The employment contract is the fundamental legal framework governing the relationship between employers and employees in the Kingdom of Saudi Arabia. It defines the rights and obligations of each party and the mechanisms for initiating and terminating the relationship, thus ensuring job stability and fairness.

This article aims to clarify the concept of the employment contract within the Saudi Labor Law, explaining the difference between fixed-term and open-ended contracts and the circumstances under which each can be converted. It also presents the most important provisions related to contract termination and offers practical advice for both employers and employees.

Definition of an Employment Contract in the Saudi Labor Law

The Saudi Labor Law defines an employment contract as any agreement, whether written or unwritten, whereby an employee undertakes to work under the management or supervision of an employer in exchange for wages. This definition encompasses all forms of agreements that regulate the relationship between the two parties, whether concluded in the form of an official document or through approved correspondence, as long as they include the essential elements of the contract.

These elements include the details of both parties, the type and location of the work, the worker's salary, the subject of the contract, the start date and duration, working hours, leave entitlements, and other rights stipulated by law. The law also requires that the contract for a non-Saudi worker be in writing and for a fixed term. If the contract does not specify a term, its duration is considered to be one year from the date the worker actually begins work, to prevent the employment relationship from remaining open-ended.

Fixed-Term Contract

A fixed-term contract is one in which the beginning and end of the relationship are clearly stated, either by a specific date, a fixed term such as one or two years, or by linking it to the completion of a specific project, upon whose completion the contract ends. This type of contract typically expires automatically upon the expiration of its term without the need for any additional procedures or notice, unless both parties agree to renew it or the contract includes a clause for automatic renewal.

Therefore, many employers resort to this type of contract when they need workers for a specific period, for a temporary project, or when they wish to evaluate an employee's performance over a defined period. Fixed-term contracts are commonly used with non-Saudi workers because the regulations mandate that their contracts be for a fixed term and not open-ended. If the contract does not specify a term, its duration is considered to be one year from the date the worker actually begins work.

Indefinite-Term Contracts

An indefinite-term contract is one that does not specify an end date or where the term is automatically renewed, effectively becoming indefinite. This type of contract is generally applied to Saudi workers because it provides them with greater job security and stability. However, the regulations do not permit indefinite-term contracts for non-Saudi workers. An indefinite-term contract remains in effect as long as the employment relationship exists and only terminates if there is a legitimate reason for termination by either the employer or the employee, in accordance with the regulations regarding notice and compensation.

To prevent this stability from becoming an unfair burden on either party, the regulations have established controls for terminating an indefinite-term contract. The employer or the employee may terminate the contract for a legitimate reason, provided that notice is given. If the termination is initiated by the employer (and the salary is paid monthly), the notice period must be at least sixty days. If the termination is initiated by the employee (and the salary is paid monthly): the notice period must be at least thirty days.

If the salary is not paid monthly (daily or weekly): the notice period is thirty days for both parties, unless otherwise agreed upon. Failure to adhere to the notice period or the absence of a legitimate reason renders the termination unlawful, entitling the affected party to compensation in addition to other rights such as end-of-service benefits.

The Difference Between a Fixed-Term Contract and an Indefinite-Term Contract

The fundamental difference between the two lies in the element of time and the method of termination. A fixed-term contract is tied to a specific period or the completion of a specific task and terminates automatically upon the expiration of that period or the completion of the task without the need for notice. An indefinite-term contract, on the other hand, is not bound by a clear end date but continues until either party wishes to terminate it for a legitimate reason, provided prior notice is given.

They also differ in how compensation is calculated for unlawful termination. In a fixed-term contract, the remaining term of the contract is usually considered, while in an indefinite-term contract, compensation is often calculated based on a specific number of days' wages for each year of service, with a minimum threshold. The conversion of a fixed-term contract to an open-ended contract

The system has established conditions under which a fixed-term contract can be converted to an open-ended contract to protect workers from the unjustified practice of repeatedly entering into short-term contracts. When a fixed-term contract is concluded with a Saudi worker and renewed for several consecutive periods, or when the employment relationship extends for a long, continuous period with work continuing under almost the same conditions, the contract is considered open-ended at a certain stage, even if both parties continue to use the fixed-term contract template. The rationale is that the actual nature of the relationship has become permanent, not temporary, and therefore the provisions governing open-ended contracts regarding termination and compensation should apply.

Termination of Employment Contracts in Both Fixed and Open-Term Contracts

A fixed-term employment contract is usually terminated naturally, either upon the expiration of the contract term or the completion of the work for which the contract was concluded, or by mutual agreement of both parties to terminate before the agreed-upon term. If either party wishes to terminate the contract before its expiry without a legitimate reason, they are obligated to compensate the other party for the remaining period of the contract.

An open-ended contract, however, can be terminated by either party if there is a legitimate reason commensurate with the seriousness of the matter, such as persistent poor performance despite warnings, a genuine organizational need, or the employee's desire to leave due to personal circumstances. In such cases, written notice must be given in the specified manner and for the required duration, and the employer must document the reason for termination and the notice to prevent the action from being interpreted as arbitrary dismissal.

Legal Advice for Employers and Employees

The first essential piece of advice is to carefully read the employment contract before signing it. Ensure that the contract type, duration, nature of work, salary, working hours, leave entitlements, and any additional clauses, such as renewal clauses or termination penalty clauses, are clear. It is advisable to keep a copy of the contract, its addenda, and any correspondence or decisions affecting the employment relationship, as these documents serve as primary evidence in case of any dispute.

The second piece of advice for employers is to choose a contract type that suits the nature of the business. Temporary or seasonal projects are best suited to fixed-term contracts, while permanent, core positions within the establishment are better suited to open-ended contracts for Saudi employees. Care should also be taken when repeatedly renewing fixed-term contracts for Saudi employees to ensure that the total duration does not exceed the limits that would render them open-ended according to regulations. Each renewal or amendment should be documented through official, approved platforms.

As for employees, they should be aware of their rights and obligations as stipulated in the Labor Law, not just those stated in the contract. They should seek assistance from the relevant authorities or legal counsel if they encounter problems related to termination, changes in working conditions, or delayed wages. It is also important to adhere to the contract's stipulations, including performing work as required and respecting company regulations, as gross negligence may constitute legitimate grounds for contract termination without compensation.

Conclusion: In the Saudi system, an employment contract is not merely a document signed at the start of employment. Rather, it is the legal framework that governs the relationship between the employee and the employer throughout the employment period and even after its termination, in terms of financial rights and obligations.

Understanding the differences between fixed-term and open-ended contracts, as well as the circumstances under which a contract can be converted, the methods of termination, and the regulations governing compensation, helps both parties build a stable and fair working relationship based on clarity and commitment, thus reducing the likelihood of disputes and regulatory violations.

Disclaimer: The above content does not constitute legal advice, and the office assumes no legal responsibility. For legal consultations, please contact us.