What are the payroll rules in Saudi Arabia?

Payroll management could appear like a straightforward assignment, but in reality, it is much more than just computing wages, subtracting taxes, and transferring salaries. It is a procedure that is prone to risk and compliance challenges if not handled well. Each country presents its own set of payroll rules that businesses must adhere to, and even minor mistakes can lead to severe legal troubles, which are not just detrimental to reputation but also to business operations and finances. Specifically in the progressing countries like Saudi Arabia, payroll compliance is highly emphasized, where every business must keep up with the evolving payroll regulations.

These regulations are also necessary to protect the rights of employees by assuring that they are getting all the applicable benefits and salaries on time, with the right calculations. This also keeps the country in line with global payroll standards to support the Saudi Mission to develop an internationally recognized country. This article will explore the core payroll legislation that is essential for entities to stay compliant with in order to operate in a legally sound environment in KSA.

Payroll in KSA and Scope of Applicability

The Saudi Payroll management services go beyond just hitting a transfer button, but they cover Labor Law, mandatory social insurance schemes, digitally compliant payroll systems like WPS, and staying current with all the recent updates. Any mishandled payroll means fines, suspension of licenses, and even blockage of Visa renewals.

The Saudi Payroll rules are applied to all the employers operating in the private sector, no matter if they have Saudi-based teams or expatriates; they are legally obliged to comply with the payroll regulations. However, some of the contributions differ according to the nationality and the type of employment contract of an employee. For the Public sector, these rules may vary, and several categories, like domestic workers, have distinct regulations. In a matter of fact, if a private business is operating in KSA and on board and employs, it must keep its payroll as per the Saudi Labor Law, the General Organization for Social Insurance (GOSI) requirements, and the Wage Protection System (WPS).

Core Payroll Rules in KSA

1.     The Right Process of Salary Payments

One of the foremost payroll rules in Saudi Arabia is the need to pay the employees through the registered and legally approved banking channels and report this data to the Wage Protection System (WPS). The WPS is mainly responsible for making certain that all the businesses are paying their employees on time and an accurate amount to build a transparent and trustworthy database of salary payments. All the payments are required to be transferred through banks that are interlinked with WPS, and must submit a wages document that covers the employees’ records. The two important points to keep in mind while transferring the salaries are:

1. Salaries must be transferred via bank to the employee’s account each month. There is no fixed date set by the employer, but the late payments are flagged by WPS and can cause legal questioning
2. The format of the payroll file and bank instructions must fulfil the technical requirements as defined by the ministry. Hence, it is crucial to generate WPS-compliant files.

2.     Frequency and Timing of Payments

Although the Labor Law highly prioritizes paying salaries monthly, it doesn’t strictly impose a single unified pay cycle for all sectors. That being said, the wages must be paid on time and as mentioned in the employment contract. Mostly compliant businesses follow a persistent date, usually the last working day or the 27th of each month. It is important that employers create a payroll calendar that is not just WPS compliant but also on time.

3.     What counts as “wages”

It is necessary to understand that Wages of employees comprise basic salary along with allowances that are mentioned in the contract, like a share for housing, transport, cost-of-living, education, etc., apart from certain employment contracts or the policies of the company that separate specific non-wage payments. It is mandated as per GOSI and EOSB that employers should clearly define their base salaries, allowances, and other payments in the contracts and payroll data.

4.     Social insurance (GOSI) contributions

Despite the fact that KSA doesn’t impose any personal income tax on the majority of individuals, the social insurance contributions through GOSI must be deducted from the employees’ wages. These rules differ for Saudi and Non-Saudi employees, such as:

• Saudi Nationals: It includes the pensions and social insurance. Employer and employee contribute to it; generally, the rate is 22% which is equally split between both. The exact percentages are subject to updates and rely on schemes like pension vs occupational hazards. All Saudi Employees must be registered with GOSI by their employers and should make timely monthly declarations.
• Expatriate: The non-Saudi Employees are not bound to pay the pension part of GOSI, but the employers are still required to pay their contribution part. These rules are subject to variations as per nationality and emerging GOSI schemes.

