Key Takeaway: The Saudi Ministry of Human Resources & Social Development has issued an explanatory memorandum to guide private sector employers in implementing immediate changes to their employment relationships to lessen the adverse economic impact on businesses arising from the COVID-19 pandemic. These measures include the right to unilaterally decrease salaries by as much as 40% for a period of up to six months, provided that there is a commensurate reduction in working hours.
On 6 April 2020, the Ministry of Human Resources & Social Development (the “Ministry”) added a new article to the Implementing Regulations of the Labor Law (“Article 41”). Article 41 was introduced to govern the contractual relationship between employer and employee in the context of the curfews and other restrictions imposed by the Saudi Arabian Government to address the COVID-19 pandemic.
Article 41(1) enables employers to discuss and agree with employees – within six months from the start of the Government-imposed restrictions (i.e., on or about 16 March 2020) (the “COVID-19 Measures Start Date”) - three options to lessen the adverse economic impact associated with the work restrictions resulting from the COVID-19 pandemic. These options are:
- reducing the employee's salary commensurate with a reduction in the employee’s working hours;
- placing the employee on annual leave as a part of his/her annual leave entitlement; and
- placing the employee on an exceptional unpaid leave pursuant to Article 116 of the Labor Law.
Article 41(2) provides that termination of employment shall be deemed illegitimate if the employer has benefited from any government programs/support to face the exceptional events associated with the COVID-19 pandemic.
Article 41(3) permits the employee to terminate the employment relationship notwithstanding the provisions of the Article 41.
On 3 May 2020, the Ministry issued an explanatory memorandum to Article 41 (the “Memo”) to further clarify the scope and implementation of Article 41. The Memo sets out certain rules for implementing the actions permitted by Article 41.
1) The Memo provides rules and guidelines on Article 41(1) as follows:
a) Reduction of Employee Salaries:
The employer shall have the option of reducing the employee’s salary commensurate with a reduction in the employee’s working hours (the consent of the employee is not required), subject to the following conditions:
- the maximum period of reduction is six months;
- the reduction shall not exceed (40%) of the total actual wage** of the employee;
- the reduction shall be commensurate with a reduction in the daily or weekly working hours of the employee; and
- an employee cannot refuse the option of reduction of salary unless it exceeds 40% of the employee’s actual wage.
b) Annual Leave:
The employer also shall have the option of (i) requesting that the employee to take his/her annual leave, and (ii) set the days of the annual leave, subject to the following conditions:
- the annual leave is paid in accordance with Article 109 of the Labor Law;
- the annual leave must be within the six months following the COVID-19 Measures Start Date;
- the payment of the annual leave shall be calculated based upon the actual wage and not the reduced wage (if any) implemented under Article 41; and
- the employee shall not refuse to take his/her paid annual leave when directed by the employer.
c) Exceptional Leave:
Article 116 of the Labor Law states that an employee has the right to request unpaid leave (exceptional leave). Article 41 of the Implementing Regulations gives the employer the right, in certain exceptional circumstances, to request that the employee take an exceptional leave within the six months following the COVID-19 Measures Start Date. The Memo sets out the following conditions applicable to the option of an employee utilizing exceptional leave:
- the exceptional unpaid leave can only be applied with the consent of both the employee and employer (perhaps making this option less attractive to employers);
- Pursuant to Article 116 of the Labor Law, the employment relationship must be suspended if the exceptional leave exceeds 20 days, unless both the employer and the employee agree otherwise.
2) With respect to Article 41(2), the Memo mentions that employers have the right to terminate the employment relationship on the basis of force majeure stated in Article 74(5) of the Labor Law only if the following conditions are satisfied:
- the unusual situation persists for a period of more than six months from the COVID-19 Measures Start Date;
- the options of Article 41(1) have been exhausted in-whole or in-part; and
- the employer has not benefited from any government programs regardless of the nature of the program.***
Termination in accordance with the above shall not be deemed termination with cause under Article 80 of the Labor Law and, thus, the employee remains entitled to his/her benefits (e.g., end of service benefits).
3) With respect to Article 41(3), the Memo states that the employee has the right to terminate the employment contract due to force majeure, subject to the following:
- the unusual situation persists for a period of more than six months after the COVID-19 Measures Start Date; and
- the options of Article 41(1) have been exhausted in-whole or in-part.
Furthermore, the Memo states that the Ministry has the right to impose a fine on employers for violations of Article 41 in the amount of SAR 10,000 per violation per employee. The Ministry would also have the right to settle such fines if the Ministry determines that the violations have been sufficiently addressed and the errant employer has complied with the terms of settlement agreed with the Ministry.
The Ministerial Resolution approving the Memo is effective from the publication date in the Official Gazette or the Ministry’s website. The Ministerial Resolution was published on the Ministry’s website on 5 May 2020.
This is an important new development but its interpretation and application in practice are not entirely clear and labor matters are always fact specific. Please let us know if you have any specific inquiries or would like to speak with one of our lawyers on how these measures may be applied in your business.
This overview is not intended as legal advice.
** The Labor Law defines “Actual Wage” as an employee’s basic wage plus all additional allowances to which an employee is entitled pursuant to his/her terms of employment.
*** This includes the option afforded to employers on 3 April 2020 to place a certain percentage of their Saudi Arabian national employees on unemployment for the months of May, June and July 2020, with the General Organization for Social Insurance (“GOSI”) to pay such employees 60% of their salaries up to a maximum of SAR 9,000 / month, and both the employer and employee would be exempt from such employees’ GOSI contributions.
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