Layoff

What Does Layoff Mean?

Employee layoffs, or “layoffs,” are the process of terminating the employment relationship between an employer and a large number of employees en masse—whether temporarily or permanently—for reasons related to economic or organizational conditions within the organization, such as a decrease in work requirements due to economic crises or recessions, the need for restructuring or automation, or a decline in sales. Layoffs are characterized as an organizational or economic measure aimed at reducing costs or improving efficiency, without being based on mistakes or negligence on the part of the employees. This measure differs from dismissal, which results from an employee’s misconduct or incompetence and is typically subject to legal regulations that safeguard the rights of both parties.

Under Saudi law, as defined by Ministerial Decision No. 50945, employee layoffs are defined as the termination of a group of Saudi employees amounting to more than 1% of the establishment’s workforce or a total of 10 employees—whichever is greater—within one year from the date of the most recent dismissal.

What are the reasons for employee layoffs?

Employee layoffs are a measure that companies and institutions resort to for various reasons, ranging from economic to organizational to technological, such as:

• Cost reduction: When companies face a decline in profits or an increase in debt, they seek to reduce operating costs by laying off employees, especially during economic crises or when demand for products and services declines. 
• Economic fluctuations: Economic crises negatively impact corporate profits, which may lead to a policy of reducing headcount and laying off employees in phases.
• Restructuring: Companies may reorganize their administrative structures or merge departments to streamline operations and increase efficiency, resulting in the elimination of certain positions deemed redundant in the new structure.
• Mergers and Acquisitions: When two companies merge or one acquires the other, there is an overlap in positions and roles; therefore, to avoid duplication and reduce costs, some employees may be laid off. 
• Changes in Strategic Direction: Sometimes, companies change their strategies or shift their focus to new areas of business, which reduces the need for certain legacy positions and leads to their elimination through layoffs.
• Automation and Technological Advancements: With the continuous advancement of technology, companies adopt automated systems that perform tasks more efficiently and at a lower cost, enabling them to eliminate a number of employees whose duties relied on manual processes. 
• Digital Transformation: Many companies are pursuing digital transformation to meet the demands of the modern market. This transformation requires new skills; therefore, if current employees lack these skills, they may be laid off and replaced with employees who possess the required skills.
• Relocation of Headquarters: Most of the workforce often consists of residents of the area where the workplace is located; consequently, relocating the workplace to another area may result in the layoff of many employees who are unable to commute from their homes to their new workplace. Some companies may decide to relocate part of their operations to another country that offers lower operating costs, leading to the layoff of a large number of employees in the country of origin. 

What is the difference between layoff and dismissal?

Dismissal under the Saudi Labor Law is a legal procedure that terminates the contractual relationship between the employer and the employee due to the employee’s breach of duties, violation of the terms of the contract, or other reasons listed in Article 80 of the Labor Law. However, dismissal may occur for reasons unrelated to the employee’s performance but deemed lawful by the Labor Law, as specified in Article 74, or it may occur arbitrarily for unlawful reasons. Nevertheless, the term “dismissal” is most often used to describe the first scenario, in which the contract is terminated for reasons related to the employee’s performance or a violation they committed.

Among the most important differences between dismissal and layoff are:

• Reason: Dismissal occurs due to an employee’s conduct or performance, such as a breach of job duties or the commission of serious violations. In contrast, layoffs occur for reasons beyond the employee’s control, such as economic crises, a decline in demand for products, or the restructuring of the organization.
• Nature: Dismissal is often individual and targets one or a small number of employees due to their actions or performance, whereas layoffs are usually collective and affect a large number of employees as a result of organizational or economic decisions concerning the establishment.
• Legal Procedures: Dismissal does not require prior notice or compensation if one of the grounds for dismissal stipulated in Article 80 of the Labor Law is established; however, if the dismissal is arbitrary or unlawful, the employer is liable for specific compensation under Article 77. Layoffs, on the other hand, require advance notice to the employee, along with the obligation to pay the employee’s legal entitlements, such as end-of-service benefits, in addition to any compensation due under the employment contract.

What are the procedures for laying off employees in Saudi Arabia?

The Saudi Labor Law ensures a balance between the rights of employees and the needs of employers when laying off employees. This balance requires compliance with specific procedures that ensure transparency and fairness, including:

Advance Notice

The employer must notify the employee of the decision to lay off the employee within a specified period, which varies depending on the type of contract and the circumstances of the layoff. For indefinite-term contracts, Article 75 of the Labor Law stipulates that the employee must be notified in writing at least sixty days in advance if the employee is paid monthly, and thirty days in advance if the employee is not paid monthly. 

Providing Clear Justification

The law requires the employer to provide clear and detailed reasons for the termination decision. These reasons must be objective and justified—such as economic circumstances or restructuring—and must be supported by documentation and evidence to prove the validity or necessity of the decision.

Providing an Opportunity to Object

The law stipulates that the dismissed employee must be given an opportunity to object to the decision within a specified period; the employee may formally submit their objection to the competent authorities, which will review the legality of the decision.

Compliance with Fair Selection Criteria

If the layoff is due to economic circumstances or restructuring, the employer must follow fair and objective criteria in selecting the employees targeted for layoff, without discrimination or unjustified selectivity.

Notification to the Competent Authorities

In cases of mass layoffs, the employer must notify the Ministry of Human Resources and Social Development of the layoff decision in advance so that the decision can be reviewed for compliance with legal regulations. Ministerial Decision No. 50945 prohibits large, medium, and small enterprises—except in cases of bankruptcy or permanent closure of the enterprise— to collectively dismiss Saudi employees for any reason without prior notification to the competent labor office, at least 60 days before the effective date of the dismissal decision.

Payment of Financial Entitlements

The law requires that all financial entitlements be paid to the employee upon termination, including:

• Overdue wages include compensation and allowances.
• Compensation for unused annual leave.
• Severance pay.
• Compensation for the notice period if it was not granted.

The employer is also required to provide the employee with a certificate of employment specifying the duration of employment and the positions held, and to return any documents the employee submitted upon hiring.

Compensation for Unjust Dismissal

If it is proven that the termination was without just cause, the employee is entitled to seek financial compensation through the courts for the damages incurred, which is determined based on the length of service and the type of contract.