End-of-Service Benefit in Saudi Arabia: How the Calculation Works

A worked example of how the Saudi end-of-service gratuity is built up and reduced on resignation, using illustrative assumptions you should confirm.

The end-of-service benefit is a lump sum an employer pays when employment ends, calculated from the employee's last wage and length of service, with reductions in some cases of resignation. The Labour Law defines the formula and when it applies in full or in part. The example below uses the commonly cited structure as an illustrative assumption; confirm the current articles with an adviser before paying or accruing anything.

The situation

An engineer resigns after seven years and six months with a company. The employer wants to calculate the end-of-service benefit and understand how much it should have accrued. For illustration, assume a structure of half a month's wage per year for the first five years and one month's wage per year after that, with a reduction when the employee resigns, as the Labour Law has commonly been described. The actual rules must be confirmed.

Assumptions (illustrative)

• Assumed last monthly wage used for the calculation: SAR 18,000 (basic plus allowances counted under the law).
• Service: 7 years and 6 months, or 7.5 years.
• Assumed rate: half a month per year for years one to five, one month per year after.
• Assumed resignation reduction for service between five and ten years: two thirds of the full award is payable.
• Partial years counted proportionally.
• No other deductions or dues assumed.

Step 1: First five years

5 years x (18,000 x 0.5) = 5 x 9,000 = SAR 45,000.

The first five years build the award at the lower rate.

Step 2: Service after five years

7.5 minus 5 = 2.5 years. 2.5 x 18,000 = SAR 45,000.

Service after the fifth year accrues at the full monthly rate, so the award grows faster.

Step 3: Full award

45,000 + 45,000 = SAR 90,000.

This is what would be due if the employer ended the contract without a reason that removes the entitlement, or on expiry of a fixed term.

Step 4: Award on resignation

Two thirds of 90,000 = 90,000 x 2 / 3 = SAR 60,000.

Under the assumed rule, resigning between five and ten years reduces the award, so how the contract ends changes the cost by SAR 30,000.

Step 5: Annual accrual for the next year

Each further year adds 1 x 18,000 = SAR 18,000 to the full award, at the current wage.

A pay rise increases the whole award, because the calculation uses the last wage, not the average.

What changes the answer

• Which allowances count in the wage used for the calculation changes the base substantially.
• Resignation before an initial service threshold may reduce the award to nothing under the rules commonly described; confirm them.
• Termination for one of the reasons the law allows can remove the entitlement.
• A salary increase in the final year raises the whole award, not just the last year.
• Contracts or company policy can be more generous than the law, never less.

What the numbers tell you

• Accrue the liability monthly using the current wage and full-award assumption.
• Define clearly which allowances form part of the wage in contracts and payroll.
• Record how every employment ended, since the reason drives the amount.
• Have the final calculation checked against current law before payment.

Limits of this example

Every figure above is an illustrative assumption used to show the method, not a quote, valuation or market rate. Costs, rates, fees and regulations change and must be confirmed with the relevant authority, lender or supplier before you commit.

Domira works with foreign investors on the property side of entering Saudi Arabia: finding land or premises, due diligence, design, construction and asset management. For licensing, tax and legal steps, work with a licensed adviser; we coordinate with yours so the property decision fits the structure you choose.