Severance Pay vs. End-of-Service Benefits:
What's the Difference in the GCC and Saudi Arabia?

Confused about severance, end-of-service benefits, or gratuity? Here’s a 2025 guide to understanding the differences under GCC and KSA labor laws.

If you work in the Gulf region, you've probably heard the terms "severance pay", "end-of-service benefits" (ESB), and "gratuity" used interchangeably. But are they the same thing?

But, they’re not.

In the GCC, and especially in Saudi Arabia (KSA), the differences between severance and ESB are critical to understand for both employers and employees. Each comes with unique legal requirements, eligibility rules, and financial implications.

In this 2025 guide, you’ll learn the key differences between severance pay and end-of-service benefits, how they’re calculated, and when each applies in countries like Saudi Arabia, the UAE, Qatar, and more.

Table of Contents

1. What Are End-of-Service Benefits (ESB)?
2. What Is Severance Pay?
3. Key Differences Between Severance and ESB
4. Is Gratuity the Same as ESB?
5. How End-of-Service Benefits Work in Saudi Arabia
6. Severance and ESB in Other GCC Countries
7. FAQ: What People Also Ask
8. Final Thoughts
   
   
   

What Are End-of-Service Benefits (ESB)?

End-of-service benefits (often called gratuity) are a statutory entitlement paid to employees at the end of their employment in most GCC countries.

They are mandated by law and are calculated based on:

• Length of service
• Final basic salary
• Reason for termination (resignation or dismissal)
  
  

📝 ESB Applies When:

• An employee resigns or is terminated
• The employee has completed at least one year of continuous service
• Employment ends without serious misconduct
  
  

The benefit is meant to reward loyalty and provide financial support during the transition out of employment.

What Is Severance Pay?

Severance pay is a broader, more discretionary compensation that an employer may offer during involuntary terminations, especially those unrelated to employee misconduct.

It’s often used in:

• Layoffs
• Redundancies
• Company restructuring
• Mutual separations
  
  

Severance is not always legally required in the GCC, unlike ESB. However, it may be:

• Stipulated in employment contracts
• Offered as part of a settlement agreement
• Given to avoid legal disputes or reputational damage
  
  

Key Differences Between Severance and ESB

Is Gratuity the Same as End-of-Service Benefits?

Yes. In GCC terminology, "gratuity" and "end-of-service benefits" (ESB) usually refer to the same concept.

For example:

• In the UAE: Gratuity is the official term used in the UAE Labour Law.
• In Saudi Arabia: ESB or “مكافأة نهاية الخدمة” is the common term, though some companies refer to it as gratuity in English.
  
  

So while the terms are used interchangeably, remember that the rules and formulas differ by country.

How End-of-Service Benefits Work in Saudi Arabia (KSA)

Saudi Arabia has clearly defined ESB rules under Articles 84 to 87 of the Saudi Labor Law.

Who Qualifies:

✅ All employees who complete 1 year or more of continuous service

✅ Workers were terminated without serious misconduct

✅ Employees who resign voluntarily (partial or full ESB, depending on tenure)

ESB Calculation Formula (KSA):

💡 If the employee resigns:

• 2–5 years of service = 1/3 of ESB
• 5–10 years = 2/3 of ESB
• 10+ years = Full ESB
  
  

Example:
If your basic monthly salary is SAR 10,000 and you’ve worked for 7 years:

• First 5 years = 0.5 × 10,000 × 5 = SAR 25,000
  
  
• Next 2 years = 1 × 10,000 × 2 = SAR 20,000
  → Total ESB = SAR 45,000
  
  

If you resigned after 7 years, you’d get two-thirds of that = SAR 30,000

Severance & ESB in Other GCC Countries

🇦🇪 United Arab Emirates (UAE):

• Gratuity is calculated based on basic salary only
• 21 days’ pay per year (first 5 years), then 30 days/year
• Misconduct can lead to forfeiture
• Severance is not mandatory, but is often offered in layoffs
  
  

🇶🇦 Qatar:

• Employees receive 3 weeks’ wages per year
• Applies after 1 year of service
• Severance is not mandated, but gratuity is
  
  

🇴🇲 Oman:

• Gratuity is calculated as 15 days’ pay per year (first 3 years), then 30 days/year
• Must be paid within 7 days of employment termination
  
  

🇰🇼 Kuwait & 🇧🇭 Bahrain:

• Similar rules apply, with slight differences in wage components and payout deadlines.
  
  

FAQs: What People Also Ask

1.Is severance pay mandatory in Saudi Arabia?

No. Severance pay is not legally required in Saudi Arabia. However, companies may choose to offer it in cases of layoffs or restructuring.

2.How is end-of-service gratuity calculated in KSA?

In KSA, the gratuity (ESB) is calculated based on the employee’s basic salary and years of service:

• Half-month pay per year for first 5 years
• One month's pay per year after that
  
  

3.Can an employee receive both severance pay and ESB?

Yes, if the employer voluntarily offers severance in addition to the mandatory ESB, an employee may receive both.

4.What happens if an employee is terminated for misconduct?

In most GCC countries, including KSA, serious misconduct may forfeit ESB. Severance is also unlikely to be offered.

5.Is end-of-service benefits taxable in the GCC?

In most GCC countries, including KSA and UAE, ESB and severance pay are not subject to income tax.

Final Thoughts

While severance pay and end-of-service benefits (gratuity) may seem similar, they serve different purposes and follow different rules—especially in GCC countries like Saudi Arabia.

• End-of-service benefits are a legal right and must be calculated according to national labor laws.
  
  
• Severance pay is typically optional and negotiated based on company policy or individual contracts.
  
  

As an HR professional or employee, understanding the distinction helps you stay compliant, plan better, and avoid disputes. Always refer to your local labor law—or better yet, use an HR solution like ZenHR to automate these calculations accurately and in line with the law.