How to Calculate End of Service Benefits in Saudi Arabia

End of Service Benefits (EOSB) is a key aspect of employment contracts in Saudi Arabia. This benefit ensures employees receive financial support when their tenure ends. The Ministry of Human Resources and Social Development governs EOSB calculations under Saudi Labor Law. Employers must calculate these benefits accurately, ensuring fairness and compliance with the law. Understanding the formula and key elements of EOSB calculation can help both employers and employees. 

Today, we will explain the steps to calculate EOSB, key components, and important rules to keep in mind.

What Are End of Service Benefits?

End of Service Benefits serve as compensation for employees after the termination of their employment.

• The Saudi Labor Law mandates EOSB for terminated employees or those who resign after a specific period.
• This benefit reflects an employer’s gratitude for an employee’s service.
• It provides financial stability during an employee’s transition to a new job.

Factors That Influence EOSB Calculation

Several factors affect how EOSB is calculated. These include:

• Employee’s Salary: The calculation uses the last drawn basic salary, excluding allowances.
• Years of Service: The number of years determines the amount of compensation an employee receives.
• Reason for Leaving: The reason for resignation or termination influences the calculation method.

Understanding these factors is crucial for both parties to ensure accurate benefits.

Step-by-Step Process to Calculate EOSB

1. Calculate Benefits for the First Five Years: Employers must pay half a month’s salary for each year of service in the first five years. For example, if the basic salary is SAR 10,000, the benefit for five years equals SAR 25,000.

2. Add Full Monthly Salary for Additional Years:Employees serving more than five years receive a full month’s salary for each additional year. For instance, an employee with eight years of service and a SAR 10,000 salary earns SAR 30,000 for the last three years.

3. Adjust for Resignation Cases: Employees who resign voluntarily may receive a reduced amount. The reduction depends on their tenure and falls between 0% and 100% of EOSB.

4. Combine Total Benefits: Add the calculated benefits from all applicable years to find the total amount due.

Scenarios Impacting EOSB Payouts

• Resignation Before Two Years of Service: Employees resigning before completing two years of service are generally not entitled to EOSB. However, exceptions apply for forced resignations or those with valid reasons.
• Completion of Two to Five Years of Service: Employees who resign between two and five years receive one-third of their EOSB. Employers use the half-month salary formula to calculate this amount.
• Resignation After Five Years: Employees who resign after completing five years are entitled to two-thirds of their EOSB. Beyond ten years, they receive the full benefit regardless of the reason for resignation.
• Termination Without Just Cause: Employees terminated unfairly or without valid cause receive full EOSB. This rule ensures protection for employees in cases of unjust dismissal.

Common Mistakes in EOSB Calculations

Employers often make errors in calculating EOSB. These mistakes can lead to disputes and legal complications.

1. Overlooking Total Service Period: Employers sometimes miscalculate the service period, leading to incorrect payouts.
2. Excluding Bonuses or Commissions: Only basic salary counts, but some employers mistakenly add bonuses or commissions.
3. Incorrect Application of Resignation Rules: Failing to adjust EOSB calculations for resigning employees often causes issues.

Tips to Avoid Errors in EOSB Calculation:

• Use official EOSB calculators available online.
• Seek professional advice from experts like Mithras Consultants for complex cases.
• Maintain detailed records of salaries and service periods.

Key Points to Remember About EOSB

• Timely Payouts: Employers must pay EOSB promptly after contract termination.
• Documentation: Proper documentation ensures smooth payouts and avoids disputes.
• Legal Compliance: Employers must comply with Saudi Labor Law to avoid penalties.
• Professional Assistance: Consulting experts ensure accurate calculations and reduce risks.

Points for Quick Reference:

• Calculate half-month salary for the first five years.
• Add a full month’s salary for additional years of service.
• Adjust payouts for resignation cases based on tenure.
• Follow Saudi Labor Law guidelines strictly.
• Keep records updated and verified.

Conclusion

End of Service Benefits play a vital role in ensuring employee satisfaction and legal compliance. Proper calculations build trust between employers and employees while adhering to Saudi Labor Law. Miscalculations can lead to disputes and potential penalties, making accuracy essential.At Mithras Consultants, we offer tailored actuarial and insurance solutions for your business. Our team ensures compliance with legal requirements and delivers high-quality financial advice. By understanding your unique needs, we help you make informed decisions regarding risk management and financial planning. Let us help you secure your business goals with precision and reliability.