End of Service Benefits in Saudi Arabia Explained

What end of service benefits are

End of service benefits, or EOSB, are the lump-sum gratuity Saudi Labor Law requires an employer to pay an employee whose employment ends, calculated from years of service and final wage rather than paid into a separate pension fund during employment. It matters because EOSB is not optional or negotiable downward: the formula sets a floor, and how much of that floor an employee actually receives depends on whether they resigned or were terminated, and how long they had worked.

Every private-sector employee earns this entitlement gradually across their employment, which is why it needs to sit on the balance sheet as a growing liability rather than surface only as a surprise cash cost the month someone leaves the business.

The gratuity formula

The full gratuity formula is half a month's wage for each of the first five years of service, and one full month's wage for every year of service beyond that. Wage for this purpose is the employee's final wage at the point their employment ends, not an average across their tenure.

The two-tier structure means gratuity accrues faster the longer someone stays: the sixth year of service alone adds as much to the entitlement as the first two years combined, since years six onward accrue at double the rate of years one through five, which rewards longer tenure in a way a flat annual rate would not.

Resignation: a tiered entitlement

An employee who resigns does not automatically receive the full gratuity calculated above; Labor Law Article 85 tiers the resigning employee's entitlement by total years of service. Under 2 years of service, a resigning employee receives no gratuity at all. Between 2 and 5 years, they receive one third of the full gratuity. Between 5 and 10 years, they receive two thirds. Beyond 10 years of service, a resigning employee receives the full gratuity, the same as if they had been terminated.

• Under 2 years: 0% of full gratuity.
• 2 to 5 years: 1/3 of full gratuity.
• 5 to 10 years: 2/3 of full gratuity.
• Over 10 years: 100% of full gratuity.

Two more resignation scenarios worth comparing

The tiers move quickly from nothing to everything, so it helps to see them applied to two more tenures alongside the 6-year example above.

A Riyadh-based employee earning SAR 7,000 a month resigns after exactly 3 years, landing in the 2-to-5-year band. A colleague earning SAR 15,000 a month resigns after 12 years, past the 10-year mark where resignation and termination are treated the same.

• 3 years' service, full gratuity: 3 x 0.5 month = 1.5 months' wage = 1.5 x 7,000 = SAR 10,500.
• Resigning at 3 years (2-to-5-year band, 1/3): 1/3 x 10,500 = SAR 3,500.
• 12 years' service, full gratuity: (5 x 0.5) + (7 x 1) = 2.5 + 7 = 9.5 months' wage = 9.5 x 15,000 = SAR 142,500.
• Resigning at 12 years (over 10 years, 100%): the full SAR 142,500, identical to what termination would pay.

Termination: a much faster path to the full amount

Termination by the employer, where the employer ends the contract for a reason not attributable to the employee, follows a different and far more generous rule: the employee is entitled to the full gratuity, with no tiering, once they have completed just over one year of service. There is no 2-year, 5-year or 10-year staging for a termination case the way there is for resignation.

This creates a real asymmetry worth understanding on both sides of the employment relationship. An employee terminated after 18 months receives the full gratuity for those 18 months of service, while an employee who resigns after the same 18 months receives nothing at all, purely because of which side ended the contract. The generous termination rule applies to a dismissal not attributable to the employee, such as redundancy or the employer ending the contract for its own reasons; a dismissal for cause under the labour law's own disciplinary provisions is a separate, narrower case and a business should confirm the distinction with a labour law adviser before assuming a difficult dismissal automatically qualifies for the full, untiered gratuity.

Worked example: six years of service

An employee's final wage is SAR 12,000 a month and they have completed exactly 6 years of service. The full gratuity is built from two tiers: the first 5 years at half a month's wage each, plus the sixth year at a full month's wage, since it falls beyond the 5-year mark.

If this employee is terminated by the employer, or resigns after more than 10 years in a different scenario, they receive the full amount. If instead they resign after these same 6 years, they fall into the 5-to-10-year band and receive only two thirds of it.

• Full gratuity: (5 years x 0.5 month) + (1 year x 1 month) = 2.5 + 1 = 3.5 months' wage.
• Full gratuity in SAR: 3.5 x 12,000 = SAR 42,000.
• If terminated by the employer: SAR 42,000 in full.
• If the employee resigns at 6 years (5-to-10-year band, 2/3): 2/3 x 42,000 = SAR 28,000.

