Are Housing and Transportation Allowances Included in EOSB? (The Final Salary Test)

The calculation of End-of-Service Benefits (EOSB) in the Kingdom of Saudi Arabia (KSA) often leads to significant confusion, particularly concerning whether allowances - such as those for housing and transportation - are included in the final compensation figure.

The Saudi Labor Law (SLL) provides a definitive answer: Yes, generally, fixed allowances like housing and transportation must be included in the final salary used for calculating the EOSB, provided they are regular components of the worker’s Actual Wage.
This inclusion is mandatory because these allowances fall under the legal definition of remuneration. Exceptions exist only for certain variable forms of pay, a matter governed by the specific provisions of Article 86 of the SLL.

I. The Final Salary Test: Actual Wage as the Calculation Basis

To determine what is included in the EOSB calculation, we must first establish the legal basis for the payment.
Article 84 of the SLL mandates that the End-of-Service Award must be calculated based on the “last wage” received by the worker.

The law then defines the applicable “Wage” (or remuneration) as the Actual Wage. This is a comprehensive figure, encompassing the Basic Wage plus all other due increments.

The Components of the Actual Wage

The “Actual Wage” expands upon the Basic Wage by incorporating multiple types of allowances and benefits (as defined in Article 2 of the SLL):

• The Basic Wage (plus periodic increments)
• Allowances decided for the worker for exerted effort, or risks encountered while performing their job
• Increments granted in accordance with the standard of living or to meet family expenses
• Grants or rewards (if stipulated in the contract/regulation or customary)
• In rem privileges (non-cash benefits, capped at a maximum of two months’ basic wage per annum, unless the contract determines otherwise)

Because housing and transportation allowances are intrinsically designed to address either “family expenses” or the “standard of living,” they fall directly under the definition of the Actual Wage components.

Legal Reinforcement (Amended Article 61): The law itself reinforces this requirement by obligating the employer to provide adequate housing and transportation or an “appropriate cash allowance paid to them along with their wages.”
This confirms these payments are a fundamental, due component of the total compensation.

II. Distinguishing Fixed vs. Variable Allowances for EOSB

The core distinction that determines inclusion in the EOSB calculation lies in the nature of the pay component: is it stable and fixed, or variable and performance-based?

Fixed Allowances (Mandatory Inclusion in EOSB)

Fixed allowances - such as housing allowance, transportation allowance, or cost-of-living allowance - are typically predetermined lump sums paid monthly along with the Basic Wage.

Rationale for Inclusion:
They are considered rights that compensate the worker for routine living or operational costs and are not inherently dependent on sales, profits, or specific performance metrics.
They constitute a stable, guaranteed part of the total remuneration.

Example:
If an employee receives a Basic Wage of SAR 5,000, a Housing Allowance of SAR 1,500, and a Transportation Allowance of SAR 500, the Actual Wage used as the basis for the EOSB calculation would generally be SAR 7,000 (Basic Wage + all fixed allowances).

Variable Pay (Exclusion Possible via Contract)

In contrast, variable pay components are those tied directly to productivity, output, or profitability.
These include payments such as sales commissions, production bonuses, or percentages of profits.

III. The Article 86 Exception for Variable Pay

The Saudi Labor Law generally prohibits conditions that waive or diminish the worker’s rights. However, Article 86 provides a crucial and precise exception regarding variable pay.

Article 86 Exception:
This article explicitly grants employers and workers the right to agree - typically within the employment contract - to exclude variable pay components from the “last wage” calculation used for EOSB.

Scope of Exclusion:
This exception applies only to pay components that are “by their nature subject to increase or decrease,” such as:

• Commissions
• Sales percentages
• Similar fluctuating components

Key Rule:
This exception does not authorize the exclusion of fixed allowances like housing and transportation, which are stable elements of the Actual Wage necessary to meet the worker’s standard of living.
Since fixed allowances are guaranteed monthly amounts, they usually fall outside the scope of the Article 86 exception and must be included.

IV. Determining the EOSB for Productivity-Based Wages

A separate calculation method applies when the entire wage is variable (e.g., for workers paid purely by commission or piecework, covered under Article 96).

Calculation Method:
The final wage basis for these roles must use the average wage received for the worker’s actual workdays during the last year of service.

Inclusion:
Even in these cases, any allowances received (such as a guaranteed minimum monthly transportation allowance) must still be included in the final average to ensure the “Actual Wage” definition is met, unless excluded by a specific agreement under Article 86.

V. Conclusion: The Definitive Role of Fixed Allowances

The definitive answer is that fixed Housing and Transportation allowances are generally included in the End-of-Service Benefit calculation.
They satisfy the statutory requirement of being part of the Actual Wage (or “last wage” as per Article 84).

The fundamental difference for EOSB purposes is whether the component is fixed or variable:

Any unresolved disputes or questions must be formally directed to the relevant Saudi authorities for official clarification and binding decisions.

Further Reading

For full detail on calculating all wage components, read the
Guide to EOSB Wage Component Calculations.