This article was written by senior associate Helen Perrin and associate Paul Lockyer.
Similar to the labour markets of other GCC states (Emiratisation: what foreign businesses in the UAE need to know), the private sector in Saudi Arabia is largely dominated by expatriate workers. This has become a pressing concern for the Saudi Government in recent years, with the policy known as “Saudiization” becoming a top priority.
Under the Saudi Labour Law, at least 75 per cent of a private company’s workforce must be Saudi nationals. The law grants the Minister of Labour discretion to lower the percentage as appropriate, perhaps having envisaged that many companies will struggle to meet such a high threshold. For many years, the provisions of the Labour Law on Saudiization were routinely ignored. Supplemental Saudiization policies were introduced in the mid-1990s to require companies to increase the number of Saudi employees by 5% a year until the target of 50% was reached for most industries. In mid-2006, a new Minister of Labour scrapped that approach and mandated that 30% be the goal. The percentage was 20% for industrial companies and only 5% for O&M contractors. This system was replaced in late 2011 by the “Nitaqat” Program, which has so far facilitated the employment of over 400,000 Saudi nationals (Integrating Gulf nationals)
What is the Nitaqat Program?
The Nitaqat Program is the latest Saudiization initiative for the private sector which categorises companies depending on current percentages of Saudi employees. Nitaqat requires private companies in most industries to ensure that at least 30% of employees are Saudi nationals.
The word “nitaqat” means “ranges” in Arabic, which reflects the sliding scale model for assessing Saudiization targets. Employers with fewer than ten employees are exempt from Nitaqat. Under Nitaqat, entities fall under four categories based on their current Saudiization rates: Excellent (full compliance), Green (good compliance), Yellow (poor compliance) and Red (no compliance).
The program assesses the performance of enterprises in each category and rewards Excellent and Green bands with top priority, gives Red the least priority, and gives a longer deadline for enterprises in the Yellow band to increase their Saudiization rates.
Excellent and Green
Companies that fall in the Excellent and Green categories are those which have already achieved the relevant Saudiization targets. Some of the benefits enjoyed by these entities are as follows:
- the continued right to obtain and renew visas for expatriate workers
- the right to recruit and transfer expatriate workers from Yellow and Red entities even if those entities do not consent to the transfer
- the right to recruit and transfer employees even if the employee has not been employed by his previous employer for two years
- a one-year grace period following the expiry of municipal and professional licences or commercial registration.
Yellow and Red
In contrast, companies in the Yellow and Red categories will be subject to limitations and sanctions, such as being:
- restricted from opening new branches
- restricted from transferring expatriate workers onto the company’s sponsorship
- only able to apply for one new visa following the departure of two expatriate workers
- subject to the rights of companies in the Excellent and Green categories to recruit sponsored expatriate employees without the required consent of the company.
To check which category your company falls within, visit here.
What other elements of Saudiization should companies be aware of?
Under the Nitaqat scheme, companies will need to provide a Saudiization Certificate prior to taking certain corporate actions, such as the renewal of licences. Where the target has not been met, the action may be blocked and sanctions may be imposed.
More recently, the Saudi Arabian General Investment Authority (SAGIA) has rejected applications for new licences where companies have failed to present a satisfactory Saudiization plan as well as requiring that certain applications adhere to levels of Saudiization in excess of those required by the Ministry of Labour (for example manufacturing operations are required to reach 75% Saudiization and service companies classified as “contracting” are required to have 75% Saudi nationals in management, executive and professional roles). Saudiization levels are also being monitored as a part of the renewal of SAGIA Licensing.
In addition, Saudi entities employing over half of their workforce from expatriates are subject to a fine of SAR 2,400 for each expatriate employed above the number of Saudi employees (Fakeih: No going back on Saudiization).
What practical steps should Saudi companies take?
As the Saudi Government continues to implement further Saudiization initiatives, companies should focus on adopting incentive schemes to improve the recruitment and retention of Saudi nationals. Training programs, compensation packages and employee benefits are all useful tools for attracting and retaining Saudi employees in the private sector.