Specified Term Employment ContractsKSA2021OverviewSaudi Arabia Royal Decree No. M 51/1426, Approving the Labor Law (Saudi Arabia Cabinet Decision No. 219/1426 on the Approval of the Labor Law) as further amended by virtue of Royal Decree No. M 46/1436 has provided the legal framework governing specified (or fixed) term employment contracts, allocating more specifically Articles 37, 55 and 77 to address the various issues raised by those contracts. In this article, we will examine more closely the provisions of the Labor Law that govern (i) the scope of application of specified term employment contracts; (ii) the conditions required for the validity of those contracts ; (iii) the provisions governing their renewal, expiry and termination; and (iv) the damages to which the employee is entitled in case of unlawful termination of a specified term employment contract.
(i) Scope of Application of Specified Term Employment Contracts.
Specified term employment contracts can be used by employers to hire Saudi and expatriate workers. As far as the latter are concerned, the use of a specified term employment contract is mandatory. Article 37 of the Labor Law provides that “the employment contract of a non-Saudi worker must be in writing and entered into for a fixed term. If the contract does not specify its term, the validity period of the employment permit shall be deemed to be the term of the employment contract”.
Accordingly, if the employment contract of an expatriate worker stipulates that it is entered into for an unspecified period, in the event that a dispute arises between the employee and the employer, the labor court will most likely re-qualify the contract as being a fixed term a contract and will therefore apply the relevant provisions to the dispute referred to it.
(ii)Conditions Required for the Validity of Specified Term Employment Contracts.
In addition to the common requirements for the validity of contracts namely a free and uncoerced consent, a valid and licit subject and purpose, the fixed term employment contract must satisfy the following additional conditions:
a-The contract must be in writing: this requirement is expressly spelt out in Articles 37 and 51 of the Labor Law. That said, writing is not a condition for the existence of the contract since a verbal employment would be valid but putting the agreement in writing would assist the employee in establishing his rights. Paragraph 2 of Article 51 provides that “the employment contract shall be valid even if it is not in writing. In this case, the employee alone shall be able to establish the contract and his rights as the same arise out thereof by all evidentiary means”.
b-The Contract must be drawn up in the Arabic language which is the official language in Saudi Arabia. Article 9 of the Labor Law stipulates that “the Arabic language shall be used in all records, files, employment contracts and other documents referred to in this law, or in any resolution issued pursuant to it, as well as the instructions issued by the employer to his employees. If the employer uses a foreign language alongside the Arabic language, in any of the aforementioned cases, the Arabic text alone shall prevail”.
c-The contract must comply with the standard form adopted by the Ministry of Labor. Article 52 of the Labor Law provides that:“1-Without prejudice to the provisions of Article 37 of the law, the Ministry shall adopt a uniform standard employment contract which will primarily include the following information: employer’s name and address, employee’s name and nationality, a reference to his personal identification document, his address, the salary agreed between the parties including any allowances and benefits, the employment start date and the contract duration if it is entered for a fixed term.“2-The contract must conform to the standard agreement provided for in paragraph (1) of this Article. The parties may add provisions to the standard form provided that the additional provisions do not conflict with the provisions of this law, its implementing regulations and the resolutions issued pursuant thereto”.
d-If the employee is subject to a probationary period, the contract shall explicitly provide for it. Article 53 of the Labor Law stipulates that “in the event that employee is subject to a probationary period, the contract shall explicitly provide for it and specify its duration so that it does not exceed ninety days”.
e-The contract must be drawn up in duplicate. Article 51 of the Labor Law provides that “the employment contract must be drawn up in duplicate, each party retaining a copy.
f-The contract must specify its duration (see below).
(iii)Term, Renewal and Termination of Specified Term Employment Contracts
The contract must specify its duration. This requirement makes much sense in the case of a specified term employment contract as the presumption is that the contract shall be deemed to be entered into for an unspecified term if no duration is provided for in the contract. That said, in the case of expatriate workers, the employment contract will always be treated, pursuant to Article 37 of the Labor Law, as a fixed term contract and if the parties have not specified its duration, the term shall be equal to the validity period of the work permit (paragraph 2 of Article 37).
b-Renewal and Termination
-Expatriate workers: notwithstanding any renewal (s) of the contract, the latter shall always be treated as a fixed term contract and thus governed by the relevant provisions applicable to this type of contracts.
