End-of-service gratuity: how to calculate it correctly and avoid disputes with your employee

What is end-of-service gratuity, and why does it matter specifically to you?

In this guide we explain the method step by step, with examples worked out in riyals, the difference when the end is a resignation, and the most costly mistakes business owners make.

End-of-service gratuity is an amount an employee is entitled to when the employment relationship ends, in return for the time they spent at the company. It is a statutory obligation, not an optional gesture, and it is calculated based on actual length of service and the last wage.

For you as the owner of a small business, the risk is not in the principle but in the details: what wage is it calculated on? How are part-years treated? What changes on resignation? A simple mistake in any of these items is the cause of most disputes.

The basic rule: half a month for each year, then a full month

The calculation is based on two tiers:

• •Half a month's wage for each of the first five years.
• •A full month's wage for each subsequent year (the sixth year and beyond).
• •Part-years are calculated proportionally — an employee who has completed a year and a half is entitled to the proportional half, which is neither ignored nor rounded up to a full year.
• •The basis is the employee's last wage.

The wage the gratuity is calculated on

This rule is fixed, and the difference between cases comes from only two factors: what counts as the "wage" being calculated, and whether the ending is a resignation or not.

A point many overlook: the gratuity is not calculated on the basic salary alone in every case, but on the wage as defined by the law, which is the basic salary plus fixed allowances paid on a continuous basis. Variable allowances, or those tied to an actual expense, are treated differently.

The safe, practical rule: first settle exactly what counts as "wage" for this specific employee before multiplying any figure. Choosing the wrong basis is what most often turns the calculation upside down.

What changes on resignation?

If it is the employee who ended the relationship by resigning, the gratuity does not lapse, but it is paid at a percentage that scales with their length of service:

• •Less than two years: no gratuity is due for resignation.
• •From two to less than five years: one third of the gratuity is due.
• •From five to less than ten years: two thirds of the gratuity is due.
• •Ten years or more: the full gratuity is due.

A note on the resignation scale

Note that this scale is statutory and final, and it may not be tightened by an internal policy that deprives the employee of their share. Trying to deny a resigning employee their "third" after three years is a ready-made recipe for losing before the labour court.

Worked examples in riyals

Example 1 · Contract ends (not a resignation): the employee's last salary is 8,000 riyals, with 7 years of service.

• •First 5 years: 5 × half a month = 5 × 4,000 = 20,000.
• •The following two years: 2 × a full month = 2 × 8,000 = 16,000.
• •Total: 36,000 riyals.

Example 2 · Same employee, but a resignation

Their service is between 5 and 10 years, so they are entitled to two thirds.

• •36,000 × ⅔ = 24,000 riyals.

Example 3 · Part-years

Salary of 6,000 riyals, service of 3 years and 6 months, contract ends.

• •3 years: 3 × 3,000 = 9,000.
• •Half of the fourth year: half a month for the year equals 3,000, and for six months half of that = 1,500.
• •Total: 10,500 riyals.

Common mistakes that cost business owners

The difference between two identical examples in salary and duration — one 36,000 and the other 24,000 — comes down to a single fact: who ended the relationship. This is exactly where the mistakes happen.

• •Calculating on the basic salary alone when the employee has fixed allowances that count within the wage, which produces a figure lower than their entitlement.
• •Ignoring part-years, or rounding them in the company's favour, a recurring and costly mistake.
• •Dropping a resigning employee's gratuity entirely on the assumption that resignation cancels the right, when in truth it only reduces it by a percentage.
• •Relying on an old salary instead of the last wage.
• •Confusing dismissal, fixed-term contracts and resignation, when each is treated differently.

Conclusion

Calculating the gratuity is not complicated, but it is precise: the correct wage, an accurate duration, and a clear reason for ending. Get these three right and you close the matter with confidence and avoid disputes.

The problem is that this is not a once-a-year transaction, but part of ongoing oversight of your employees' affairs: wages, contracts, entitlements, and procedures that never stop. If these details are taking more of your time than they should, this is exactly our role. At HRFirst we manage your employee affairs so you can keep your focus on growing your business.