Saudi Labour Law Articles 84 & 85: The Comprehensive Guide to Actual Wage and Resignation Tiers

1. Statutory Context of the Saudi End of Service Award

In the Kingdom of Saudi Arabia, terminal severance compensation is formally designated as the End of Service Award (Mukafoat Nihayat Al-Khidma). Governed by Royal Decree No. M/51 (as amended) and enforced by the Ministry of Human Resources and Social Development (MHRSD), the award represents a non-negotiable statutory obligation owed by the employer to the employee upon the conclusion of their employment relationship.

Navigating Saudi severance entitlements requires an exact understanding of two interconnected legal concepts: the definition of the statutory wage baseline under Article 2, and the application of tenure deduction scales under Article 85 when employment terminates via employee resignation.

2. The Mandatory 'Actual Wage' Calculation Baseline (Article 2)

The most prevalent source of labour dispute in Saudi Arabia stems from employers attempting to compute severance pay exclusively using an employee's basic salary. Under Article 2 of the Saudi Labour Law, this practice is strictly unlawful.

The law differentiates between Basic Wage (Al-Ajr Al-Asasi) and Actual Wage (Al-Ajr Al-Fi'li):

• Basic Wage: The core contracted remuneration agreed between the parties, excluding all allowances.
• Actual Wage: The Basic Wage plus all regular, recurring cash allowances provided to the employee. This explicitly includes mandatory housing allowances (or the cash equivalent of company-provided accommodations) and regular transportation allowances.

Because Article 84 specifies that the award must be calculated on the basis of the worker's latest drawn comprehensive wage, any corporate policy that calculates gratuity solely on basic pay violates public policy. Under Article 8 of the Labour Law, any agreement that waives or reduces statutory worker rights is legally void.

3. Accrual Rates Under Article 84

When an employment contract concludes due to natural expiration, mutual separation, or employer-initiated termination without misconduct, Article 84 establishes the baseline accrual framework:

• Years 1 Through 5: Half of one month's Actual Wage for each completed year of service (equivalent to fifteen days of wage per year).
• Year 6 and Beyond: One full month's Actual Wage for each subsequent completed year of service (equivalent to thirty days of wage per year).
• Fractions of a Year: The employee is entitled to an exact pro-rata proportion for completed months and days.

4. Resignation Deduction Tiers Under Article 85

Unlike the United Arab Emirates, where resignation and termination have been unified, Saudi Labour Law maintains distinct statutory deduction tiers if an employee voluntarily resigns from an indefinite term employment contract.

Article 85 governs these reductions:

5. Statutory Exceptions Under Article 87 (Full Award on Resignation)

An essential nuance of the Saudi regime is Article 87, which overrides Article 85 under specific social and emergency conditions. Under Article 87, an employee who resigns voluntarily is entitled to their full, unreduced award regardless of their tenure if:

• The female worker resigns within six (6) months from the date of her marriage;
• The female worker resigns within three (3) months from the date of giving birth;
• The worker leaves employment as a result of proven force majeure events beyond their control;
• The worker resigns under Article 81 due to an employer's material default, such as non-payment of wages, contractual breach, or physical assault.

6. Practical Case Demonstrations