Saudi Arabia Ends Kafala Sponsorship System: Implications for Business

Saudi Arabia announced the abolition of the kafala sponsorship system in June 2025, marking a historic shift to contract-based employment, granting migrant workers greater mobility and rights. For businesses, it brings higher compliance and wage pressures but also improved labor flexibility and investment appeal under Vision 2030.

Saudi Arabia has announced in June 2025 the end of its decades-old kafala sponsorship system, a sweeping labor reform affecting roughly 13 million migrant workers (over 2.6 million of them being Indian, according to the Indian Ministry of External Affair).

This change dismantles the employer-tied visa rules that long governed Gulf labor markets, aligning Saudi Arabia’s Labor Law more closely with international standards and its own Vision 2030 modernization agenda.

For business leaders, HR professionals, and investors, the reform signals both new opportunities and challenges: greater workforce flexibility and global talent appeal, but also higher expectations for compliance, labor costs, and talent retention. Below we summarize the key reforms, business impacts, and recommended actions to adapt.

The kafala sponsorship system (1950s–2025)

Historically, the kafala system (Arabic for “sponsorship”) tied a migrant worker’s legal status directly to a Saudi employer (the “kafeel”). Under this framework, the employer controlled the worker’s visa, residency, and permission to change jobs or leave the country. In practice, that gave employers sweeping power and left workers with little autonomy. Critically, workers could not switch employers or exit Saudi Arabia without their sponsor’s approval.

Human rights organizations have long raised concerns that the kafala  system enabled practices such as passport retention, wage disputes, and restricted mobility for workers, contributing to imbalances in employer-employee relations. Domestic workers and low-wage laborers were particularly affected under the previous framework.

Originally introduced in the 1950s to regulate the employment of foreign labor, the kafala model gradually became a focal point of international debate.

What has changed? Key features of the reform

Saudi Arabia’s new labor regime replaces sponsorship with a contract-based system and explicitly grants much greater worker freedom. Under the announced reform (implemented in late 2025), migrant workers may change jobs without their employer’s consent and leave or re-enter Saudi Arabia without needing exit/re-entry visas from sponsors. Official statements confirm that under the reformed rules, employment will be based on formal contracts (managed via the digital Qiwa platform) rather than informal sponsorship. Workers also gain expanded access to labor courts and grievance mechanisms, so they can report abuse or non-payment without fear of retaliation.

Key changes include:

• Worker mobility: Employees can switch employers freely once contractual obligations (or notice periods) are met. They no longer require a “no objection” certificate from their previous sponsor, ending a major obstacle to job mobility.
• Exit/entry rights: The previous requirement for a sponsor’s permission to leave or re-enter Saudi Arabia is phased out. In practical terms, workers can now travel abroad and return without seeking an exit visa from their employer.
• Formal contracts and Qiwa: All employment will be governed by formal contracts, often processed on Saudi’s electronic Qiwa platform. This shift to digital contract registration is intended to boost transparency and reduce under-the-table arrangements.
• Legal protections: Migrant workers gain improved access to labor courts and dispute resolution channels that were underused before. Companies are now expected to honor contract terms or face enforcement actions.
• Transition rules: Authorities have outlined certain eligibility criteria to benefit from the new freedoms. For example, workers typically need documented contracts, a minimum period of service, clean legal status, and a verified offer from a compliant employer to switch jobs. These conditions aim to ensure a smooth transition and prevent abuse of the system.

It is important to note that implementation is still unfolding, and some categories (such as domestic workers, informal labor) may not be fully covered immediately. Nonetheless, officially the era of sponsorship is over and it aligns Saudi Arabia with global labor norms.

Business implications: Talent, costs, and compliance

For companies operating in Saudi Arabia (and the wider Gulf), abolishing kafala has far-reaching effects on workforce strategy, operations and investment outlook.

Talent and workforce strategy

Labor mobility will ease hiring and redeployment. Companies can recruit from a wider pool (current employees can be hired away without employer consent), but this also raises competition for talent. Businesses may need to enhance wages, benefits or career development to retain skilled workers who now have freedom to switch jobs.

In sectors like construction, healthcare, hospitality and services, typically employing millions of expatriate workers, employers should anticipate higher turnover and plan accordingly. On the positive side, the reform makes Saudi operations more attractive to foreign professionals, potentially easing regional staffing for joint ventures and multinational projects.

Compliance and reputation

With kafala gone, Saudi employers have one fewer layer of legal risk related to sponsorship abuses. However, the spotlight on labor practices is only sharpening. Multinational firms and investors now face heightened scrutiny of their labor and ESG (environmental, social, governance) standards. Ensuring all contracts and policies comply with the new rules is critical.

For example, failing to allow a worker to change jobs or exit the country could trigger penalties. Aligning with international labor conventions, the reform is seen as improving Saudi Arabia’s global standing, a reputational boost for companies that adapt proactively. Conversely, firms clinging to outdated practices may face legal issues or brand damage.

Cost and operational planning

As the labor market liberalizes, basic wage inflation is likely. Businesses used to captive low-cost migrant labor may need to raise salaries or offer additional benefits to retain workers.

Human resources and payroll systems will need updating to interface with new digital platforms (like Qiwa) and visa processes. In the short run, expect transitional disruptions: processing existing sponsorship transfers and reissuing contracts under the new regime could require extra administrative effort. Over time, greater mobility may increase turnover, so companies should bolster recruitment pipelines and consider upskilling or automation to optimize their workforce.

