Layoff

What a layoff is

A layoff, also called a redundancy or termination for economic reasons (تسريح العمالة لأسباب اقتصادية), is the ending by an organisation of employment relationships that are still running, for a reason that lies with the organisation itself: falling demand, the closure of an activity, or a cut in costs. The reason does not lie in the conduct of the person whose employment ends.

That distinction is what the subject turns on. In a layoff the reason describes the state of the organisation, and the worker has done nothing that can be attributed to them. Provisions built on an act by the worker therefore do not fit a layoff, and carrying them across moves a rule out of the place it was written for. So the practical question a layoff raises is not whether it is allowed. It is which provision ends the contract, and what is owed when it does.

Where a layoff sits in the Saudi Labor Law

Article 74 of the Saudi Labor Law (نظام العمل) lists the cases in which an employment contract ends. Three of them concern the state of the establishment itself:

• Force majeure.
• The permanent closure of the establishment. The word permanent is in the text, so a temporary stoppage does not fall within this case, however long it lasts.
• The ending of the activity in which the worker is employed, unless otherwise agreed. The final qualifier is part of the text, not a comment on it: an agreement displaces the rule.

The other cases in Article 74 of the Labor Law are agreement of the parties, where the worker’s consent must be in writing; expiry of the term stated in the contract, unless it has been expressly renewed; the will of one party in a contract of indefinite duration, in accordance with Article 75 of the Labor Law; resignation; the worker reaching retirement age under the social insurance law, unless the parties agree to continue; a decision, or a final judgment, of the competent court ending the worker’s contract in bankruptcy proceedings; and any other case that another law provides for.

Two of those cases were added to Article 74 of the Labor Law by Royal Decree M/44: resignation, as item 3 bis, and the court decision in bankruptcy proceedings, as item 7 bis. Anyone working from an earlier version of the article counts fewer cases than it now holds, and the bankruptcy case is the one closest in setting to a layoff.

Two points follow from the list. First, weak demand or a wish to cut costs is not in itself one of the cases in Article 74 of the Labor Law; what the article holds is permanent closure, the ending of an activity, and force majeure. Second, the list is not closed within the Labor Law, because its last item refers to any case another law provides for, and those other laws fall outside what we reviewed.

In the sources we reviewed, we found no provision in the Labor Law that sets a dedicated regime for a layoff: no criteria for choosing whose employment ends, no duty to consult or to give advance notice of numbers, and no separate payment named for the layoff. We did not infer a criterion from not having found one. That statement describes how far our review reached; it is not a ruling on anything beyond it.

A layoff under a contract of indefinite duration

Where none of the cases in Article 74 applies, the route left to the establishment is Article 75 of the Labor Law. It covers contracts of indefinite duration only, requires the termination to rest on a legitimate reason, and requires written notice of at least the following length:

• Wage paid monthly, ended by the employer: 60 days.
• Wage paid monthly, ended by the worker: 30 days.
• Wage not paid monthly, ended by either party: 30 days.

The two monthly periods are not the same, and that is one of the changes made by Royal Decree M/44. Before the amendment, Article 75 of the Labor Law was symmetric: 60 days on each party where the wage was monthly. Copying 60 days for both parties today repeats a superseded text and places a heavier obligation on the worker than the Law now imposes. The notice rules are set out in our guide to the notice period and terminating an employment contract.

Article 75 of the Labor Law sets no standard for what counts as a legitimate reason, and we found nothing in our sources that sets one out. Whether financial strain is a legitimate reason in a particular case is not something the definition of a layoff settles.

A party who ends the contract without observing the notice period must, under Article 76 of the Labor Law, pay the other party a sum equal to the worker’s wage for the notice period, unless the parties agreed on more.

The effect of the asymmetry shows in the sum owed. An establishment that ends a monthly paid contract of indefinite duration without notice owes, under Article 76 of the Labor Law, the wage for 60 days, or roughly two months’ wage. Had the worker ended the same contract without notice, the sum owed would be the wage for 30 days. The two amounts differ because the two periods in Article 75 of the Labor Law differ, and a calculation run on a single period for both directions is wrong for one of the parties. This sum stands in place of the notice, and it is a separate item from the compensation under Article 77 of the Labor Law and from the end of service award.

A layoff under a fixed term contract

A fixed term contract carries no notice under Article 75 of the Labor Law at all. It ends when its term expires, under Article 74 of the Labor Law. Ending it before then without a legitimate reason does not give rise to a notice period; it gives rise to compensation under Article 77 of the Labor Law. This is a point at which the two contract types are confused: asking for a notice period in a fixed term contract asks for something the text does not provide for that type. How the two types differ, and when one converts into the other, is covered in our guide to fixed term and indefinite contracts.

Compensation when a layoff is unlawful

Article 77 of the Labor Law sets what the injured party is due where a contract is ended for a reason that is not legitimate, unless the contract itself fixes a sum for that case:

• A contract of indefinite duration: the wage for fifteen days for each year of the worker’s service.
• A fixed term contract: the wage for the remaining period of the contract.
• In both cases: the compensation may not be less than two months’ wage.

The floor can change the outcome of a layoff. A worker with one year of service on a contract of indefinite duration is due the wage for 15 days under the first rule, and Article 77 of the Labor Law raises that to two months’ wage. A worker with ten years of service is due the wage for 150 days, which is above the floor, so the calculation stands. The floor operates at the short end of service and not at the long end.

