Why End-of-Service and Leave Are Where Payroll Errors Hide
Most payroll teams in Saudi Arabia get the monthly salary right. The basic wage, housing and transport allowances, overtime and deductions repeat every month, and mistakes surface quickly because employees notice them on payday. End-of-service awards and leave balances are different. They build up quietly over years, they are calculated only once, at the moment an employee leaves or goes on leave, and by then the data behind them may be scattered across contract amendments, old spreadsheets and email approvals.
That is why final settlements cause so many disputes. An employee who has worked seven years expects a specific figure, the company calculates another, and the gap usually comes from one of a handful of questions: which wage is the basis, how partial years are counted, whether the employee resigned or was terminated, and how many leave days were actually used. Each question has an answer in the Labor Law, but applying those answers by hand to hundreds of employees is where things break.
This guide walks through the rules that matter, with worked numbers, and then shows how an ERP with integrated HR and payroll turns end-of-service and leave from a year-end scramble into a figure you can read on any given day.
The End-of-Service Award Under the Saudi Labor Law
The basic formula (Article 84)
When a fixed-term contract ends, or the employer ends an indefinite contract, the employee is entitled to an end-of-service award calculated as follows:
- Half a month's wage for each of the first five years of service.
- A full month's wage for each year after the fifth.
- Partial years are prorated, so the employee earns a share of the award for every part of a year worked.
- The basis is the last wage the employee received, including allowances that form part of the wage, not the basic salary alone.
Resignation (Article 85)
When the employee resigns, the award is reduced according to length of service:
| Length of service at resignation | Share of the full award |
|---|---|
| Less than 2 years | Nothing |
| 2 years to less than 5 years | One third |
| 5 years to less than 10 years | Two thirds |
| 10 years or more | Full award |
Cases that receive the full award
Some departures are treated as entitling the employee to the full award even though the employee ended the relationship. According to the Ministry of Human Resources knowledge centre, these include leaving because of force majeure, and a female employee ending her contract within six months of her marriage or within three months of giving birth. These cases are rare, which is exactly why they are easy to miss when the calculation is done from memory.
Worked Example: One Employee, Three Outcomes
Consider a hypothetical engineer with 7 years and 4 months of service. Her last monthly wage is SAR 8,000 basic, SAR 2,000 housing and SAR 500 transport, so SAR 10,500 in total.
- First five years: 5 × 0.5 × 10,500 = SAR 26,250
- Remaining 2 years and 4 months (2.333 years): 2.333 × 10,500 = SAR 24,500
- Full award: SAR 50,750
| Reason for leaving | Rule applied | Award |
|---|---|---|
| Employer ends the contract (not for a cause that forfeits the award) | Full award, Article 84 | SAR 50,750 |
| Employee resigns after 7 years 4 months | Two thirds, Article 85 | SAR 33,833 |
| Employee leaves within three months of giving birth | Full award | SAR 50,750 |
The difference between the second and third rows is almost SAR 17,000 for the same employee on the same day. It depends entirely on one field in the termination record: the reason. If that reason is chosen carelessly, or the HR officer does not know the special cases, the settlement is wrong.
Now a shorter example. A hypothetical storekeeper resigns after 3 years and 6 months with a last wage of SAR 6,000. The full award would be 3.5 × 0.5 × 6,000 = SAR 10,500. Because he resigned with between two and five years of service, he receives one third: SAR 3,500.
Where manual calculations go wrong
- Using basic salary only. Leaving housing and transport out of the base understates the award, and the employee is likely to challenge it.
- Rounding service to whole years. Ignoring four months of service in the example above removes several thousand riyals.
- Forgetting salary history. The base is the last wage. If a raise was approved two months before departure but never updated in the spreadsheet, the figure is wrong.
- Applying the resignation fraction to the wrong slice. The fraction is applied to the full award, not only to the years after the fifth.
- Not deducting unpaid leave periods where company policy and the law exclude them from service, or deducting them where they should be counted.
