# End-of-Service Gratuity in Saudi Arabia: How to Calculate It *A complete guide to calculating final entitlements accurately and avoiding labor disputes* > **In short:** A practical guide to calculating end-of-service gratuity under the Saudi Labor Law: resignation vs dismissal, basic salary, allowances, worked examples. - **URL:** https://www.snad.io/en/blog/hisab-mukafaat-nihayat-khidma-saudi - **Arabic original:** https://www.snad.io/blog/hisab-mukafaat-nihayat-khidma-saudi - **Category:** Guides — Human Resources - **Tags:** Human Resources, Payroll, Saudi Labor Law, Compliance, Accounting, Small Business - **Published:** 2026-05-10 - **Updated:** 2026-08-02 - **Publisher:** Snad (snad.io) End-of-service gratuity is one of the most sensitive points in any Saudi employment relationship, and one of the most common causes of cases before the labor court. Many small business owners assume the gratuity is simply the last salary multiplied by the number of years served. They find out too late that the law draws a sharp distinction between resignation and dismissal, and that it counts only the basic salary and fixed allowances, not the variable ones. This guide walks through the legal basis for calculating end-of-service gratuity, the difference between a fixed-term and an open-ended contract, the cases of full and partial entitlement, worked examples with real figures, and how a professional payroll system protects both parties automatically and saves you hours of manual calculation. ## What is end-of-service gratuity under the Saudi Labor Law? End-of-service gratuity is a sum the employee becomes entitled to when the employment relationship ends, as set out in Article 84 of the Saudi Labor Law and the articles that follow it. Its purpose is to compensate the employee for years of service and to give them a financial base for moving to a new job or for a period of searching. The gratuity is not a bonus or a gift. It is a statutory right. Saudi nationals and non-Saudi residents are treated alike, as long as the conditions for entitlement are met. It applies to employment contracts governed by the Labor Law, meaning employer-employee relationships in the private sector. It does not apply to independent contractors or to anyone whose relationship with the business is a service contract rather than an employment contract. The key point many business owners miss: the gratuity is an annual cumulative entitlement, not something that starts accruing only when the contract ends. The sound accounting practice is to accrue the gratuity due each month as a liability in the financial statements, so the business is not caught off guard by a large sum when an employee leaves. ## The core calculation rule The general rule in the law works in three layers: - Half a month's pay for each of the first five years of service. - A full month's pay for each year after the first five. - A partial year is calculated on a pro rata basis. A first example: an employee served 7 years and the contract ended in the ordinary course, with a final qualifying salary of SAR 10,000: - For the first 5 years: 5 × (10,000 ÷ 2) = SAR 25,000. - For the 2 additional years: 2 × 10,000 = SAR 20,000. - Total gratuity before applying the entitlement percentages: SAR 45,000. This figure represents the full gratuity. The amount the employee actually receives may be lower, depending on how the relationship ended (resignation or dismissal) and on the length of service. The sections below cover those details. ## Which pay components count toward the gratuity? The salary the gratuity is calculated on is not necessarily the total amount paid to the employee each month. The law distinguishes between: - Basic salary: counted in full. - Fixed allowances: counted (housing allowance, transport allowance, a fixed nature-of-work allowance). - Variable allowances: not counted (variable sales commissions, performance bonuses, seasonal incentives). - Tips and gratuities from customers: normally not counted, unless the employee proves they were fixed and regular. The most frequent dispute before the labor court is over allowances: are they fixed or variable? The practical test is simple. If the allowance recurs at the same amount every month and is not tied to performance or output, it is fixed and counts toward the gratuity. This is why handling the pay structure professionally in a clear HR system helps the business avoid arguments later, by documenting the nature of every pay component from the moment the contract is signed. ## Resignation: when is the full gratuity due? When an employee resigns from an open-ended contract, the gratuity is due on a sliding scale: - Less than 2 years of service: no gratuity is due. - From 2 years to less than 5 years: one third of the gratuity calculated under the core rule. - From 5 years to less than 10 years: two thirds of the gratuity. - 10 years or more: the full gratuity. Example: an employee resigns after 6 years, with a final qualifying salary of SAR 8,000: - Full gratuity under the rule: (5 × 4,000) + (1 × 8,000) = SAR 28,000. - Because the resignation falls in the 5-10 year band, two thirds is due: 28,000 × ⅔ ≈ SAR 18,667. An important note: if a female employee leaves work within 6 months of marriage or 3 months of giving birth, she is entitled to the full gratuity. The same applies when the contract ends for reasons outside the employee's control (death, incapacity, force majeure). ## Dismissal or termination by the employer If the employer ends the contract without a legitimate reason, the employee is entitled to the full gratuity under the core rule, regardless of length of service (even below 2 years, calculated pro rata). The employer may also owe additional compensation if the dismissal is judged arbitrary. Where the dismissal is for one of the statutory reasons listed in Article 80 of the Labor Law (such as gross misconduct by the employee, assaulting the employer, disclosing trade secrets, or repeated unjustified absence), the employer may have the right to terminate the contract without paying the gratuity, provided the required procedures are followed: - Recording the violations in the company's register. - Issuing a written