End-of-service gratuity (ESG) under the Saudi Labor Law is a statutory entitlement owed to employees when employment ends. Calculation depends on tenure, whether the employee resigned or was terminated, and the "basic salary" recorded in Qiwa and paid via WPS. This guide sets out the Article 84 rates, resignation vs termination rules, partial-year pro-rata, timing obligations, and three worked examples. For lawful dismissal and process, see disciplinary procedures and termination; for dispute resolution, see labor disputes. Payroll and employer of record providers must ensure ESG is calculated and paid on time to avoid penalties.
What Is End-of-Service Gratuity?
End-of-service gratuity (ESG) is a lump sum paid by the employer when an employment relationship ends, under Article 84 of the Saudi Labor Law (Royal Decree M/51, as amended). It is not a discretionary bonus — it is a legal obligation. The amount is based on the employee's basic salary (as defined for ESG purposes) and length of service. Allowances such as housing, transport, or other variable pay are excluded from the ESG base unless they are contractually defined as part of basic salary and reflected as such in the registered contract and WPS. Saudi courts and the Fawd dispute system rely on Qiwa contract data and WPS payment history to determine the correct base; inconsistent records increase dispute risk.
Entitlement Rates (Article 84)
Article 84 sets the following rates when the employer terminates the employment (other than for Article 80 gross misconduct):
| Years of service | ESG per year (employer termination) |
|---|---|
| First 1–5 years | Half month's basic salary per year |
| After 5 years | One month's basic salary per year |
When the employee resigns, entitlement is reduced: one-third of the above for service between 2 and 5 years; two-thirds for service between 5 and 10 years; full entitlement only for 10+ years (see Resignation rules). Service of less than two years on resignation generally attracts no ESG. Partial years are pro-rated (see Partial-year pro-rata).
Resignation Rules
When the employee resigns, Article 84 reduces ESG as follows:
- Less than 2 years: no ESG.
- 2 to less than 5 years: one-third of the amount that would apply on employer termination.
- 5 to less than 10 years: two-thirds of that amount.
- 10 years or more: full ESG (half month per year for years 1–5, one month per year for years after 5).
The employee must serve the contractual notice period (typically 30 days under the Labor Law) unless the employer waives it. Resignation must be clear and documented; ambiguous departures can lead to disputes over whether the termination was employer-initiated (full rates) or employee resignation (reduced rates).
Termination Rules
When the employer terminates the contract (other than for Article 80 grounds), the employee is entitled to full ESG at the Article 84 rates: half month per year for the first five years, one month per year thereafter. If the employer terminates for one of the Article 80 exhaustive grounds (e.g. gross misconduct, assault, breach of trust), the employee may forfeit ESG — but the employer bears the burden of proof and must have followed the disciplinary process. Wrongful termination can result in compensation (e.g. 3 months plus notice) in addition to or in lieu of ESG disputes. Fixed-term contracts that end by expiry without renewal still attract ESG for the period worked, at the same rates as employer termination.
Partial-Year Pro-Rata
Any incomplete year of service is pro-rated. Formula:
- For years 1–5: (basic salary ÷ 2) × (months worked ÷ 12).
- For years 6+: basic salary × (months worked ÷ 12).
Example: 3 years and 4 months of service, employer termination, basic salary SAR 10,000. Years 1–3: 3 × (10,000 ÷ 2) = SAR 15,000. Partial year (4 months): (10,000 ÷ 2) × (4 ÷ 12) = SAR 1,666.67. Total ESG = SAR 16,666.67. For resignation, apply the one-third or two-thirds rule to this total where applicable.
Payment Timing
ESG must be paid within 7 days of the employee's last working day. Delays can trigger labor inspections, fines, and claims via the Fawd platform. Employers should also pay any accrued but untaken annual leave (cash in lieu) and any outstanding overtime or other wages in the same final settlement. From a ZATCA and accounting perspective, ESG is an accruing liability: best practice is to provide for it monthly (or at least quarterly) so that the liability is reflected in the financial statements and the cash outflow at termination does not create a surprise. Provisioning does not change the legal payment date — the 7-day rule still applies.
Disputes & Evidence
In labor disputes, the employer typically bears the burden of proof. The "basic salary" used for ESG is what is recorded in the Qiwa employment contract and paid through WPS. If the contract states a lower basic salary but the employer paid a higher amount via WPS (e.g. including allowances in the monthly transfer), courts may look at the actual payments to determine the ESG base. Consistently recording basic salary and allowances in Qiwa and WPS, and ensuring the contract matches actual pay, reduces dispute risk. Disputes are first raised through the Fawd platform; unresolved claims proceed to the Labor Courts.
Worked Calculation Examples
Assume basic salary SAR 12,000 in all examples (as per Qiwa/WPS).
Example 1: Employee resigns after 3.5 years
Resignation 2–5 years → one-third of employer-termination amount.
Full amount if employer had terminated: 3.5 × (12,000 ÷ 2) = SAR 21,000.
ESG = 21,000 ÷ 3 = SAR 7,000.
Example 2: Employer terminates after 8 years
Years 1–5: 5 × (12,000 ÷ 2) = SAR 30,000. Years 6–8: 3 × 12,000 = SAR 36,000.
ESG = 30,000 + 36,000 = SAR 66,000.
Example 3: Fixed-term contract not renewed after 2 years
Treated like employer termination: 2 × (12,000 ÷ 2) = SAR 12,000.
ESG = SAR 12,000.