Law.
• The company’s internal policies regarding how allowances are calculated and paid, in accordance with its budget and business requirements.

It is important that allowances be clearly specified in employment contracts to ensure employees’ rights and promote transparency, fairness, and clarity in the compensation provided to employees.

When Are Allowances Paid Retroactively?

Allowances are paid retroactively in certain cases to safeguard employees’ rights and compensate them for previous periods during which they did not receive their correct entitlements, such as:

• Delays in issuing decisions to increase allowances, in which case these allowances are paid retroactively to cover the period during which the decision was delayed.
• Correction of financial errors: If errors occur in the calculation or payment of allowances, they are corrected, and the difference owed is paid retroactively.
• Amendments to or the implementation of new laws or regulations requiring an increase in allowances; these are applied retroactively if the law so stipulates, covering the period from the law’s effective date to the date of calculation.
• When an employee is promoted or transferred to a new position entitling them to higher allowances, the allowances are paid retroactively to cover the period from the date of promotion to the start of allowance payments.

Does the end-of-service bonus include allowances?

According to the Saudi Labor Law, the end-of-service benefit is calculated based on the employee’s last actual salary, which therefore includes allowances; However, pursuant to Article 86 of the Labor Law, it may be agreed that the salary used to calculate the end-of-service benefit shall exclude all or part of commissions, percentages of sales, and similar components that are, by their nature, subject to fluctuation.

Are allowances included in social insurance calculations?

In the Kingdom of Saudi Arabia, allowances are considered part of the total wages calculated for social insurance purposes. According to the Social Insurance Law, total wages—including allowances—are included in the calculation of insurance contributions.