-Saudi workers: Article 55 of the Labor Law provides that: a-“the specified term employment contract shall end upon the expiry of its term and if the parties continue to execute it, the contract shall be deemed to have become an unspecified term employment contract, without prejudice to the provisions of Article 37 of this law as far as non-Saudis are concerned. b-“If the specified term employment contract provides for its renewal for a similar term or for a fixed term, it shall stand renewed for the agreed upon term. If the contract is renewed for more than three consecutive times or if the term of the initial contract together with the renewal periods reaches four years, whichever is lesser, and the parties have continued to execute it, the contract shall become an unspecified term contract”. In the latter case, the length of the services of the employee shall be deemed to be continuous for the purposes of calculating his entitlements.2-ExpiryThe contract shall automatically come to an end upon the expiry of its term, without the need for a prior written notice being sent by either party, unless the contract provides that a prior notice should be sent to the other party to notify it of the other party’s intention not to renew the contract. In such a case, and absent a prior notice, the contract shall not expire automatically but shall be renewed automatically for a similar term or a different fixed term agreed upon by the parties.
Except in cases where the contract may be terminated by either party in accordance with the provisions of Article 80 of the Labor Law (i.e. common grounds of termination of employment contracts, including by mutuus dissensus), neither party may terminate the specified term employment contract prior to the expiry of its initial or renewed term (s).
Accordingly, if either party terminates the contract prior to the expiry of its term, the terminating party shall be liable to the other party in damages (both material and moral) pursuant to the rules and principles governing contractual liability, it being noted that the parties may mutually agree that, in such a case, the terminating party shall be liable pursuant to a penalty clause incorporated into the employment contract, provided that the amount of damages is reasonable as assessed by the competent court. It is also worth noting that if the terminating party has committed fraud or was found guilty of willful misconduct, the court may increase the amount of damages agreed upon by the parties
.(iv)Damages for Unlawful Termination of Specified Term Employment Contracts.
Paragraph 2 of Article 77 of the Labor Law as amended by virtue of Royal Decree No. M/46 stipulates that “unless the contract provides for a specific amount of damages if either party terminates it unlawfully, the aggrieved party shall be entitled to claim damages as follows:
2-The salary for the remainder of the contract term if the contract is a fixed term contract.3-Damages as provided for in paragraphs 1 and 2 above shall not be less than the employee’s salary for a period of two months”.
It is worth noting that prior to the amendment of Article 77 of the Labor Law, labor courts enjoyed some level of discretion in determining the amount of damages a terminated employee could claim in case of unlawful termination of his employment contract by the employer, taking into consideration the age of the employee, the length of his/her services, the nature of his/her work, the amount of his/her salary and his/her responsibilities to his dependents as well as the likelihood of him/her finding a replacement job.
By amending the provisions of Article 77 of the Labor Law in this way, the Saudi legislator seems to have deliberately sided with the employers, by enabling them to unlawfully terminate specified and unspecified employment contracts without having to worry about the amount of damages that might be awarded by a labor court in case the latter makes a determination that termination of the contract by the employer was indeed unlawful since the maximum that could be awarded could equal two months’ salaries.
Anyone (Saudi or expatriate) offered a specified (or fixed) term employment contract governed by the provisions of the Labor Law would be well advised to consider incorporating the following clauses into the Contract:
1-Prior notice of non-renewal or termination:
Non-renewal: this would give the employee and employer the assurance that the contract would not be renewed automatically for a similar or different fixed term without his approval if he does not wish to remain in the contractual relationship by advising the other party of his intention not to renew. this would definitely protect the employee by allowing him enough time (especially if the prior notice period is relatively long e.g. 2 months) to seek a replacement job, knowing that his employment contract will not be renewed upon the expiry of its term.
2- Pre-estimated damages or penalty clause in case of unlawful termination of the contract:
Following the amendment of Article 77 of the Labor Law, an employee would be well advised to incorporate a clause providing for liquidated damages or a penalty for unlawful termination of the contract by the employer. In doing so, the employee would have the assurance that whenever the competent labor court makes a determination that termination of the contract by the employer was unlawful, the amount of damages will be higher than the minimum provided for in paragraph 3 of Article 77.
In such a scenario, the employee would need to make sure that the amount of liquidated damages or penalty remains within reasonable limits to avoid its reduction by the court which retains a discretion to assess the reasonableness of the contractual damages agreed upon by the parties.
Legislation·Saudi Arabia Royal Decree No. M51/1426 Approving the Labour Law·Saudi Arabia Cabinet Decision No. 219/1426 on the Approval of the Labour Law
Dr. Mohammad Ali Omran, Al Waseet Fi Sharh Ahkam Qanoun Al Aamal Al Jadid·
Dr. Hamdi Abdelrahman, Dr. Khaled Hamdi, Sharh Ahkam Qanoun Al Aamal Al Jadid·
Dr. Alsayyed Ali Nayel, Al Waseet Fi Sharh Nizamay Al Aamal Wal Taminat Al Ijtimai’yya Fil Mamlaka Al Arabiyya Al Saoudiyya, Vol. I, Nizam Al Aamal Al Saoudi