Terminating Employment Contracts Under Article 77 of the Labor Law

Article 77 of the Saudi Labor Law remains one of the most discussed topics among employers and employees, particularly regarding the calculation of compensation when a contractual relationship ends.

When a contract is terminated under Article 77, HR professionals often face the challenge of calculating fair and accurate compensation. This is especially complex given the different requirements for Fixed-Term Contracts versus Indefinite Contracts. To address this, we are excited to announce a new feature in our system designed to automate these calculations with total precision.

Key Features of the New Update:

1. Determining the Initiating Party The system now allows you to specify who initiated the termination: the Employer or the Employee. This distinction is fundamental, as financial obligations vary significantly based on which party ended the contract.

2. Calculation Options: Automatic vs. Manual We understand that some companies reach private settlements or specific agreements with employees upon termination. Therefore, the system offers two flexible options:

• Automatic Calculation: The system automatically calculates the compensation based on the remaining duration of the contract or the standard Labor Law requirements.

• Manual Entry: If there is a prior agreement on a specific compensation amount, you can enter it directly, and the system will seamlessly integrate it into the Final Settlement.

3. Smart Differentiation Between Contract Types The system is intelligent enough to distinguish between:

• Fixed-Term Contract: Where compensation is typically calculated based on the wages for the remainder of the contract period.

• Indefinite Contract: Where it follows general compensation rules (e.g., 15 days' wage for each year of service).

Transparent Final Settlements

Once termination under Article 77 is triggered, the system generates a dedicated Compensation Tab within the Final Settlement statement. This card is displayed clearly and separately, detailing:

• The total compensation amount due.

• Any associated deductions (if applicable).

• An Audit History (recording who performed the action and when).

Note: Identifying the party that initiates the termination is the decisive factor in whether Article 77 is applied and who receives the compensation

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Detailed Explanation of How Article 77 compensation in Jisr System is Calculated Based on Contract Type, with Examples (in Years, Months, and Days):

First: In the case of an "Indefinite-Term Contract"

The rule here is: 15 days' wages for each year of the employee's service, provided that the compensation is not less than two months' wages.

Calculation Formula:

Compensation = Number of Years of Service × 15 × (Monthly Wage ÷ 30)

Example:

An employee with a salary of 10,000 Riyals, who worked for 3 years, 6 months, and 15 days.

1. Calculate the value of 15 days (half a month): 10,000 ÷ 2 = 5,000
2. Accurate calculation of service years:
   • For the 3 full years: 5,000 × 3 = 15,000
   • For the 6 months: 5,000 × 0.5 = 2,500
   • For the 15 days: 5,000 × (15 ÷ 365) ≈ 205
3. Subtotal Calculation: 15,000 + 2,500 + 205 = 17,705
4. Comparison with the Minimum: The system compares this amount with two months' wages: 20,000.
5. Final Settlement Result: The system will disburse 20,000 Riyals to the employee because it is the higher amount.

Second: In the case of a "Fixed-Term Contract"

The rule here is: Wages for the remaining period of the contract, provided that the compensation is not less than two months' wages.

Calculation Formula:

Compensation = Remaining Period (in months and days) × Monthly Wage

Example:

An employee with a salary of 10,000 Riyals, whose fixed-term contract was terminated, with 4 months and 10 days remaining in the contract.

1. Calculate wages for the remaining months: 10,000 × 4 = 40,000
2. Calculate wages for the remaining days: 10 × (10,000 ÷ 30) ≈ 3,333
3. Subtotal Calculation: 40,000 + 3,333 = 43,333
4. Comparison with the Minimum: The system compares this amount with two months' wages: 20,000.
5. Final Settlement Result: The system will disburse 43,333 Riyals to the employee because it is the higher amount.