On March 14, Saudi Arabia began implementing new labor reforms that will impact around 7 million foreign workers in the private sector. The new changes – known as the “improving the contractual relationship initiative”– are part of part of Vision 2030’s National Transformation Program. The initiative, however, does not include foreign domestic workers, of which there are more than 3 million in the country. Domestic workers will still be tied to their sponsors under a  separate regulatory framework. Nevertheless, the new reforms are expected to improve the conditions of a large segment of foreign workers in the kingdom. The outcome of the reforms could also create more room for Saudi job seekers, who have been traditionally less inclined to enter the private sector. As a result, the changes are expected to contribute to solving the unemployment crisis for Saudi workers, which reached an all-time high of 15.4% in the second quarter of 2020.

The recent labor reforms will grant foreigner workers the freedom to change jobs, move, and travel without the need for their sponsors’ approval. Previously, sponsors were responsible for requesting an exit or a reentry visa. Now, foreign workers will be allowed access to government apps (such as Absher and Qiwa) to request one themselves (not including multiple-entry visas). The sponsor will be informed of the request but will not be able to object. After the end of their contract, workers will also be able to change jobs without their sponsors’ consent. However, the new labor reforms will continue to allow sponsors to file absconding cases against workers. The Ministry of Human Resources and Social Development stated that one of the objectives of the initiative is to limit the numbers of such reports – by providing greater job mobility, workers can legally leave for another job.

Another objective of the initiative is to raise the standards and competitiveness of the labor market. It could also create a better work environment, which, in the long run, could help attract foreign investments, a cornerstone of Vision 2030. The reforms are also in line with the government’s efforts to reduce the numbers of low-skilled and undocumented workers; this process began years ago, and efforts have significantly increased in recent years. The need to improve the quality of the workforce reflects the government’s interest in promoting new businesses that would require more skilled and experienced workers as opposed to decades of attracting low-skilled laborers. However, it remains to be seen whether labor reforms increasing the mobility of foreign workers, many of whom are trained for low-skilled, relatively low-wage jobs, will reduce the reliance on such workers or encourage the creation of new, higher wage businesses.

The initiative also aims to reduce commercial concealment, which continues to be a problem despite laws and clampdowns in recent years to deter such activities. Commercial concealment has allowed foreign workers to run businesses registered by Saudi citizens in exchange for a monthly payment to the citizen business owner. The initiative could also reduce the number of dayworkers who pay their sponsors a monthly or annual fee to remain in the country while working in various other jobs. Both these practices in the past have allowed Saudi employers to avoid previous government efforts focused on Saudization of the workforce, while keeping wages and salaries artificially low.

The government hopes these reforms will contribute to solving the growing unemployment situation, which was at 14.9% in the third quarter of 2020, by encouraging employers to hire Saudi citizens. The changes could increase the expense for hiring foreign workers, whose wage scale has traditionally hovered at a significantly lower level than that for citizens. Additionally, the government began implementing a monthly expatriate levy in 2018 on workers that sponsors have had to pay. This combination, in effect bridging the wage gap between locals and foreigners, will help raise the costs for importing foreign workers to make it more attractive to hire locals. The private sector has long preferred hiring foreign workers because the sponsorship system did not allow them to change jobs. Saudis, on the other hand, were able to change jobs when a better position became available. The new initiative will allow foreign workers more mobility, similar to locals, which will further blur the distinctions between the two. These developments should help even the playing field between Saudi citizens and foreign workers when competing for the same positions in the private sector, which is already under pressure to nationalize more jobs.

The Saudi business community has received the new changes with mixed reactions. After decades of benefiting significantly from restrictions imposed on foreign workers, Saudi employers are likely, at least initially, to focus on what they see as the negative implications for their businesses. The flexibility and ease in changing jobs could encourage workers to leave for a better salary or working conditions. This could create some disruption in the production chain of companies. The increased cost of foreign workers could make services more expensive or decrease the quality of services provided, negatively affecting citizens and residents alike.

New initiatives and laws targeting the workforce are often expected to create and nationalize more jobs for citizens. However, not all the decisions implemented so far will necessarily improve the unemployment situation for Saudis. Saudi Arabia is walking a fine line between introducing new initiatives to attract foreign investment and finding solutions for the growing unemployment crisis.

The announcement in February that firms need to move their regional headquarters to the kingdom by 2024 to retain government contracts is a recent example of this conflicting approach. The decision was first promoted as a step toward creating thousands of jobs for Saudis. However, a few days later, Minister of Investment Khalid al-Falih clarified that companies that relocate will not be forced to hire nationals. The kingdom is trying to tackle both issues, unemployment and attracting foreign investment, but the two efforts are not always in synergy.

The private sector is the focus of Saudization efforts, but it is also the most affected by the recent labor reforms as it employs the vast majority of foreign workers. The sector has a history of circumventing regulations and laws to avoid hiring Saudis, such as changing job titles to avoid nationalization of certain positions. As a result, the new labor reforms will be effective in reducing unemployment of locals only with the active participation of the private sector. This will take time to materialize as companies are adjusting to the new policies. Nevertheless, the reforms are an important first step to improve conditions for foreign workers and could open the door for wider reforms, especially pertaining to the situation of domestic workers in the country.