End of service gratuity calculation in KSA

David Kambo

25 October, 2020

image

Article 84 of the KSA Labor law states as follows regarding end-of-service settlement;

Upon the end of the work relation, the employer shall pay the worker an end-of-service award of a half-month wage for each of the first five years and a one-month wage for each of the following years. The end-of-service award shall be calculated on the basis of the last wage and the worker shall be entitled to an end-of-service award for the portions of the year in proportion to the time spent on the job.

Gratuity is a token of appreciation for all the hard work and commitment an employee has shown towards one’s workplace. It is usually calculated at the time of resignation or termination. In KSA, an employee is entitled to an end of service benefit upon completion of two years of service if he is resigning from work. In the case of termination, the employee is entitled to a full accrual if the service period is more than one year.

Here our payroll experts in KSA, explain in detail the gratuity policy in KSA, along with some sample gratuity calculations.

What is Gratuity?
Gratuity is a monetary payment eligible to an employee as a lump sum at the end of his tenure provided that the period of service exceeds one year. Gratuity payment is a liability to the employer which accrues as the employee service period progresses.

When does the employee become eligible for gratuity accrual?
Gratuity accrues from the first day of employment up to the last working day. The settlement is dependent on some factors as we will see below.

Which workers are eligible for gratuity payment?
Saudi labor law does not specify which workers qualify for gratuity accrual and payment. The law does not say if gratuity should be paid to expatriates only or to both KSA nationals and expats. It is our understanding that gratuity is accrued to all workers in KSA. Please see how gratuity accrual and payment policy in KSA differs from UAE gratuity policy here

What is the limit for gratuity payable?
The law does not limit the amount of gratuity that an employee can receive at end of service settlement.

What is the basis amount that is used to calculate gratuity?
Gratuity is calculated based on the last paid total wage as at the time of final settlement.

How is the accrual period determined in calculating gratuity?
Gratuity calculation is accrued at the following basis

  • If the service period is below five years at half month salary per year.
  • If the service period is more than five years and above at full month salary per year.

The following simple illustration shows how gratuity accrues in Saudi Arabia.

Accrual
Service periodLess than 5 years 5 Years and Above
    Hire date
    Total salary (SAR)10,000.0010,000.00
    Payroll MonthAug-20Aug-20
    Number of years in service as of 31st August 20204.137.55
    One day salary333.33333.33
    Gratuity days62.01151.50
    Gratuity Accrued
        For the first five years (1/2-month salary per year)20,671.2325,000.00
        Five years and above (One-month salary per Year)N/A25500
    Total Accrued Gratuity20,671.2350,500.00

 

Factors affecting the amount of gratuity payable in Saudi Arabia

The Saudi Labor law does define the type of contracts as Fixed-term contracts and Indefinite term contracts. The gratuity paid is not affected by the type of contract, but by the type of separation. Articles 85 and 87 define the payable amount based on the separation type and the length of the period of service as seen below.

Resignation

Article 85 states as follows ‘If the work relation ends due to the worker’s resignation, he shall, in this case, be entitled to one-third of the award after a service of not less than two consecutive years and not more than five years, to two thirds if his service is in excess of five successive years but less than ten years and to the full award if his service amounts to ten or more years.’

Under this separation type, the gratuity accrues at the following rate.

  • If the service period is below two years – No gratuity is paid
  • If the service period is above two and below five years – one-third of accrual.
  • If the service is above five years but less than ten years – two-thirds of accrual.
  • If the service period is above ten years – full accrual.

The following table illustrates such a scenario;

Resignation
Service periodLess than 2 years2-5 years5-10 years 10 years and above.
    Hire date14/08/1912/05/1710/02/1310/01/08
    Total Salary (SAR)10,000.0010,000.0010,000.0010,000.00
    Last working day31/08/2031/08/2031/08/2031/08/20
    Number of days in service384.001,208.002,760.004,618.00
    Number of years in service1.053.317.5612.65
    Gratuity days15.7849.64151.80304.50
    One day salary333.33333.33333.33333.33
    Gratuity Accrued1/3 of accrual2/3 of accrualfull accrual
        For the first five years (1/2- month salary per year)5,515.9816,666.6725,000.00
        Five years and above (One-month salary per Year)N/AN/A17,066.6776,500.00
    Gratuity Pay-out AmountNo gratuity is paid5,515.9833,733.33101,500.00

 

Termination

When the separation is by termination, the employee is entitled to full accrual if the service period is longer than one year.

Article 87 states as follows; ‘As an exception to the provisions of Article (85) of this Law, the worker shall be entitled to the full award if he leaves the work due to a force majeure beyond his control’.

Under this separation type, the gratuity accrues at the following rate.

  • If the service period is less than one year – no gratuity.
  • If the service period is more than one year but less than five years – half month salary per year.
  • If the service period is above five years – full Accrual.

The following table illustrates this scenario.

Termination
Service periodLess than 1 year1-less than 5 Years5 Years and Above
    Hire date14/11/1912/05/1810/02/14
    Total salary (SAR)10,000.0010,000.0010,000.00
    Last working day31/08/2031/08/2031/08/20
    Number of days in service292843.002,395.00
    Number of years in service0.802.316.56
    Gratuity days12.0034.6498.40
    One day salary333.33333.33333.33
    Gratuity Accrued
        For the first five years (1/2-month salary per year)11,547.9525,000.00
        Five years and above (Full month salary per Year)N/AN/A15,600.00
    Gratuity AmountNo gratuity is paid11,547.9540,600.00

 

Is there a specific provision for female employees relating to gratuity?
Article 87 states that female workers are entitled to full gratuity accrued under the following scenarios.

