Legal Implications of Contract Termination Under Saudi Labor Law Articles 74 and 77

All staff terminations in Saudi Arabia need to follow the procedures determined by the Saudi Labor Law regulations. Articles 80 and 81 of the Saudi Labor Law regulate worker dismissal cases arising from misconduct or resignations with valid notice periods but Articles 74 and 77 govern employee terminations without any workers’ misconduct or contract expiration. The termination of labor contracts through normal expiration dates or mutual agreement or unilaterally made decisions without legal misconduct requires these essential provisions.

Knowledge about legal provisions governing terminations needs to exist among both employers and employees to conduct lawful dismissals while avoiding future liabilities and enabling appropriate compensation payments for those who deserve it.

See also: Overview of Saudi Labor Law: Termination Rules, Employee Benefits & Key Changes

Article 74 of Saudi Labor Law and Its Application

Article 74 of the Saudi Labor Law establishes six legitimate measures for employer or employee contract end which does not cause legal breach. These include:

1. The contract termination occurs through mutual written consent between both parties.
2. The defined expiration date of the contract makes it terminated by default since it lacks renewal options.
3. An indefinite contract holder can stop the employment through proper notice according to the specified contractual or legal requirements.
4. When an employee meets the mandatory retirement standards (which set 60 for men and 55 for women) retirement becomes applicable unless the contract specifies another procedure.
5. A force majeure event occurs when unexpected matters surpass the control of both parties like natural disasters or wartime.
6. Closure of Business or Activity: If the employer ceases business operations completely.

Article 74 aims to establish mutual understanding through both predictable and legally clear employment termination practices. Termination through this article does not cause legal responsibility unless both parties have specified compensation.

Article 77 of Saudi Labor Law and Compensation for Unilateral Termination

The Saudi Labor Law through Article 77 provides guidelines about employee release from employment when there is no reasonable cause to do so for indefinite term contracts. Under this section of regulation, both employers and employees may end contracts without legal repercussion when standard termination notices are delivered together with monetary payments.

The article becomes applicable in these situations:

• An employer has the right to terminate employee service although Article 80 safeguards are not present.
• Staff members exit their employment prior to their agreed contract period ending.

Under Article 77, the compensation owed is:

• As specified in the employment contract; or
• Equivalent to 15 days’ wage for each year of service for indefinite contracts; or
• The balance of wages due until the expiry of a fixed-term contract.

The aim of Article 77 is to provide balance and predictability in cases where there is no fault but one party wishes to end the contract early. This ensures employees are compensated for sudden dismissal and employers are not penalized unfairly when an employee resigns prematurely.

See also: Saudi Labor Law Amendments 2024

Practical Implications for Employers and Employees

Employers pursuing an unjustified employee termination must allocate funds for compensation specifically in cases of long-term contracts. The employer needs to meet two requirements when terminating an employee: observe the specified notice period (60 days unless different in the agreement) and present a written explanation of the termination factors.

Employees, on the other hand, should be aware that resigning from a fixed-term contract without justification may require them to pay the employer compensation equal to the unworked period or agreed penalty.

In either case, the presence or absence of termination clauses in the employment contract plays a decisive role in determining the outcome.

Comparing Articles 74 and 77 in Practice

While Article 74 emphasizes mutual or natural termination of employment, Article 77 deals with unilateral termination with compensation. The two articles often overlap in practical application but differ in legal consequence:

• Article 74 is typically used when both parties agree or when the contract ends on its own terms.
• Article 77 applies when only one party chooses to end the relationship before the contract expires or without legal justification.

For instance, if a company restructures and decides to release an employee before the contract term, Article 77 ensures the employee receives compensation even if there is no fault.

See also: Saudi Labor Law Articles 80 and 81: The Legal Framework Governing Termination and Resignation in Saudi Arabia

Employer Best Practices

To avoid liability under Article 77, employers should:

• Clearly define termination procedures and compensation terms in the employment contract.
• Provide proper notice (or payment in lieu of notice).
• Document any reasons for termination to prevent potential labor claims.
• Use mutual termination agreements under Article 74 whenever possible to reduce risk.

Additionally, regular performance reviews and written warnings can help justify terminations under Article 80, thereby avoiding the financial burden of Article 77.

See also: Saudi Foreign Investment Law

If you require legal advice or representation regarding Saudi Labor Law Articles 74 and 77, our legal team at Hamad and Youssry Saleh Law Firm offers expert counsel tailored to your employment situation. Contact us today at info@ahysp.com.

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