ESB

Introduction

End of Service Benefits (ESB) in Saudi Arabia represent an essential financial right for employees who complete a defined period of service with their employers. ESB provides employees with a lump sum amount at the end of their employment contract, whether through resignation, retirement, or termination. Both employers and employees need to understand how to accurately calculate ESB to ensure compliance with the law and avoid disputes. In this guide, we will explore the key elements involved in the ESB calculation process, offering a detailed step-by-step approach and expert insights.

Understanding the Labor Law

The Saudi Labor Law governs the calculation and distribution of ESB. The core provision is found under Articles 84 to 90, which outline the eligibility criteria, calculation methods, and entitlement processes. According to these provisions:

• Eligibility: Employees are entitled to ESB if they have completed at least two years of continuous service with the employer.
• Termination Types: Whether an employee resigns, is dismissed, or retires impacts the ESB calculation, with different entitlements based on the reason for termination.
• Dispute Resolution: If an ESB dispute arises, the labor courts or mediation procedures provided by the Ministry of Human Resources and Social Development (MHRSD) are used for resolution.

Key Factors Affecting ESB Calculations

Several factors influence the final ESB amount. The most important ones include:

1. Tenure of Service:

   • Service tenure is calculated in years and months, and the more years of service an employee has, the higher the ESB.
   • Fixed-term contracts and indefinite contracts are treated similarly for ESB purposes, but the calculation varies depending on the type of termination (voluntary resignation vs. employer termination).

2. Basic Salary:

   • Basic salary is the core amount an employee earns before allowances and benefits.
   • For ESB calculation, only the basic salary is considered, excluding benefits such as housing, transportation, and other allowances.

3. Gratuity Calculation:

   • The primary component ofESB is the gratuity, which is calculated as follows:
     • For the first 5 years of service: 1/2 month’s salary for each year of service.
     • For each year after 5 years: 1 month’s salary for each additional year.
   • There is a cap on the maximum gratuity payout, which can be limited by factors such as company policies or specific agreements.

4. Annual Leave Encashment:

   • Employees are entitled to unused annual leave days. These days are calculated by referring to the employee’s average daily wage, which is based on the basic salary.
   • The rate of encashment is governed by the number of days of leave an employee has accumulated, and employers must compensate for unused leave days in full, in accordance with the Labor Law.

5. Other Benefits:

   • Additional allowances (such as housing, transportation, and family allowances) may be included in the ESB calculation if they are explicitly mentioned in the employment contract.
   • These benefits are subject to the nature of the employee’s role and specific employer policies.

Step-by-Step Guide to ESB Calculation

Follow these steps to calculate the total ESB:

1. Gather Necessary Information:

   • Collect details regarding the employee’s tenure, basic salary, and any additional allowances or benefits.
   • Ensure clarity on whether the employee’s contract is fixed-term or indefinite.

2. Calculate Gratuity:

   • Apply the formula for gratuity based on years of service:
     • For the first 5 years: 1/2 month salary per year.
     • After 5 years: 1 month salary per year.
   • Ensure the gratuity amount does not exceed the maximum limit prescribed by law.

3. Calculate Annual Leave Encashment:

   • Identify the total unused leave days.
   • Multiply the unused leave days by the employee’s average daily wage.

4. Add Other Benefits:

   • If applicable, include allowances and other benefits specified in the contract.
   • Ensure these amounts are legally and contractually valid for ESB purposes.

5. Total ESB Calculation:

   • Sum the gratuity, annual leave encashment, and other benefits (if applicable) to arrive at the total ESB payout.

Common Mistakes to Avoid

• Incorrect Calculation of Service Period: Always ensure the service period is accurately calculated in years and months. For example, if an employee has worked for 3 years and 7 months, round it off appropriately based on company policy.

• Misunderstanding of Basic Salary: Clarify that the basic salary includes only the base wage and excludes allowances. Some employers mistakenly calculate ESB based on total earnings, which could be incorrect.

• Ignoring Maximum Gratuity Limit: Many employers overlook the maximum gratuity cap, which could result in overpayment.

• Overlooking Other Entitlements: If the employment contract includes specific benefits like housing or transportation allowances, these should be included in the ESB calculation.

Dispute Resolution and Legal Advice

In case of a dispute, the first step is usually to attempt mediation with the Ministry of Human Resources and Social Development (MHRSD). If this fails, legal proceedings in labor courts are available.

• Seeking Legal Counsel: If there is uncertainty or a complex situation, consulting with a labor lawyer is highly recommended. They can help clarify any doubts regarding the calculation and eligibility criteria.