June 2017

Bonus and End of Service Benefit in Saudi Arabia

Did you know your bonus can be deducted from your End of Service Benefit?

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This is a rather specialized area, so if you're neither an employer nor employee in Saudi Arabia, read on. Tasked with doing due diligence for the upcoming Aramco IPO? You might want to take a look.

Saudi Arabia, as well as many other Gulf states, requires the payment of compensation to an employee at the completion of his employment contract. This award, called the "End of Service Benefit" ("EOSB") is based on the employee's "wage" as well as his longevity with the company. "Wage" is a term of art and roughly corresponds to salary and many other types of regular payments. While payment of an annual bonus is discretionary, some employment contracts specify the employee's right to an annual bonus. Some employers pay a bonus to employees each year. If bonus payments were regular, they can be considered part of the "wage" for the purposes of calculating the EOSB.
Because many employers fail to budget EOSB payments, often this can become a contentious issue between employer and employee. Also, some employers have in the past made advance EOSB payments only to find that these were not counted when the employee finally resigned.
While this interpretation of the Saudi labor regulations was thought settled, the Saudi Labor Ministry has issued the following guidance:
Pursuant to the provisions of Article 84 of the Labor Law, the rule is that the end of service benefit is paid at the end of work relation. Any big amounts paid to any employee during work under the end of service benefit are considered sums under the account of end of service benefit and shall be deducted from the total value of end of service benefit upon expiry or termination of his service and settlement of his final entitlements with the employer after assessing them for the full actual service period from the first to the last working day according to the employee's last salary. (emphasis supplied)
I think a fair reading of this guidance means that when an employer characterizes a payment as an advance EOSB payment, that payment will be treated as such and not as a bonus. It is therefore important that these payments be properly characterized. In the past, some employers were surprised to find out that their advance EOSB payments were treated as a regular annual bonus and used to calculate the End of Service Benefit.
The purpose of the EOSB is to insure that the employee has funds available to support himself or his family while he searches for a new position. Making these payments in advance makes it likely that a terminating employee will lack financial resources at a critical time. Whether you think the EOSB is a good idea or not, it has long been an important feature of the Saudi labor law.
While the MoL guidance is not binding, it is likely that it will be followed in administrative proceedings in the labor court.
Opinions expressed above are those of the author alone and do not constitute legal advice. If you need legal advice, lawyer up.