The Saudi Government has launched a number of regulatory reforms of labour legislation, often collectively referred to as the “Labour Correction”. There is no comprehensive White Paper on reform strategy and plan; however, a vigilant observer of official releases discerns that the Labour Correction has three interconnected objectives:

Enhancing the nationalisation of jobs in the private sector

This is not a new policy. The Saudi Government has been exerting increasing efforts to improve the employability of Saudis. Most notably, it has adopted an incentive program known as Nitaqat, whereby companies which hire more Saudis have more privileges than others. The Ministry of Labour has also issued a list of “Saudi” jobs such as executive work. Furthermore, legal fees for obtaining work permits which were introduced last April are considerably higher for firms employing more foreigners than Saudis. Foreign expats still, however, comprise 90 percent of the workforce in private companies, while unemployment amongst young Saudi graduates is increasing.

Elimination of the problem of illegal workers

According to Saudi law, foreigners are not allowed to work without the business owner (known as the sponsor) first obtaining a work visa. The worker may not transfer from one job to another, as a general rule, without transferring his sponsorship to the new employer.

Immigration rules have however largely been ignored. Numerous expats have entered the country on pilgrimage or visit visas, or remained in the country after the expiry of their permitted work residency. These breaches of immigration laws have been blamed for distorting the labour market and reducing job opportunities for Saudis. In a decisive move, the Government issued a three-month ultimatum for all illegal expats and their employers to rectify the situation or face deportation and a ban from re-entering the country. Any foreign expat who leaves the country or rectifies his immigration status during the three-month grace period is granted an amnesty from immigration law violations and given the right to re-enter the country. Meanwhile, the Labour Law was amended to impose a fine of 100,000 SAR (26,600 USD) on any employer which hires a foreign employee without a valid work permit or under the sponsorship of another employer after the grace period.

As a result of these measures, huge numbers of expats rushed to rectify their situation. Long queues outside the Saudi Labour office and Passport Departments were hard to miss. The problem has even affected embassies, as it turns out that many expats have been in the country for a long time and have never bothered to renew their official passports. Some embassies, particularly from Asian countries, were unable to cope and in one incident riots erupted at the gates of Indonesian companies. As the huge size of the problem has unfolded, it has been decided that the grace period should be further extended until November 2013.

Improving work conditions

Young Saudis, who generally enjoy a high standard of living, have long preferred to work for the Government rather than the private sector, since then they enjoy less working hours and a two-day weekend. Therefore, the Government has proposed amendments to the Labour Law reducing maximum working hours to potentially 40 hours or 44 hours, enabling the extension of the weekend. The amendment is currently before the legislative body, the Shura Council. In order to facilitate the amendment, a Royal Decree was issued to change the formal weekend from Thursday and Friday to Friday and Saturday. Private companies have understandably rejected the imposition of a long weekend, as it will isolate them from their international clients for four consecutive days, and so be harmful to their business.

Attempts to set a universal minimum wage for Saudi workers have not been endorsed. However, the Government has indirectly improved the minimum wage by imposing a minimum of 3000 SAR (800 USD) monthly wage in order to count as a “Saudi employer” for Nitaqat purposes.

How should companies cope?

The new restrictions on employing expats and the increase in their work permit fees have imposed many challenges for investors. Companies providing construction and transportation services have been particularly hit because they are heavily dependent on a large base of foreign expats. The restriction that no company can hire a worker under the sponsorship of another company has largely closed the door for secondment and outsourcing.

Part of the solution was to activate the Recruitment and Outsourcing Companies Law which allows specialised recruiting companies to sponsor instead of business owners. Few companies have already been licensed to provide outsourcing services which seems to have eased the problems faced by the business sector. Worth mentioning is that Squire Sanders’ Riyadh Office assisted the Saudi Ministry of Labour on drafting this Regulation and provided assistance on the modernization of nationalisation regulations, including recruitment and outsourcing.