The compensation is due to the injured party: Article 77 of the Labor Law is not limited to the worker. This compensation is also distinct from the end of service award, which Article 84 of the Labor Law sets on a different basis: half a month’s wage for each of the first five years, a month’s wage for each later year, calculated on the last wage. The two are separate amounts, calculated separately, and one is not a substitute for the other. The award is explained under end of service benefits.

What a layoff is not built on

• Article 80 of the Labor Law. It allows the employer to end the contract without award, notice or compensation in nine listed cases, and only on condition that the employer gives the worker the opportunity to state their objections to the termination. Eight of the nine cases turn on conduct by the worker, and the ninth on the worker being on probation; none of them describes the state of the establishment. The reason for a layoff lies in the state of the establishment and involves no act attributable to the worker, so that reason is not one of the cases in Article 80 of the Labor Law. Article 80 of the Labor Law is covered in our guide to dismissal under Articles 80 and 81. Article 80 of the Labor Law is a lawful exit and is not the same thing as unfair dismissal (الفصل التعسفي).
• A change of owner. Article 18 of the Labor Law provides that employment contracts remain in force when ownership of the establishment passes to a new owner or its legal form changes, that service is treated as continuous, and that the successor and the predecessor are jointly and severally liable for the workers’ rights arising from the period before the change. A sale or a merger is not in itself a route to ending contracts.
• Business restructuring. It is a financial and accounting description of a plan and the provisions made for it; a layoff is the ending of employment relationships under the rules that govern them. A plan approved and recorded in the books does not by itself create a statutory basis for ending a contract.
• A temporary stoppage of operations. The case in Article 74 of the Labor Law is the permanent closure of the establishment, and the word is in the text. Suspending activity for a season, or even for a long period while the establishment continues to exist, is not that case, and the contract stays in force during it with the obligations it carries. Calling a temporary stoppage a permanent closure relies on a case that has not occurred.
• A collective, temporary cut in hours. Article 119 of the Labor Law provides that full time workers affected by a collective and temporary reduction in their normal working hours for economic, technical or structural reasons are not to be regarded as part time workers. Both words are in the text, so the article does not reach an individual reduction or a permanent one. It is a classification rule, not a route to a layoff: it does not authorise the reduction, set conditions for it, or create any payment for it. What it does is keep the worker’s full time status, so that the whole of the Labor Law continues to apply rather than the narrower provisions for part time work. In our search of the Labor Law text it is the only place the phrase economic reasons (أسباب اقتصادية) appears, and its appearance there creates no layoff regime.
• A waiver by the worker. Article 8 of the Labor Law voids any term that contradicts the Law, and any release or settlement of the worker’s statutory rights made while the contract is in force, unless it is more favourable to the worker.

What comes before a layoff decision, and what follows it

Before the decision come measures that end no relationship at all, and they can be considered first because they carry no statutory cost: a review of the headcount plan, and a hiring freeze, which lowers the number by not replacing leavers rather than by ending contracts. The way a lower headcount is reached by not refilling posts is set out under attrition. Termination by mutual agreement is a different kind of measure, because it does end the relationship: it is one of the cases in Article 74 of the Labor Law, and it requires the worker’s consent in writing.

After the decision comes the settlement of what has fallen due. Article 88 of the Labor Law requires the employer, when the worker’s service ends, to pay the wage and settle the worker’s entitlements within one week at most of the date the contractual relationship ends; where it is the worker who ended the contract, within a period not exceeding two weeks. The employer may set off any debt owed to it that arose from the work. One week is the general rule for every ending of service, whatever its cause, and two weeks is a single exception limited to an ending by the worker. A layoff for economic reasons therefore falls under the general rule and not under the exception, so its deadline is one week. The deadline and the content of the settlement are covered in our guide to wage payment dates and the final settlement.

For a worker who is not Saudi, the effect of a layoff on the work permit and the residence permit (iqama) has its own sources and authorities, and it is not derived by analogy from the rules of the contract.

The provisions relied on are those of the Saudi Labor Law as published by the Ministry of Human Resources and Social Development: Article 8 (terms and releases that are void), Article 18 (a change of ownership), Article 74 (the cases in which a contract ends), Article 75 (notice in a contract of indefinite duration), Article 76 (payment in place of notice), Article 77 (compensation for termination without a legitimate reason), Article 80 (termination without award, notice or compensation, cited to show why a layoff does not rest on it), Article 84 (the end of service award), Article 88 (the settlement deadline) and Article 119 (a collective, temporary reduction in hours). Royal Decree M/44 of 1446H, in force since 19 February 2025, amended Articles 74 and 75 of the Labor Law and did not amend Articles 8, 18, 76, 77, 80, 84, 88 or 119; the last amendment to Articles 76, 77 and 80 of the Labor Law was made by Royal Decree M/46 of 1436H.

Before a layoff decision is taken

Three steps, taken in order, can prevent the errors described above. The first is to establish the type of contract, because the two types share neither a notice period nor a method of calculating compensation. The second is to establish the provision: is this one of the statutory cases in which a contract ends, or a termination with notice? The third is to calculate what is owed under separate heads: the end of service award, calculated separately; the sum in place of notice where the notice period was not observed; and compensation for unlawful termination where it applies.

Starting from the figure before the provision can end in an amount with no provision identified to support it. A layoff decision can be reviewed after it has been taken, and if its basis, its date and the type of contract were not written down at the time, the review has nothing to work from.

This is an explanation of the concept and of the statutory provisions cited, not legal advice.

Related terms

• End-of-Service Benefits (EOSB)
• End of Service Calculation
• Attrition
• Salary Freeze
• Corporate Restructuring