In Short

The Situation: On November 4, 2020, the Saudi Arabian Ministry of Human Resources and Social Development launched a Labor Reform Initiative ("LRI") to replace the existing sponsorship system (kafala in Arabic), which governs foreign worker mobility in Saudi Arabia. Prior to the reforms, foreign workers sponsored by employers in Saudi Arabia required the permission of their employer to change jobs, open a bank account, travel out of the country, and other administrative tasks.

The Result: The LRI will apply to millions of foreign workers in the private sector. Specifically, it will ease job mobility and place greater emphasis on the contractual relationship between employers and foreign employees.

Looking Ahead: Resolution No. 51848/1442 of the Minister of Human Resources and Social Development addresses the labor mobility component of the LRI, which will become effective on March 14, 2021. The Ministry of Interior is also expected to ease restrictions on the rules regarding exit and re-entry visa issuance. These reforms will advance the country's objective of diversifying its oil-dependent economy by increasing transparency in the employment process and streamlining immigration rules.

Background

The sponsorship system in the Kingdom emerged in the 1950s as a way to regulate the relationship between employers and migrant workers. Under kafala, a migrant worker's immigration status is bound to an individual employer or sponsor (kafeel) for a specified period. Historically, the kafeel was given broad rights regarding the movement of the migrant worker. The migrant worker was permitted to work within the Kingdom for his/her specified contractual period but could not transfer employment to another employer/sponsor or leave the Kingdom without first obtaining written permission from the kafeel.

The kafeel also had the sole authority (other than the government) to secure and renew migrant workers' residency and work permits, and to cancel such permits. The kafeel was required to report to immigration authorities if the migrant worker left his/her employment and to confirm that the migrant worker was provided transportation back to his/her home country following the termination of the employment period.

Finally, the kafeel may report a migrant worker who had absconded to the authorities, in which circumstances the migrant worker would become undocumented and may be deported.

What Are the Changes?

On November 4, 2020, the Saudi Arabian Ministry of Human Resources and Social Development launched LRI to replace the existing sponsorship system. The labor reforms introduce significant changes to the existing labor and immigration laws, as described below.

Labor Law Reform. As of March 14, 2021, all employment relationships covered by the Saudi Labor Law, which includes the kafala system, will be subject to the reforms enacted by the Ministry of Human Resources and Social Development, Resolution No. 51848/1442 ("Resolution"). The Resolution mainly deals with the mobility of workers. It will allow foreign employees to: (i) leave their jobs without the consent of the employer/kafeel upon the expiry of their employment contracts; and (ii) leave their jobs prior to the expiry of the employment contract, provided that the worker has been in the country for at least a year and has given 90 days' notice to the employer. In addition, under certain conditions, the Resolution also permits migrant workers to change jobs within the first year of employment. Finally, the Ministry has established an electronic portal where both workers and employers may submit notifications, job offers, and transfer requests, a task previously within only the kafeel's discretion.

Exit and Re-Entry Visa Reform. The LRI also addresses Saudi entry and exit requirements for foreign workers. Previously, a foreign employee could not exit Saudi Arabia without first obtaining an exit and re-entry visa through his/her employer/kafeel. Under the LRI, the employer/kafeel's permission to leave or re-enter the country is no longer required; instead, workers may make the request themselves through the Saudi government's online platform. The Saudi authorities may deny exit if any debts or fines are outstanding, a practice common in the GCC countries. Once approved, the employer/kafeel will receive an automatic notification when the employee leaves and re-enters the country.

Final Exit Reform. Prior to the reforms, Saudi immigration policy required that employers/kafeels sign a "final exit visa" for migrant workers wishing to emigrate to their home country. Following the implementation of the LRI, the employer/kafeel's consent for emigration from the Kingdom will no longer be required.

What Should Employers Know?

Companies doing business in Saudi Arabia need to be aware not only of the upcoming changes to the Labor Law but of three possible limitations to its reach.

First, in addition to the Labor Law, the employment of foreign employees is subject to the Saudization (Nitaqat) system. Nitaqat requires employers in the private sector to hire a minimum percentage of Saudi nationals, depending on the business sector and number of employees. Under the current Nitaqat rules, if an expatriate employee wishes to transfer his/her sponsorship to a different employer, the Ministry of Interior would require a no-objection letter from the current employer. Although the Resolution announced the removal of such requirement in the Labor Law, there has not yet been a similar announcement from the Ministry of Interior, which regulates the Nitiqat system, although one is expected. Because the Ministry of Interior has not yet announced any changes to the immigration laws with respect to how it will implement the LRI regarding exit and re-entry visa issuance, employers must continue to be mindful of upcoming legislation prior to revising their employment processes.

Second, the Saudi Labor Law does not apply to all categories of employees (domestic and agricultural workers, certain sea workers, players and trainers at clubs and sports unions, etc. are regulated by other laws). Currently, there is no indication of whether the LRI will apply to these categories of employees.

Third, employers may continue to protect their business interests by incorporating noncompete clauses in employment contracts. Noncompete clauses are explicitly permitted by the Labor Law, subject to certain conditions contained in Article 83. In the event an employee breaches his/her noncompete clause, employers may bring claims for damages within one year of the breach.

LRI and Human Trafficking

As Jones Day has discussed in previous publications, the prevalence of environmental, social, and governance ("ESG") investment criteria has created a growing expectation for companies to incorporate social and human capital management goals in their internal business plans and policies (see our Commentary, "Enhanced Focus on the "S" in ESG Investing"). For example, Norway's sovereign wealth fund blacklisted shares in British security company G4S last year because of the "unacceptable risk of the company contributing to systematic human rights violations" against its workforce in Qatar and the United Arab Emirates. As a result, it is increasingly important for boards to familiarize themselves with how their companies are managing their supply chains. Happily, the LRI joins global efforts to combat human trafficking by addressing the black market for absconding workers and other violations under the previous kafala system that were prone to exploitation by offenders of human trafficking laws.

Five Key Takeaways

  1. Saudi Arabia has launched a Labor Reform Initiative designed to modernize the terms of employment of expatriate employees in the Kingdom.
  2. In 2021, the Saudi government will implement amendments to the Labor Law pursuant to the LRI to improve transparency and mobility for expatriate employees in the private sector.
  3. The reforms will make it easier for employees to change Saudi employers, will reduce restrictions on employees, and ease entry and exit requirements for foreign employees in the Kingdom.
  4. Kingdom authorities must still implement LRI legislation, which will determine the actual scope and breadth of the initiative. Furthermore, amendments to the immigration laws (as differentiated from the Labor Law) have yet to be announced.
  5. The LRI will be an effective tool for the Kingdom to combat the black market in absconding workers and mitigate against the risk of human trafficking exploitation.