Saudi Article 77: How the Compensation Is Actually Computed
Search for Article 77 of the Saudi Labour Law and you get page after page reproducing the same text. The text is not the problem — it is published and freely available. The problem is that the number your HR system produces does not match the number the labour court awards, and the gap opens in four specific places that nobody writes about.
This article does not explain Article 77. It explains how Article 77 becomes an amount in riyals, and where the system goes wrong on the way there.
The text after Royal Decree M/46
Article 77 was amended by Royal Decree No. (M/46) dated 5/6/1436H. The wording in force today reads:
Unless the contract specifies a defined compensation for its termination by either party for an unlawful reason, the party harmed by the termination is entitled to compensation as follows:
- Fifteen days' wages for each year of the worker's service, where the contract is of indefinite term.
- The wages for the remaining term of the contract, where the contract is of fixed term.
- The compensation in either case must not be less than the worker's wages for two months.
The decisive phrases are "either party" and "the party harmed". Before the 1436H amendment the article ran in one direction only: it bound the employer toward the worker. After the amendment it is mutual — a worker who abandons a fixed-term contract before it expires without lawful reason can be pursued for compensation on the very same basis.
This is not an academic detail. A large share of the pages published today still reproduce the pre-amendment wording, "by the employer… the worker is entitled". If your contract template or your system rule was built on that wording, it was built on text superseded more than ten years ago.
The rule that replaces the calculation: under four years, the answer is two months
Paragraphs (1) and (3) interact in a way that produces a hard arithmetic result, and it is rarely stated outright.
Fifteen days per year does not reach two months until four full years have passed:
| Years of service | Formula result (15 days/year) | Floor (two months) | Actually payable |
|---|---|---|---|
| 1 year | 15 days | 60 days | 60 days |
| 2 years | 30 days | 60 days | 60 days |
| 3 years | 45 days | 60 days | 60 days |
| 4 years | 60 days | 60 days | 60 days — break-even |
| 6 years | 90 days | 60 days | 90 days |
| 10 years | 150 days | 60 days | 150 days |
In practice: for every indefinite-term contract with under four years of service, the formula result is meaningless — the floor is what is owed, every time.
That is also the majority case in this market. Any system that shows "15 × years" without applying the floor afterwards understates the amount in every case under four years, which is most of them.
A real example: a worker with 3.17 years of service on a wage of SAR 4,000. The formula gives 15 × 3.17 = 47.5 days, roughly SAR 6,333. The floor gives two months, or SAR 8,000. The SAR 1,667 difference favours the worker, and it surfaces in court rather than on the payslip.
Actual wage, not basic wage
Article 77 says "wages" without qualification. The Labour Law's own definitions distinguish the basic wage from the actual wage — the actual wage being the basic plus the allowances and benefits paid to the worker. Where the law says "wages" without restricting it to basic, what counts is the last actual wage, not the figure sitting in the basic-salary field of the contract.
This is where the largest systematic error lives, because it is a structural error rather than a data-entry one: the database has a column called basic_salary, the formula is written against it, and nobody revisits it.
In the standard Saudi package structure, housing allowance runs at 25% of basic and transport at 10%. The actual wage therefore exceeds the basic by roughly 35%:
| Component | Amount |
|---|---|
| Basic wage | SAR 10,000 |
| Housing allowance (25%) | SAR 2,500 |
| Transport allowance (10%) | SAR 1,000 |
| Actual wage | SAR 13,500 |
Article 77 compensation for six years of service: on basic, SAR 30,000. On actual, SAR 40,500. A SAR 10,500 gap in a single file — multiply by a hundred employees to size the provision missing from the budget.
The operational rule: audit the field your compensation formula reads from, not the formula itself. In most systems we have examined the formula is correct; its input is not.
Fixed-term contracts: compensation without a ceiling
Paragraph (2) is where the real exposure sits, and it is the least discussed.