Worked example: short service, resignation versus termination

Tenure length changes the outcome even more sharply for shorter service. Two employees each earning SAR 9,000 a month leave after 18 months, one by resigning and one by termination without cause.

• Full gratuity for 1.5 years: 1.5 x 0.5 month = 0.75 months' wage = 0.75 x 9,000 = SAR 6,750.
• Resigning employee (under 2 years of service): 0% of the full gratuity = SAR 0.
• Terminated employee (over 1 year of service, employer-initiated): 100% of the full gratuity = SAR 6,750.

EOSB as a balance sheet liability

Because EOSB is earned gradually across employment rather than paid as it accrues, it is a liability an employer owes to its whole current workforce at any point in time, not only to the employee who happens to leave this month. Under IAS 19 Employee Benefits, an obligation of this kind, payable in future based on years of service and final salary, is a post-employment benefit that in principle calls for an actuarial valuation, discounting the expected future payment to its present value using assumptions about salary growth, staff turnover and the discount rate.

In practice, many private Saudi businesses that are not required to produce actuarial reports use a simplified, undiscounted version of the formula, calculating what each employee would be owed today under the resignation or termination rules and carrying that as the provision. This is a reasonable practical approach for a small or medium business, but a business that needs full IFRS-compliant financial statements should confirm with its auditor or an actuary whether a formal actuarial valuation is required for its EOSB provision.

Either way, the provision is a real liability that grows with every year of service and every salary increase, not a notional figure kept off the balance sheet until someone resigns. A workforce with long average tenure and rising wages carries a correspondingly larger EOSB provision, which is worth watching alongside headcount growth when a business reviews its balance sheet, since the liability can grow faster than cash reserves set aside to cover it if no provisioning discipline is in place.

The monthly accrual entry

Whichever measurement approach a business uses, EOSB should be expensed and provided for every month, not only recognised when someone actually leaves. A simplified monthly accrual spreads the year's expected increase in the provision evenly across the twelve months, so the income statement carries the cost as it is earned.

For the 6-year employee above, the sixth year of service adds one month's wage, SAR 12,000, to the gratuity entitlement over that year. Spread evenly, that is SAR 1,000 accrued each month during the sixth year: Dr End-of-service benefits expense 1,000 / Cr End-of-service benefits provision 1,000. When the employee eventually leaves and the gratuity is actually paid, the payment clears the provision rather than hitting the expense account a second time: Dr End-of-service benefits provision (the accumulated balance) / Cr Bank.

The same logic applies in the employee's first five years, just at half the monthly rate: half a month's wage a year is one twenty-fourth of a month's wage accrued each month, since half a month spread across twelve months is 0.5 divided by 12. On a SAR 8,000 wage, that is SAR 333.33 accrued a month during each of the first five years, before the rate doubles once the employee passes the 5-year mark and moves onto the full-month accrual shown above.

Common EOSB mistakes

Most EOSB errors either misapply the resignation tiers or ignore the liability until someone actually leaves. Both mistakes are avoidable with the same discipline: checking the employee's actual years of service and final wage against the formula every time a departure or a year-end provision is calculated, rather than reusing a figure from a previous year or a different employee's case.

• Paying a resigning employee the full gratuity when their years of service place them in the 1/3 or 2/3 tier instead.
• Treating a termination the same as a resignation and applying the tiered percentages, when termination without cause entitles the employee to the full amount after just over a year.
• Calculating gratuity on an average or starting wage instead of the employee's final wage at the point of leaving.
• Never provisioning for EOSB during employment, so the expense lands as a single large surprise the month an employee departs.
• Applying the half-month rate to years beyond year 5, when those years accrue at the full-month rate instead.

Doing this in Skyline Nexus ERP

Skyline Nexus ERP's HCM module includes an EOSB report alongside payroll processing, payslips and GOSI reporting, and when payroll is set up with Payroll Mapping, the accounts available include a dedicated EOSB expense account and an EOSB provision account, separate from ordinary salary expense and salaries payable.

Recording the monthly accrual shown above as a manual journal entry, or through payroll processing where the business has configured it to do so, keeps the EOSB provision account building up in line with the workforce's actual entitlement, so the balance sheet reflects what is owed rather than only showing the cost once an employee's final settlement is calculated.