The difference between a fixed-term and an open-ended contract in Saudi labor law

Have you ever been confused by the difference between a fixed-term and an open-ended contract in Saudi labor law, and how this difference directly affects your job stability and legal rights? An employment contract in Saudi Arabia is not just a piece of paper that is signed at the beginning of the employment relationship, but rather it is the roadmap that clarifies your rights and duties. A good understanding of the type of contract and its advantages is the first and most important step to obtaining your rights and fulfilling your duties.

But the most important question is: Which is better for you: a fixed-term contract or an open-ended contract? The answer isn't a simple yes or no; it depends on your circumstances, the nature of your work, and your career goals.

This article provides a simplified yet comprehensive overview of the differences between fixed-term and open-ended contracts under Saudi labor law.

Abdulaziz bin Yasser Al-Anzi Law Firm

Employment contract under Saudi law

It is a contract concluded between two parties: the employer, who is the party who manages and supervises the work, and the worker, who is the party who undertakes to work under the management or supervision of the employer in exchange for receiving a wage.

The employment contract, according to the model provided by the Ministry, must contain a set of essential information, including: information about both parties (employer's name and location, employee's name, nationality, identification information, and residential address), as well as the type and location of work, the date of commencement, the contract duration if it is fixed-term, the agreed-upon wage, including benefits and allowances, and the basic rights and obligations of both the employer and the employee.

Types of contracts in the Saudi Labor Law

Employment contracts under Saudi law vary according to the nature of the job, the number of working hours, and the duration of the contract, as follows:

1. The contract is for a fixed term.
2. Open-ended contract.
3. Temporary employment contract.
4. Seasonal work contract.
5. The employment contract is for a specific task.
6. Part-time employment contract.
7. Flexible work contract.
8. Maritime employment contract.
9. Qualification and training contract.

In the following paragraphs, we will elaborate on the difference between fixed-term and open-ended contracts in terms of definition and characteristics, according to the Saudi Labor Law.

 The difference between a fixed-term contract and an indefinite-term contract in terms of definition

A fixed-term employment contract is one that is linked to the completion of a specific task within a certain period of time, and ends upon the expiry of its term, with the possibility of renewal by agreement of both parties, while an indefinite-term contract is an open contract that does not end except for a legitimate reason or at the desire of one of the parties, with the obligation to provide a written notice period.

If the notice period is not observed, the party terminating the contract is obligated to pay compensation equivalent to the wages for the notice period. If the worker is non-Saudi and the contract does not specify a term, the term is considered to be one year, renewable.

Advantages of a fixed-term contract for employers

Temporary employment contracts provide employers with a number of important administrative and financial advantages, most notably that they allow companies to control costs by setting employee entitlements and financial benefits at the end of the contract period.

These contracts also offer flexibility in workforce management, as the company has the right to terminate the contract normally upon its expiry without any obligation to renew.

In addition, legal risks can be reduced by limiting the likelihood of facing unfair dismissal claims in a fixed-term contract, thus mitigating potential financial burdens such as severance pay.

In any case, it is always recommended that institutions draft the contract terms, clearly and accurately specifying all conditions, tasks and benefits from the outset.

Legal guarantees for the worker in a fixed-term contract

The Labor Law guarantees to the worker who enters into a fixed-term contract a set of basic rights, which remain in effect throughout the duration of the contract, in addition to his right to receive the full agreed wage, including bonuses and allowances.

The most prominent of these rights is the enjoyment of all types of leave, whether annual, sick, or official. The employer is also obligated to provide a safe and healthy work environment, health and social insurance, and compensation in cases of injury during work or breach of the contract terms.

Another important right is for the worker to receive advance notice regarding contract renewal or termination as its term approaches, noting that the details of these rights may vary depending on the terms of the contract signed between the two parties.

Features of the indefinite-term contract

A fixed-term contract is an ideal model for job stability, as it is not tied to a specific time period, thus giving both the employer and the employee considerable flexibility.

Perhaps one of its most notable advantages is the requirement for both parties to exchange prior notice in case of a desire to terminate the contract, in order to ensure the protection of everyone's rights.