On a fixed-term contract the compensation is not 15 days per year. It is the wages for the entire remaining term. There is no cap on it.
A three-year contract terminated in its second month without lawful reason carries thirty-four months' wages. Computed on the indefinite-term rule, the same case would produce roughly five days. The distance between those two numbers is not a percentage — it is two orders of magnitude.
This is why a single field called "compensation" is not enough. Contract type swaps the formula outright; it does not adjust a coefficient inside it. The two-month floor still applies here too: a fixed-term contract ended two weeks before its expiry owes two months, not two weeks.
And do not overlook Article 55: a Saudi worker's fixed-term contract converts to indefinite once it has been renewed three consecutive times or its duration reaches four years, whichever comes first. The calculation branch changes at that moment without anyone signing anything. We covered that conversion in detail in Article 74 and the seven ways a contract ends.
The clause that overrides everything above
The opening words are: "Unless the contract specifies a defined compensation for its termination…".
In other words, if the contract names a compensation figure, that figure applies instead of the statutory formula. Many employment contracts in the Kingdom carry such a clause, copied in from a template without any thought to its effect.
So the first step in any termination case is not opening the calculator — it is reading the contract. The statutory formula is a fallback that operates only where the contract is silent. A system that automatically applies the statutory formula to every employee is ignoring a contractual term that outranks it.
What is added on top of Article 77 compensation
Article 77 compensation is a standalone line that is added; it replaces nothing. A full unlawful-termination settlement is built from parallel entitlements:
| Entitlement | Basis | Added? |
|---|---|---|
| Unlawful-termination compensation | Article 77 | The base line |
| End-of-service gratuity | Articles 84 and 85 | Yes — in full |
| Payment in lieu of notice | Articles 75 and 76 | Yes — where no notice was given |
| Accrued leave balance | Articles 109 and 111 | Yes |
| Documented unpaid wages | — | Yes |
The common error runs the other way: assuming Article 77 is an alternative to the end-of-service gratuity, so the larger of the two is paid. It is not. Both are owed, from two different provisions.
Note too that a dismissal falling outside Article 80 is not thereby weakened — it moves to Article 77 with its full financial effect, which we set out in Articles 80 and 81 and the burden of proof.
What your system needs to record
From auditing live HR systems, these are the fields whose absence makes the system emit the wrong number:
- Contract type as a discrete value (fixed or indefinite), not free text — it selects the formula rather than adjusting it.
- The contracted end date, stored even on indefinite contracts, so the remaining term can be computed after a conversion.
- A renewal counter and total service duration, to catch the Article 55 conversion at the moment it happens.
- Actual wage as a derived field from basic plus allowances, rather than basic alone.
- A reference to the contractual compensation clause where the contract carries one, with its amount.
- Which party ended the contract, because the article became mutual after M/46.
The last three are the ones usually missing. And when they are missing the system does not fail — it emits a number that looks plausible, which is worse than a visible breakage, because nobody reviews it until the claim has been filed.
Run the numbers on the same rules
The free Saudi Labour Rights Calculator applies the two-month floor after the formula, and keeps the end-of-service gratuity separate from the Article 77 compensation instead of merging them into one figure. Enter the service dates and the reason for termination to see the entitlements broken out, each against its own article.
To compare all five entitlements together, see the Saudi Labour Rights Calculator guide.
Is your number right?
If your system computes termination compensation from the basic-salary field, or shows the formula result without applying the floor afterwards, the amounts you paid in your recent settlements are below what is owed — and the shortfall only appears at the hearing.
Review your last ten settlements and test each figure against the four rules above. If you would rather audit the calculation logic in your system than review the files one by one, get in touch for a diagnostic session on the calculation layer: which field the formula reads from, and where the branches fall through.
Sources: Saudi Labour Law, Article 77 as amended by Royal Decree No. (M/46) dated 5/6/1436H; Articles 55, 74, 75, 76, 80, 84, 85, 109 and 111 of the same law.