Summary
How to uncover hidden employment liabilities before acquiring a Saudi company: end-of-service, GOSI, Nitaqat, pending claims and SPA protection.
Why Are Employment Liabilities the Most Underestimated Risk in Saudi Deals?
The question most investors ask before acquiring a Saudi company sounds simple: what employment liabilities will I inherit? The answer rarely is, because these liabilities tend to surface only after closing, when the buyer discovers under-provisioned accruals and undisclosed claims.
The legal effect is decisive. Article 18 of the Labor Law provides that a change in ownership of an establishment does not terminate employment contracts, and that the former and new owners are jointly liable for obligations arising before the transfer. In a share purchase, the buyer therefore inherits the company's entire employment history, protected only by what was negotiated in the sale agreement.
The liabilities we encounter most often in M&A transactions: deferred or miscalculated wages and overtime, end-of-service awards under-provisioned on the balance sheet, gaps in GOSI social insurance contributions, Nitaqat penalties, and pending or threatened labor claims.
Faisal Siddiqui addressed this topic in greater depth in his article on the Global Law Experts platform. Here we focus on what a foreign investor practically needs at each stage of the review.
What Is the Difference Between Compliance and Due Diligence?
Compliance answers a single question: is the company compliant today? Due diligence goes further: it studies historical patterns, quantifies latent exposure and anticipates future risk. A company may sit in the Nitaqat green band and pay salaries on time, yet still carry material contingent liabilities from earlier periods of non-compliance.
The review must therefore cover both dimensions: the current position as shown on government portals, and a historical record of at least three years, extended to five where the company has a history of disputes or restructuring.
Which Documents Should You Request From the Target?
The HR workstream is the highest-risk area in most Saudi deals and demands a systematic review of the entire workforce structure. The minimum document set:
All active employment contracts of every type, fixed-term, indefinite and part-time, in Arabic and English where available. Three years of payroll registers showing basic wage, allowances, overtime and deductions. GOSI contribution statements to reconcile against actual payroll. Current and historical Nitaqat reports from the HRSD portal. Termination files for the review period, with end-of-service calculations, settlement agreements and release letters. A register of all pending, threatened or recently concluded labor claims with case numbers and amounts. Finally, ministry inspection reports and any violation notices or corrective orders.
The golden rule: a gap in any of these categories is itself a red flag that calls for a wider review, not a shortcut past it.
How Is End-of-Service Calculated and Where Do Companies Get It Wrong?
The end-of-service award is one of the largest contingent liabilities in any Saudi deal. Article 84 of the Labor Law calculates it on the last wage and length of service: half a month's wage for each of the first five years and a full month for each year thereafter.
The most common error we see is calculating the award on basic salary alone, whereas the definition of wage in Article 2 covers the actual wage including fixed allowances such as housing and transport where the contract stipulates them. The result is a provision understated by as much as a third. The second error is failing to accrue for employees approaching the five-year threshold, where the accrual rate doubles.
We therefore recommend recalculating the award for a sample of employees, prioritizing long-tenured staff and senior executives, and comparing the result with what the financial statements record. The difference feeds directly into the purchase price adjustment or the escrow amount.
What Red Flags Signal Post-Closing Labor Disputes?
From the files we handle, four signals deserve particular attention.
Undocumented mass terminations: if the company reduced headcount significantly before the deal and cannot produce termination letters, award calculations and settlement agreements, the likelihood of post-closing claims is high.
A consistent pattern of calculating the award on basic salary only, which points to systematic under-provisioning rather than an isolated error.
Unresolved internal grievances that have not yet reached the labor office; these are prime candidates to become claims once ownership changes.
Gaps in payroll records for any period, since they make compliance impossible to verify and may conceal off-book cash payments. In one transaction we handled, the buyer discovered after closing that part of certain expatriate employees' salaries had been paid through informal channels; wage-difference claims followed and exceeded the indemnity cap in the sale agreement. Reconciling payroll against GOSI statements and bank transfers would have exposed this before signing.
On Nitaqat: a green classification at closing is not enough. Verify that it is sustainable and that the registered Saudi employees actually work at the establishment, because reclassification to red after an inspection means frozen visas and blocked work permit renewals for key staff.
How Do You Quantify and Allocate Employment Risk in the SPA?
Identifying risk is only half the task. The other half is converting it into numbers and allocating it between seller and buyer in the deal documents. The model we apply has three steps.
First, reconstruct three years of payroll, award accruals and GOSI contributions and identify any shortfall against statutory requirements. Second, estimate the monetary exposure for each risk category under three scenarios, best, likely and worst, with probability weighting for pending claims. Third, translate the numbers into contractual protection: a specific indemnity covering all labor claims arising from events before the closing date, capped by reference to the estimated exposure and with a defined survival period; general warranties of Labor Law compliance; and a price adjustment or escrow for contingent items.
Template language imported from other jurisdictions rarely works in the Saudi framework, particularly given joint liability under Article 18. Consider also the personal liability the new Companies Law places on board members for workforce decisions, an added element in the risk equation.
Faisal Siddiqui Law Firm, from its offices in Jeddah and Riyadh, conducts employment due diligence within acquisition transactions and drafts the contractual protections in both languages. Contact us before the letter of intent is signed, not after.