It is better to have a digitally automated GOSI remittance system in your payroll system and reconcile the differences monthly.

5.     End-of-service benefits (gratuity)

EOSB is statutory for employees who complete an entire year or more, according to the labor laws. It is mainly computed as:

• For the first five years, it’s half a month’s basic salary for each service year
• After five years, it’s a one-month basic salary for each added year.

For the early resignation of an employee, different percentages apply, such as limited percentages for resignation between 2-5 years and full claims after 10 years of employment.

6.     Overtime, working hours, and rest breaks

In keeping with Saudi Labor Law, there are standard working hours and compensation for overtime work. The payroll rules for it are:

• The fixed working hours are restricted by the labor law, which are usually 8hours per day or 48 hours per week, depending on the working shifts.
• For overtime work, 150% of the basic hourly rate is paid for working beyond the standard hours. The latest changes, however, have increased this flexibility, where employers can, with mutual consent, give off time in lieu instead of paying a fixed amount. Working on holidays and night shifts also offers special premiums or compensatory leave

7.     Statutory leaves and paid leave calculations

Employees are permitted to statutory leaves like annual leaves, public holidays, sick leaves, maternity and paternity leaves, and some special leaves like for Hajj, etc. These leaves are paid leaves as per the Labor Law and international legal policies. Businesses must track the leave balances, pay the leaves at the right rate, and enter the leave payment details in WPS reporting.

8.     Permitted and prohibited deductions

The deductions from the wages are limited only to the permitted amounts, subtracted as follows:

• The relevant fixed GOSI employee share
• Deductions ordered by the legal court, like child support
• Abstractions mentioned in employment contracts, such as loans, advance payments, etc.

Employers must not make any legally uninformed random deductions that lessen the wages beyond the specified agreement. An unexplained subtraction can trigger warnings from WPS and lead to labor inspections. A written consent must be submitted in any such case to keep the legal records clear.

9.     Payroll records and data retention

All the payroll records must be kept safe in detailed form, including the contracts, salary structures, WPS files, GOSI declarations, leave data, timesheets, and the settlement calculations. These records are compulsory for WPS reporting, to fight against any legal dispute, and to present in front of authorities during any audits or inspections. It is important that businesses have the payroll data of several years and save it on cloud backups of WPS submissions.

10. Payroll for expatriates

Payroll for international employees is linked to immigration and sponsorship requirements. Employers must ensure that the expat’s Iqama is legally valid; if not, they must renew it to have a clear compliance record. Any objection from the expatriates regarding the wages results in hefty fines, penalties, or other legal consequences.

Common Payroll Mistakes and How to Overcome Them?

• Late or installment payments trigger WPS warnings; employers must proactively cut their funds and process payroll before the given date.
• Wrong classification of payments, like mentioning of basic salary and allowance, results in errors in computation and causes penalties. It is essential to keep a standard salary structure in the contracts and payroll rules
• Not contributing fairly to GOSI can also result in legal queries. Businesses must automate GOSI rates and maintain payroll reconciliation with the GOSI statement each month.
• Many businesses don’t provide enough data for overtime or time off, in place of the recent flexibility from authorities, which can create complexities. Businesses must implement time capture and approval workflows that are linked to the payroll.
• Giving your payroll calculation and classification of records to non-skilled employees may cause miscalculations. Employers must hire external payroll providers to protect their payroll process as per the law.

How can SS&CO help?

We know for sure that payroll challenges can be extremely burdensome for the internal teams who already handle the day-to-day operational intricacies. That’s why we offer a comprehensive package of payroll services with the right guidance and smart advice to keep you always compliant with WPS. We assure you that your GOSI contributions are deducted properly and your employees are paid on time. This not only fosters trust among teams but also keeps you on the safe side of the law. We offer physical payroll services Riyadh and remote services around the Kingdom. Along with payroll, we also facilitate our clients with corporate tax advisory and auditing services to keep them away from compliance worries. Get in touch without an experienced team today and let us take the payroll burden off your shoulders.