One of the most challenging issues for investors in the Kingdom is how to adequately and commercially address the requirements of the Saudiisation policy. This is a particular challenge for foreign investors, who often have a harder time recruiting Saudi workers. The rationale behind the policy is clear: the Kingdom has a very young population and every year more young Saudis are entering the workforce. According to the Central Department of Statistics and Information, in 2013 the unemployment rate among Saudi men was 11.7% and 33.2% for Saudi women. If more jobs are not created for young Saudis, such rates could substantially increase in the coming years. Through its Saudiisation policy, the government has been trying to increase the number of nationals employed in both the public and private sectors. The policy requires private sector firms to employ a certain percentage of Saudi nationals, ranging from 5-75% based on the nature of the business, conditions of work and the availability of qualified Saudi nationals for such positions. Foreign investors may also be subject to higher Saudiisation requirements by the Saudi Arabian General Investment Authority.

Employment matters are generally governed by the labour regulations, which are enforced by the Ministry of Labour (MoL). Pursuant to the labour regulations, the Saudiisation rate for all employers should not be lower than 75%. However, if Saudi nationals with certain technical skills or educational qualifications are not available, the minister of labour may temporarily reduce the requirement. At present, the 75% target is a long-term objective, and the MoL has imposed standards with the aim of eventually achieving that goal.

In 1993 the MoL issued Ministerial Resolution No. 50, which stipulates that every firm that employs 20 workers or more must increase the number of Saudi nationals in its workforce by 5% annually. According to the MoL, the current Saudiisation threshold for firms with more than 20 employees is 30%. In addition, Ministerial Resolution No. 50 forbids establishments from employing expatriate workers as recruitment officers, receptionists, government service officers, cashiers or as civil security guards. Establishments in violation of any of these provisions are subject to penalties that include denial of sponsorship transfer applications and requests to renew employee residence permits; exclusion from government bids; disqualification for loans and government subsidies; and fines. The Saudiisation policy is now being implemented under a new system known as Nitaqat. This system classifies Saudi Arabian firms into different categories depending on their level of compliance with Saudiisation requirements. The categories are: Excellent, for exceptional compliance; Green, for good compliance; Yellow, for below average compliance; and Red for poor compliance.

The classification of an entity in a particular category will depend on how many Saudi nationals it employs. The required Saudiisation percentage for entities incorporated in the Kingdom is determined by the MoL on a case-by-case basis depending on the number of employees, the relevant industry and activities being undertaken. In January 2014, the MoL published a draft resolution that proposed a mechanism for determining the weight of expatriate workers on the Nitaqat scale by taking into account the size of their family, their salary and how long they have been working in the Kingdom.

In a recent move, the government cracked down on illegal workers in the Kingdom as part of its push to create job opportunities for Saudi nationals and announced that it will no longer tolerate expatriate employees working for employers other than their sponsors, which has been used as a way to circumvent requirements.

All investors in the Kingdom should anticipate that the government will continue to take measures to increase the participation of Saudi nationals in the workforce, including imposing higher requirements, increasing the costs associated with hiring expatriate workers and imposing additional work permit restrictions. Every company operating in the Kingdom should have a clear Saudiisation strategy and should plant to adapt as and when new measures are implemented.