  • If she terminates her contract within six months after her marriage.
  • If she terminates her contract three months after giving birth.

When should gratuity payment be done?
Upon end of service, the employer is mandated to settle the employee’s gratuity and other settlements within a period of one week from the date of end of such a relation. If the employee ends the contract the employer shall settle all the employee entitlements within a period not exceeding two weeks. Any debts and deductions due from the employee may be deducted from his end of service.

What is the effect of unpaid leave taken during the period of service?
Any period taken by the employee as unpaid leave is excluded when determining the service period. That means unpaid leave days are excluded when accruing gratuity. The period of service is reduced by the number of days served as unpaid leave.

How is Maternity unpaid leave and sick unpaid leave treated when determining the service period?
The period taken as either maternity unpaid leave or sick unpaid leave do count as part of the service period. The period of service is not affected by any period taken during tenure by employees for these two types of leaves.

Knowing how to calculate gratuity will be highly beneficial to employees and it eradicates any chances of error and confusion. It is equally important to keep yourself updated on any changes in gratuity policies/calculation criteria in KSA.

Payroll Service in KSA

The process of payroll is little complicated and time-consuming; hence it is always recommended to outsource your company’s payroll function. Outsourcing payroll will ensure the assistance of a team of trained payroll professionals and it frees up the time of the organization, helping them focus on other projects that add value to their business.

One should be extra vigilant while selecting their payroll provider, as payroll data is highly sensitive, and one should opt for a provider that can ensure high levels of data security.

As a leading payroll outsourcing company, HLB HAMT can help solve your payroll complexities through customized strategies. We take care of our clients’ entire payroll cycle that includes preparation of payroll reports, processing salary payment with WPS compliance, accrual management including Gratuity, pension funds, an online portal for accessing payslips, and many more. Our leadership team spends the necessary hours in every project, ensuring our clients get refined consulting services to take your business forward.

Disclaimer:
Whilst every effort has been made to ensure the accuracy of this information, HLB HAMT will not accept any liability arising out of errors or omissions. Please note that this blog is not all-inclusive. Our guidance is designed only to give general information on the issues/topics covered. It is subjected to change and not intended to be a comprehensive summary of all laws which may be applicable to your situation, treat exhaustively the subjects covered, provide legal advice, or render a legal opinion.

Did you find the blog informative?         

 

Mohamed Sheriff
Mohamed Sheriff
16:16 28 Jun 20
Experience with HLB Hamt in audit experience is great pleasure. They deploy well qualified accounts team for audits.... And the amount of checking they perform give the management of the company confidence that internal controls are well in place. We are glad to see they have high standard of audit practices.read more
218141 JOSEPH THOMAS
218141 JOSEPH THOMAS
16:20 23 Jun 20
Professionally managed firm with commitment to the engagements taken. My company and its group are assigning our... requirements for last 12 years to HLB and we don’t have any negative remarks on any assignments.read more
PMI
PMI
07:14 23 Jun 20
In my opinion, HLB Hamt is one of the best professional firms in UAE after big4. Excellent client service, professional... and competent staff and timely delivery are their strength. Over the years they have developed the infrastructure and skill set to handle multiple verticals ie, audit, tax services, consulting, IT support etc.Wishing HLB Hamt team all the very best.read more
RAVI CHOKSI
RAVI CHOKSI
08:28 21 Jun 20
Thank you Team HLB hamt...Your internal auditing team put the good amount of time and inputs in helping the... organisation making considerable improvements throughout the organisational working structure and helps in building the better business.Thanks.read more
Maharajan Subramaniam
Maharajan Subramaniam
18:17 06 Jun 20
High-Performing IT Teams, I'm impressed with the knowledge level of their deputed staff, audit procedures, and... checklist adopted. Mr. Vimal especially understand the requirement and provide solution not only technical feasibility and also considered budgeting. We’re confident in their abilities.read more
Mohammed L
Mohammed L
08:07 05 Jun 20
We have been working closely with them on payroll services for quite sometime.They provide very professional... services,experts in domain and excellent support. Would recommend them.Cheers.read more
ROY ROSHAN VIVIAN
ROY ROSHAN VIVIAN
06:32 04 Jun 20
Very professional team. Vimal has always given us good solution advice for various Software and IT Infra projects. We... are very Extremely satisfied working with him and his team. Wishing them success.read more
Basil Daniells
Basil Daniells
05:55 03 Jun 20
I have worked with HLB as a partner of Sage for about 2 years, they were dedicated to the success of the partnership... and kept aligned with the business plan that was agreed between our two companies. They are always ready to go the extra mile for a customer and don’t shy away from challenging circumstances. Keep up the good work and wish you all the success in the future.read more
Amar Kashyap
Amar Kashyap
19:28 02 Jun 20
Team of well qualified and organised professionals. Their reports are not based on numbers first they will understand... their client and their business. They are highly recommended and trust worthy.read more
Radz de Jesus
Radz de Jesus
16:03 02 Jun 20
We're glad to have found HLB Hamt to conduct the IT audit and risk assessment for our organization. We have learned a... lot from their team during that first project. And since then, we've continued to be in touch with them. Mr. Vimal especially is very good at presenting technical concepts in simple yet interesting ways that non-IT and business people alike would easily catch. We are very happy with the professionalism and quality of service they provide. They leave their clients nothing short of satisfied. Highly recommended.read more
Next Reviews

Get in touch

Whatever your question our team will point you in the right direction

Start the conversation
Get in touch
x
x

Share to:

Copy link:

Copied to clipboard Copy