Leave Entitlements You Have to Track
Leave is the second half of the final settlement, and it is also a running monthly cost. The main statutory entitlements are summarised below.
| Leave type | Entitlement | Tracking notes |
|---|---|---|
| Annual leave (Art. 109) | At least 21 paid days a year, rising to at least 30 days after five consecutive years with the same employer | Entitlement changes automatically on the fifth anniversary. Cannot be waived for cash during employment. |
| Sick leave (Art. 117) | Up to 120 days a year: first 30 days full pay, next 60 days at 75%, last 30 days unpaid | Count is per year, so the system must know which days fall in which band. |
| Marriage (Art. 113) | 5 paid days | Event based, usually once. |
| Death of spouse, parent, grandparent, child or grandchild (Art. 113) | 5 paid days | Event based. |
| Death of a sibling | 3 paid days (2025 amendments) | Added by the amendments effective February 2025. |
| Paternity | 3 paid days | Under the 2025 amendments. |
| Maternity | 12 weeks full pay | Increased from 10 weeks by the 2025 amendments. |
| Hajj | 10 to 15 paid days, once, after two years of service | One-time flag on the employee record. |
Two rules link leave directly to the final settlement. First, an employee who leaves before using earned annual leave is entitled to be paid for those days. Second, annual leave cannot be exchanged for cash while the employee is still working, so a company that "buys back" leave every year is creating a compliance problem rather than solving one.
Example: unused leave in the final settlement
Our engineer has 12 unused annual leave days when she leaves. Many companies convert the monthly wage to a daily rate by dividing by 30; confirm the basis your contracts and policy use. At SAR 10,500 ÷ 30 = SAR 350 a day, the leave payment is 12 × 350 = SAR 4,200, added to the end-of-service award.
Example: sick leave bands
A hypothetical technician takes 40 days of sick leave in one year, supported by medical reports. The first 30 days are paid in full, and the next 10 fall in the 75% band. If his monthly wage is SAR 7,500, his daily rate on a 30-day basis is SAR 250, so the 10 days are paid at SAR 187.50 each, and payroll deducts SAR 625 compared with full pay. If the payroll officer forgets the earlier 30 days because they were spread over several months, the technician is overpaid.
Notice Periods, Probation and Their Effect on Settlements
The Labor Law amendments effective in February 2025 changed several timings that feed into the final settlement:
- Probation may be up to 180 days and must be stated in the contract.
- Notice for indefinite contracts is 30 days if the employee resigns and 60 days if the employer terminates.
- Compensatory leave may replace overtime pay where the employee agrees, which means overtime hours can turn into leave balances that must also be tracked.
The last day of service determines both the length of service for the award and the final month's wage. If the notice period is miscounted, both are wrong.
The Financial Side: Provisions, Not Surprises
End-of-service is a liability that grows every month an employee works. Companies reporting under IFRS as endorsed in Saudi Arabia account for it under IAS 19 Employee Benefits, typically as a defined benefit obligation measured with actuarial assumptions such as salary growth, staff turnover and a discount rate. Smaller entities often use a simpler calculation where their framework allows it; agree the approach with your auditor.
Whatever the measurement method, the practical requirement is the same: the provision should be updated regularly, ideally every month, rather than calculated once a year for the financial statements. A company that books the provision only at year-end discovers in December that its liabilities have grown far beyond what management assumed during budgeting.
Leave works the same way. Each month an employee earns roughly 1.75 days of leave on a 21-day entitlement, or 2.5 days on 30 days. Unused leave is a liability. A hypothetical company with 200 employees averaging 15 unused days at SAR 300 a day carries SAR 900,000 of accrued leave that should appear in its accounts.
A simple monthly accrual entry
- Debit end-of-service expense, by cost center or project
- Credit end-of-service provision
When the employee leaves, the settlement is charged against the provision, and any difference between the provision and the final amount is recognised in the period. Allocating the expense to cost centers means each branch or project carries its real labor cost, which matters for contractors pricing long jobs.