This type of contract also opens the door to career development opportunities, as the employee receives greater opportunities for training, career advancement, and benefit from various reward, incentive, and privilege systems, thus ensuring a decent standard of living.

This is in addition to the psychological and financial stability that positively impacts employee productivity and loyalty to the organization, receiving an end-of-service bonus calculated based on the final salary, and the clear application of labor law provisions, which are often more protective of the employee in cases of contract termination.

Legitimate reasons for terminating an indefinite-term employment contract

An employment contract can be legally terminated in the following cases:

1. Termination of the contract by mutual agreement between the two parties and signing a written agreement.
2. The agreed-upon term in the contract has expired without the need for notice.
3. The worker has the right to terminate the contract with a notice period of 60 days under Saudi law.

Dismissal may be immediate for disciplinary reasons, most notably:

1. Physical or verbal abuse in the workplace.
2. Forgery or submitting forged documents.
3. Unjustified absence for more than 30 days during a year.
4. Gross breach of basic duties.
5. Unethical behavior or causing harm to the employer.

The employer also has the right to terminate the contract with 60 days' notice in cases of restructuring or economic circumstances.

Converting a fixed-term employment contract to an indefinite-term contract

According to the provisions of the Labor Law, especially Article 105 thereof, a fixed-term employment contract is automatically converted to an indefinite-term contract once its original term has expired and both parties - the employer and the employee - continue to implement its terms without an explicit agreement to renew it for a new fixed term.

This transformation is not limited to that basic case only, but extends to other cases, such as the contract not being written at all, or lacking any condition that specifies its duration, or the documented and renewed contract exceeding four consecutive years, or including a condition for automatic renewal and then being renewed three consecutive times.

Therefore, these provisions should be carefully considered, and contracts should be reviewed and renewed thoroughly before their expiry to avoid any unintended legal consequences.

The difference between a fixed-term and an open-ended contract in terms of compensation

If one party terminates an employment contract without a legally valid reason, they are obligated to pay financial compensation to the other party. The amount of this compensation varies depending on the type of contract, as follows: In fixed-term contracts, the affected party is entitled to compensation equivalent to their wages for the remaining period of the contract, provided that this compensation is not less than two months' wages, unless there is a prior agreement in the contract for a different compensation amount.

In the case of arbitrary dismissal in an indefinite-term contract, compensation is calculated on the basis of 15 days’ wages for each year of service, provided that the total is not less than two full months’ wages, unless the contract stipulates another specific compensation amount. 

The difference between a fixed-term and an open-ended contract in terms of the employee's nationality.

Saudi employees can work under either type of contract: a fixed-term contract that ends upon the agreed-upon expiry of the term, or an open-ended contract that continues until terminated according to the regulations of the system.

Non-Saudi employees, however, are required to work only on fixed-term contracts, regardless of the number of renewals. This distinction aims to regulate the labor market and protect the rights of all parties in accordance with approved local regulations.

Certified Contract Drafting Attorney

In the context of evolving work environments and complex employment relationships, the employment contract becomes a cornerstone upon which the relationship between the employer and the employee is built.

Signing an employment contract may seem like a routine step to some, but it is actually the legal document that will determine your professional future and protect your rights in case of any dispute.

Many are unaware of the inherent risks in poorly conceived contracts, which may conceal unfair or ambiguous clauses that later become a source of costly conflicts.

This is where the importance of hiring contract drafting specialists comes in. These specialists possess sufficient legal expertise and a thorough understanding of the details of the Saudi Labor Law, including the difference between fixed-term and open-ended contracts, the procedures for drafting each, and other related matters.

A good contract is not just a piece of paper to be signed; it is a clear roadmap that precisely defines the rights and obligations of each party, anticipates future scenarios, and provides practical solutions before they occur—all details that require an expert legal eye.

Therefore, when you are about to sign a new employment contract, renew an existing one, or even review your rights in a previous contract, hiring contract drafting specialists can be the best investment to protect your professional future.

Our team offers youAbdulaziz bin Yasser Al-Anzi Law FirmSpecialized legal consultations for reviewing and drafting employment contracts in accordance with Saudi labor law, to protect your rights and maintain a balanced relationship with your employer.

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