warning to the employee before deciding on dismissal. - Conducting an investigation and giving the employee an opportunity to respond. - Documenting all of this in the employee's file. Failure to follow these steps is the single biggest reason small companies lose labor disputes, which is why keeping an organized digital employee file from day one is strongly recommended. ## Fixed-term contracts versus open-ended contracts The Labor Law distinguishes between two types of contract, and each has its own rules for calculating the gratuity: - The fixed-term contract: it ends automatically when its term expires, and the employee is entitled to the full gratuity under the core rule. If the employer ends it early without a legitimate reason, the employee is entitled to the remaining salaries for the term plus the gratuity. If the employee ends it early, they may owe the employer compensation. - The open-ended contract: it remains in force until one of the parties ends it with notice. Here the sliding resignation percentages apply (one third, two thirds, full) in the case of resignation, and the full rule applies in the case of dismissal without a legitimate reason. An important practical point: a non-Saudi employee is not permitted under the regulations to hold an open-ended contract, so their contract is always fixed-term (usually tied to the duration of the residency permit). A Saudi employee may hold either type, and the most common arrangement today is a fixed-term contract renewed annually. The contract type must be stated clearly from the outset in the Qiwa contract, because it determines the rules for termination, gratuity and compensation. ## Worked examples for common cases To make the above concrete, here are three cases with settled figures: Case one — resignation after 3 years, open-ended contract, qualifying salary of SAR 7,000: - Full gratuity: 3 × 3,500 = SAR 10,500. - Actual entitlement (one third): 10,500 × ⅓ = SAR 3,500. Case two — a fixed-term contract expiring after 4 years, salary of SAR 9,000: - Gratuity: 4 × 4,500 = SAR 18,000 (paid in full, because the contract ended with the expiry of its term). Case three — an employee with 12 years of service, open-ended contract, dismissed by the employer without a legitimate reason, salary of SAR 15,000: - For the first 5 years: 5 × 7,500 = SAR 37,500. - For the 7 additional years: 7 × 15,000 = SAR 105,000. - Total gratuity: SAR 142,500 (paid in full). - Compensation is added on top if the dismissal is judged arbitrary. These examples show the scale of the financial obligation that can catch small business owners by surprise, and they underline why the liability should be accrued monthly within payroll provisions in the financial statements. ## Automating the gratuity calculation with Snad Snad's HR and payroll system turns the end-of-service gratuity from a set of complicated manual calculations into an automatic, transparent process: - Every employee has a file holding the start date, contract type, basic salary, and allowances with each one classified as fixed or variable. - The system accrues the cumulative liability monthly and posts it as a provision in the accounting entries, so the business is not hit with a shock when an employee leaves. - On termination, you select the reason (resignation, expiry of a fixed-term contract, dismissal with a legitimate reason, dismissal without a reason) and the system generates the correct gratuity amount automatically, using the percentages set by the Labor Law. - A final settlement report is issued covering the gratuity, salary for days worked, the leave balance, outstanding allowances, and any deductions. - The report can be signed digitally and stored in the employee's file for reference in the event of a dispute. This turns the company's relationship with end-of-service calculations from a source of legal and accounting risk into a documented routine. That is exactly what a small business owner needs in order to focus on growing the business instead of dealing with labor disputes. ## Frequently asked questions ### Is end-of-service gratuity due after one year of work? In the case of resignation from an open-ended contract, no gratuity is paid before 2 completed years. But if the contract ends because its term expired, or the employer dismisses the employee without a legitimate reason, the gratuity is calculated pro rata even for a single year. ### Do commissions count toward the end-of-service gratuity? Variable commissions tied to performance or sales are not included. Only the basic salary and regular fixed allowances form the base on which the gratuity is calculated under the Labor Law. ### What is the difference between lawful dismissal and arbitrary dismissal? Lawful dismissal is based on a reason listed in Article 80 of the Labor Law and documented procedurally (warning plus investigation), and no gratuity is due to the employee. Arbitrary dismissal is termination without a legitimate reason, where the employee is entitled to the full gratuity and may also be entitled to additional compensation. ### Does the gratuity differ between Saudi and non-Saudi employees? The same calculation rules apply to both. However, a non-Saudi employee usually holds a fixed-term contract, so the full gratuity is due when the contract ends with the expiry of its term, without applying the sliding resignation percentages. ### How does Snad calculate the gratuity automatically? Snad keeps the hire date, contract type and pay structure for every employee. Once you enter the reason for termination, it calculates the gratuity under the rules of the Labor Law and issues a complete final settlement report that can be signed and stored in the employee's file. --- ## About the publisher **Snad (سند)** — a private Saudi software company based in Riyadh, founded 2025. Legal form: Sole proprietorship. Commercial registration: 7038154642 VAT number: 310959226500003 Only official domain: snad.io > Snad is a private commercial business-management platform. It is not a > government body, not a bank, and not a government services portal, and it > is not affiliated with any government entity. Any site or app with a > similar name is unrelated to Snad.