Types of Employment Contracts and Their Impact on End of Service Benefits in KSA

Employment contracts define the relationship between employers and employees. In Saudi Arabia, different types of contracts influence end of service benefit (ESBs). These contracts govern obligations, rights, and expectations, ensuring clarity for both parties. Businesses must understand these contract types to ensure compliance with local labor laws. Today, we will discuss the main types of employment contracts in KSA and their impact on ESBs.

1. Fixed-Term Contracts

Fixed-term contracts specify a defined employment period. Employers use these contracts for project-based or temporary roles. The contract ends automatically when the specified period expires.

Under Saudi labor law, ESBs depend on the duration of the employee's service. Employees with less than two years of service typically receive no ESBs. However, employees who complete two or more years are entitled to benefits calculated as per legal guidelines. Fixed-term contracts require employers to clearly outline renewal terms to avoid disputes.

2. Indefinite-Term Contracts

Indefinite-term contracts are open-ended agreements. These contracts continue until either party decides to terminate them. Employers often use them for long-term roles or permanent positions.

The ESBs for indefinite-term contracts depend on the employee's tenure. Employees are entitled to half a month's wage for each of the first five years and a full month's wage for each subsequent year. Termination without a valid reason may require the employer to pay additional compensation.

Employers must follow proper procedures when terminating indefinite-term contracts. Failure to comply with termination rules can lead to disputes and additional financial liabilities.

3. Part-Time Contracts

Part-time contracts are suitable for roles that require fewer working hours. Employees under these contracts often work less than the standard 48 hours a week.

For part-time employees, ESBs are prorated based on the number of hours worked. Employers must calculate benefits in proportion to the employee’s contribution. The labor law ensures that part-time employees are not denied their legal entitlements, promoting fairness in the workplace.

Businesses must carefully manage part-time contracts to ensure they meet legal standards and avoid discrepancies in benefits calculations.

4. Probationary Employment Contracts

Probationary contracts allow employers to assess the suitability of new hires. These contracts typically last up to 90 days, but employers may extend them for an additional period as allowed by law.

Employees under probation are not entitled to ESBs during the probationary period. If the employee continues beyond probation, their service period starts from the original hiring date. Employers must clearly communicate probation terms to avoid misunderstandings.

Probationary contracts are essential for evaluating employees’ performance, but businesses must ensure they align with labor law to prevent disputes.

5. Freelance Contracts

Freelance contracts are project-based agreements between businesses and independent professionals. Freelancers work as independent contractors and do not receive traditional employment benefits.

Freelancers are not entitled to ESBs since they are not considered employees under Saudi labor law. However, businesses must clearly outline payment terms and deliverables in the contract to avoid conflicts.

Freelance contracts provide flexibility for businesses, especially for short-term projects. However, companies must ensure they do not misclassify employees as freelancers, which can lead to legal complications.

Impact of Employment Contracts on ESBs

The type of employment contract directly affects the calculation and eligibility of ESBs in Saudi Arabia. Employers must understand the nuances of each contract type to manage their financial obligations effectively. Proper documentation and adherence to labor laws are critical for avoiding disputes.

Employers should also regularly review their contracts and update them in line with labor law changes. Clear terms and transparent communication reduce the risk of misinterpretation, ensuring a smooth employer-employee relationship.

Conclusion

Employment contracts significantly influence end of service benefit in KSA. Businesses must carefully draft and manage these contracts to ensure compliance with labor laws. Mithras Consultants provides expert guidance to help businesses navigate employment contracts and ESB calculations. Our customized solutions empower clients to make informed decisions about their financial, insurance, and risk management needs. Let us assist you in achieving compliance and safeguarding your business interests.