I remember the day when I joined my first company; they used to pay cash in lieu of the leaves for which a person is entitled to. When I discussed this issue with many other friends who were working in other companies, they also accepted that it is in compliance with Saudi Labor Law. I had a doubt about it since leave encashment was not allowed in my native country. I worked into it to establish whether the leave encashment is allowed under Saudi Labor Law and came up with following findings. Before mentioning about the leave encashment rules with valid reference of Saudi Labor Law, I must admit that at least 50% of the companies are not complying with Saudi Labor Law in this regard.
What is Leave Encashment? Leave encashment is the amount payable for the employee's leave period, depending upon the leaves to his credit and his salary at the time of termination of employment or at the time of encashment of leaves.
Leaves under Saudi Labor Law: As you can understand from the definition of leave encashment that determining the factor of leave encashment is “LEAVE”. I have explained in a separate article about the different kind of leaves for which an employee is entitled to under Saudi Labor Law. Please read this article so that you can claim your rights from your employer. “Leaves under Saudi Labor Law”.
Leave Encashment during Service: As per Article 109 (2) of the Saudi Labor Law, “A worker shall enjoy his leave in the year it is due. He may not forgo it or receive cash in lieu during his period of service.” It shows that leave encashment is not allowed under Saudi Labor Law. A worker or employee cannot receive cash in exchange of the leaves he is entitled to. In my first company, after getting this information I convinced my CEO to change the policy. Now, leave encashment is not allowed in that company.
Leave Encashment at the End of Employment: As per Article (111) of the Saudi Labor Law, accrued leaves can be encashed at the end of the employment. Article 111 of the Saudi Labor Law states that “A worker shall be entitled to a wage for the accrued days of the leave if he leaves the work without using such leave. This applies to the period of work for which he has not used his leave. He is also entitled to a leave pay for the parts of the year in proportion to the part he spent at work.” It means that at the end of the employment term, every employee is entitled to get the money for the leaves he has not availed during the term of his service.
What is the Entitled Wage amount for Leave Encashment?: Above article gives reference to the “Wage” but it is not explained how much is the amount of wage? Is it a full package (basic salary, housing allowance, transportation allowance) or just basic salary? Article 2 of Saudi Labor Law defines “Wage” in the following wordings. “The basic wage plus all other accrued increases given to the workman in consideration of the effort exerted in the work or risks to which he is exposed while performing his work, or the increases given to the workman for working under the work contract or work bylaws.” It means that employees are entitled to get full salary including all allowances as leave encashment.