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A severance payment agreement is your essential legal document for managing employment terminations in Saudi Arabia while ensuring full compliance with local labor laws. This binding contract establishes the complete terms of separation between you and your employee, covering all financial obligations, continuing duties, and mutual releases that apply when the employment relationship ends.

When do you need this document?

You'll need a severance payment agreement whenever you're terminating an employment relationship in Saudi Arabia, regardless of whether the termination is voluntary, due to redundancy, mutual agreement, or other circumstances. This document becomes particularly crucial when you need to calculate and document end-of-service benefits, which are mandatory under Saudi Labor Law for employees who have completed at least two years of continuous service. You should also use this agreement when there are additional contractual benefits beyond the statutory minimums, when the employee holds a senior position requiring board approval, or when you want to include specific post-employment obligations such as confidentiality or non-compete clauses. The agreement is also essential for documenting any additional compensation beyond the legal requirements, such as discretionary bonuses or enhanced severance packages.

Key legal considerations

Your severance agreement must carefully address several critical legal elements to be enforceable under Saudi law. The calculation of end-of-service benefits must follow the statutory formula of 15 days' wages for each of the first five years of service and 30 days' wages for each subsequent year, based on the employee's last drawn basic salary. You need to include clear definitions of key terms such as termination date, service period, and what constitutes the basic salary for calculation purposes. The agreement should specify the payment method and timeline, ensuring compliance with Wage Protection System requirements for electronic payment documentation. You must also consider any social insurance implications under GOSI regulations and ensure proper tax documentation for ZATCA compliance. Include appropriate release clauses that protect your company from future claims while remaining fair and legally enforceable. If you're including restrictive covenants, ensure they comply with Saudi legal principles and are reasonable in scope and duration.

Legal requirements in Saudi Arabia

Under Saudi Labor Law (Royal Decree No. M/51), you must comply with specific mandatory requirements when structuring severance payments. Articles 84-88 detail the precise calculation methods for end-of-service benefits, which cannot be waived or reduced below the statutory minimums. You must ensure the agreement complies with Sharia principles governing contractual arrangements, particularly regarding fairness and mutual consent. For senior positions, you may need board of directors approval before finalizing the agreement. The document must be prepared in Arabic or include certified Arabic translations for legal validity. You should also ensure compliance with Wage Protection System regulations for payment documentation and consider any Ministry of Human Resources and Social Development registration requirements. Additionally, the agreement must account for any applicable Zakat, Tax and Customs Authority obligations and ensure proper social insurance contribution handling through GOSI.