Compliance Touchpoints: Mudad, GOSI and Qiwa
End-of-service and leave do not live in isolation. They feed several government platforms:
- Wage Protection through Mudad: since 1 March 2025 the wage protection file must be uploaded within 30 days. Leave salary paid in advance and final settlements must be consistent with what is reported. Mudad also flags basic wages that look inconsistent with other recorded data. For the full picture, see our guide on WPS and Mudad compliance.
- GOSI: for Saudi employees in the existing system, contributions are 9.75% employee and 11.75% employer, on basic plus housing capped at SAR 45,000 a month. Employees who entered under the new Social Insurance Law from 3 July 2024 have a different, stepped annuity rate. When an employee leaves, the registration must be closed on time.
- Qiwa: contracts are registered on Qiwa, so the contract dates, wage and type you use in the settlement should match the registered contract.
How an ERP Handles End-of-Service and Leave
The goal is not a clever calculator. It is a single employee record from which every figure is derived, so that the award on the day of departure is the result of data maintained over years rather than a reconstruction.
1. One employee master record
Hire date, contract type, wage components and every change to them with effective dates, leave history and the reason for any termination all sit in one place. When the wage changes, the system knows from which date. See how employee management keeps this record together.
2. Leave rules as configuration
Entitlements are configured once by leave type: 21 days rising to 30 after five years, sick leave bands, event leaves with their day counts. The system accrues balances monthly and switches the annual entitlement automatically on the anniversary date.
3. Requests and approvals online
Through employee self-service, employees request leave, see their balances and track approvals. HR no longer answers "how many days do I have left?" by email, and every approved request updates the balance immediately.
4. Attendance feeding payroll
Absences, overtime and compensatory leave come from time attendance rather than from manual notes. That matters for both the sick leave bands and overtime that the employee chose to take as leave.
5. Settlement calculation from the record
When termination is entered with its reason and last working day, the award, unused leave payment, final month's salary and deductions are computed from the stored data. The HR officer reviews the result rather than building it.
6. Payroll and accounting integration
Provisions are posted to the general ledger by cost center, and the final settlement flows into payroll and payment. In Tranquil, payroll management works with HR and accounting, and bank integration supports direct salary transfer. Document expiry alerts and Muqeem integration help keep iqama and visa records current, which also matters when processing an expatriate's exit.
A Monthly Checklist for HR and Finance
- Confirm that all wage changes approved this month are entered with their effective dates.
- Review leave requests approved but not yet reflected in attendance.
- Check sick leave cases approaching the 30-day and 90-day thresholds.
- Review employees reaching their fifth anniversary, whose entitlement rises to 30 days.
- Reconcile the end-of-service and leave provisions to the employee-level reports.
- Prepare and upload the wage protection file within the 30-day window.
- For each leaver, verify the termination reason, last working day and notice period before approving the settlement.
Frequently Asked Questions
Is end-of-service calculated on basic salary or the full wage?
On the last wage, which includes allowances that form part of the wage such as housing and transport, not on basic salary alone. Check how each allowance is defined in the employment contract.
Does an employee who resigns get any end-of-service award?
Yes, after two years of service. Between two and five years the employee receives one third of the award, between five and ten years two thirds, and after ten years the full award. Below two years, nothing.
Can we pay employees cash instead of annual leave each year?
Not during employment. Annual leave cannot be waived for cash while the employee is working. Unused leave is paid when the employment ends.
How many sick leave days are paid?
Within one year, the first 30 days are paid in full, the next 60 days at three quarters, and the final 30 days unpaid, up to 120 days in total.
Can Tranquil help with leave and final settlements?
Tranquil's HR and payroll modules keep employee records, attendance, leave and payroll in one system linked to accounting. Contact the Tranquil team to review how your leave policies and settlement process would be configured.