Labor Law In Saudi Arabia For Expats

[Shinyoung Gedris]

Whilethese reforms made strides in turning Saudi Arabia into an attractive place to work for Saudi nationals and expats alike, they can be confusing for foreign businesses operating in the country or digital nomads looking to work there.

Employers in Saudi Arabia can terminate employees on indefinite contracts only if they have just cause, such as employee misconduct. The notice period in Saudi Arabia is 60 days for employees who receive monthly salaries and 30 days otherwise. Still, work contracts may stipulate a longer notice period, and employers may offer pay in lieu of notice.

In addition to the above-mentioned employment rights, employees in Saudi Arabia also have entitlements to minimum wage protections, working hour regulations, overtime protections, and various statutory benefits.

The maximum number of work hours in a single day is 11 hours, and employees receive 150% of their regular wages for overtime hours and hours they work on weekly rest days, feast days, and official holidays.

The payroll cycle in Saudi Arabia is either monthly or weekly, depending on the work contract. Employers must pay daily workers once per week and salaried employees once per month before the 10th day of the following month. Employers can pay 13th-month salaries and other bonuses at their discretion.

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Disclaimer: The intent of this document is solely to provide general and preliminary information for private use. Do not rely on it as an alternative to legal, financial, taxation, or accountancy advice from an appropriately qualified professional. 2024 Velocity Global, LLC. All rights reserved.

On this diagnostic, most analysts agree. But what should replace the current economic model? Here, pundits are deeply divided: some believe that the inadequacies of the current economic model will necessarily lead, sooner or later, to a doomsday scenario of instability and pauperization; others advocate a move from the current economy still dominated by hydrocarbons to a modern and diversified knowledge-based economy, OECD-style. What seems to be missing in the current discourse on Saudi Arabia is a more reasonable vision for the future, one that not only resolves the problem of non-sustainability of the current path but that, at the same time, would also be desirable and feasible.

This confusion in the economic discourse about the kingdom has its source in the unusual structure of its labor market. The steep dualism between expatriates and national workers is unique among large countries. The main problem with the current economic system is that under it, nationals are simply not employable in large numbers in the private sector. In this chapter, I argue that the main challenge to building a better future is to find ways to employ them productively. Doing so would greatly boost growth: indeed it may be the only source of growth that is currently readily available. It would also save on the foreign exchange now being remitted by expatriates abroad, reducing the need to produce tradables besides oil. But because the current division of labor between nationals and expats is deeply inscribed in the current social contract, the Kingdom will have difficulty in balancing the interests of businesses and society at large.

By most accounts, the current depressed level of oil prices, which dropped from about $100/barrel during the decade that ended in 2010, to about $50 afterwards, is unlikely to fully recover in the medium term, given demand and supply projections. This means that there is a good chance that the old level of prices will never be recovered. Although this assertion can be debated, we will consider this hypothesis as our starting point. The implication is that the fiscal deficit resulting from this massive negative shock cannot be financed forever, and that there is therefore a need, sooner or later, to adjust the budget to the new level of oil prices.

The burden of the adjustment is made harder by the fact that by 2014, a year with record oil revenues, the budget was already running a (small) deficit. This is unlike the situation of the previous oil shock of the 1990s, when the kingdom was running a large surplus, and when the needed expenditure cutback was therefore more limited. It is also unlike the situations of most other GCC countries today (except Bahrain and Oman), which were running large surpluses in 2014, and where the negative shock only reduced this surplus, or turned it into a small deficit.

In spite of these considerable efforts, the fiscal deficit remained sizable at the end of 2017, as there was still about SAR 241 billion of excess of expenditure over revenues (9.3 percent GDP). Since the deficit has to be financed from the non-oil part of the economy, one gets a better sense of its magnitude by expressing it as a share of non-oil GDP. By this measure, it stood at 13 percent of non-oil GDP at the end of 2017, a large figure (down from 22 percent of non-oil GDP in 2015 and 2016). At the same time, the need to finance the deficit during the past 4 years has led public debt to rise from 1.6 to 19 percent GDP already, and external reserves to be reduced from $724 to $473 billion between 2014 and 2017.

The challenge ahead will be more difficult, as the type of expenditure left on the budget are more difficult to compress. Wages and compensation of public servants now approach 50 percent of expenditure, and interest payments have started to rise. Moreover, as new taxes and new tariffs start hurting poorer households, the need for some compensation will arise. The government is finalizing a cash transfer program (called the citizen account), which should start disbursing during 2018.

The government is thus left with only two choices in the short term: to increase revenues and to finance (the remaining) deficit.Footnote 1 The government has taken an aggressive stance at deficit reduction, signaling that it intends to increase taxes and cost-recovery rapidly. Whether this will happen, however, remains to be seen. To get a sense of the magnitude of the needed adjustment, government plans foresee to eliminate the deficit by 2020. To achieve this ambitious goal, tax revenues are projected to rise to SAR 200 billion by 2022 (VAT initially at 5 percent and rising afterwards, excise on tobacco and drinks, and higher expat fees), from a base of SAR 38 billion in 2014, and water and energy cost recovery are projected to rise by SAR 210 billion. In addition, non-tax revenues are expected to also rise due to an ambitious program of privatizations. This financing effort represents, therefore, about SAR 400 billion of additional revenues that will have to be paid by national households, corporations, and expatriate workers.

The important question is whether these expectations are realistic. The risk is that the planned increase in revenues meets serious social resistance and is rolled-back, and that the gap will continue to be filled up with debt. By some estimates, the kingdom can borrow abroad and sell assets to theoretically finance at least 10 years of deficits at the current level, before going bankrupt. This allows it to kick the can down the road rather than find more sustainable solutions, as has often happened to regimes built on oil (Karl 1997).

Expats do create a buffer for the economy but are unlikely to be part of the tax base. The predominance of expats in the construction sector (Fig. 3.1) meant that, unlike other countries, the recent and ongoing closing-down of major infrastructure projects has not created large unemployment among nationals, as instead, the expat labor force has shrunk (Mahroum 2016). One presumes however that expats are being paid their reservation wage, and while they can be fired at will, it is not possible to compress their net incomes by much and keep them employed. Thus, while several fees are levied on them already (work permit, residence permit, training charges), and while these fees are expected to rise more in the future (by a total 2.2 percent of GDP by 2022, according to IMF projections), one expects that such additional costs will have to be borne by their employers rather than through a compression of their net income.Footnote 2 Some more research on this issue, taking advantage of recent increases in these fees, will be useful to understand this central set of issues better.

There is a possibility of taxing wealth, such as bank accounts, and other forms of assets. There has been to date no indication that this may take place formally, although the episode of the Ritz-Carleton hotel suggests that this may take place informally, at least at the top of the corporate pyramid. There have been reports of large amounts of capital flight in recent years, which suggests that capital-holders are trying to shield their assets from potential taxation and state predation.

To get a sense of magnitude of the burden on households and corporations implied by the IMF projections, I will try below to heroically estimate a lower and upper bound aggregate tax rate. As described above, the new taxes announced are essentially a VAT and excise taxes, which will fall directly on households; higher expat fees, which indirectly affect profits and consumer prices; and increased utilities prices, which fall directly on consumers and firms, but that may end up falling more on consumers via their indirect influence on output prices.

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