Investment and market entry

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Overall, the reform is a signal that Saudi Arabia is liberalizing its economy to foreign capital. Foreign investors often cite labor market flexibility and protection of worker rights as key considerations. By ending kafala, Saudi Arabia positions itself as a more competitive destination for FDI (foreign direct investment) and for regional headquarters, compared to neighbors that still have restrictive sponsorship rules.

This could encourage new market entries or expansions by global companies. However, businesses whose models rely on ultra-cheap, captive labor will face a structural shift: tighter labor freedoms typically mean higher wage floors and more rapid churn, squeezing profit margins for low-end labor-intensive sectors.

In sum, firms should recalibrate business cases: increased costs may be offset by better-skilled employees and improved risk profile.

Saudization and regional context

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The kafala abolition occurs alongside Saudi Arabia’s ongoing push for “Saudization”, the nationalization of the workforce. Firms must juggle both trends: hiring and training more Saudi nationals while managing a now-fluid migrant labor force. The reforms may actually support Saudization by making the labor market fairer and skills-driven. Regionally, this landmark change could influence other Gulf states still on old systems. If Saudi Arabia’s model succeeds, neighbors (and multinational businesses in the Gulf) may face pressure to follow suit.

In any case, businesses with Gulf-wide operations should monitor each market’s specific labor rules as the Gulf region as a whole gradually shifts away from sponsorship-based regimes.

Impact on Indian and other expatriate businesses

Given that over one-fifth of Saudi’s labor force are Indian nationals (estimated 2.6 million) and that many Indian companies operate in Saudi Arabia, the reforms have direct bearing on Indian and other foreign employers. Staffing, construction, hospitality, domestic help, healthcare, and IT services companies (sectors with large South Asian workforces) will need to revise their employment and HR frameworks.

For example, current employee handbooks or covenants prohibiting outside offers are now unenforceable. On the positive side, Indian exporters and service providers supplying the Saudi market may benefit from a more stable, standardized labor environment, reducing hidden costs of delays and disputes. The Indian government has already welcomed the change and plans to work with Saudi authorities to protect its citizens’ interests. More broadly, this reform is a signal of regulatory modernization that global firms (including Indian multinationals) should factor into their Saudi strategies.

Potential challenges and caveats

While the headlines celebrate the change, businesses should remain aware of potential pitfalls:

• Transition period lag: Some reforms may roll out gradually. Previous changes (such as the 2021 kafala tweaks) took years to fully materialize. Companies should track new regulations closely.
• Limited coverage: Not all worker categories are immediately free from sponsorship (notably domestic workers often have separate rules). Firms relying on such labor need tailored compliance checks.
• Implementation complexity: Reworking hundreds or thousands of sponsorship contracts into the new system will incur one-time costs. HR teams and legal departments must coordinate visa changes and ensure no lapses in work authorization.
• Competitive labor market: Firms accustomed to locked-in labor should prepare for higher employee turnover. Recruiting and retention programs become more important than ever.
• Interconnected policies: This labor reform is part of a broader regulatory overhaul. Businesses must also navigate evolving Saudization quotas, changes in foreign ownership rules, and any new labor laws that build on the kafala.

Action points for business leaders

To turn this reform into a strategic advantage, companies should act proactively:

• Review and update employment policies: Employers should audit all employment contracts, sponsorship records, and visa arrangements to ensure full alignment with Saudi Arabia’s new labor framework. Updated contracts should explicitly reflect job transfer and termination provisions consistent with the reformed rules. Employee handbooks and offer letters should be revised to remove outdated kafala-related clauses.
• Strengthen compliance frameworks: Companies are advised to integrate the new labor regulations into their compliance checklists and internal audit processes. Engaging local legal counsel or HR specialists can help identify legacy risks (such as unpaid leave balances or repatriation obligations) and close potential gaps. Monitoring labor court proceedings and grievance trends can further strengthen compliance oversight.
• Enhance talent retention and recruitment: As workforce mobility increases, employers should focus on strengthening their employee value proposition. Investments in training, professional development, and engagement initiatives can reduce turnover and attract skilled talent in a more competitive market. Strong employer branding will also play a key role in positioning businesses as preferred workplaces.
• Reassess cost and staffing models: Companies should account for potential wage or benefits adjustments in budget projections. Exploring automation and productivity enhancements can help offset increased labor costs. The transition to contract-based employment can also be used as a positive narrative in negotiations with suppliers or partners, highlighting improved transparency and workforce stability.
• Leverage new opportunities: Businesses can use the labor reform as a strategic advantage in expansion and investment planning, for instance, when establishing regional offices or attracting foreign partners. The enhanced labor flexibility and stronger governance framework can serve as a compelling signal of Saudi Arabia’s improving business environment.
• Stay informed on related reforms: The kafala end is just one piece of Vision 2030. Businesses and investors must stay attuned to subsequent changes, for instance, updates to the Labor Law (October 2024 saw significant amendments) or employer-friendly incentives, and adjust the strategy accordingly. Collaborating with industry associations, chambers of commerce, and legal advisors is a must to keep policies current.

In short, abolishing the kafala system is a watershed moment for the Gulf labor market. For businesses operating in Saudi Arabia and beyond, it means adapting to a more dynamic labor regime. By proactively updating HR practices, shoring up compliance, and rethinking workforce strategies, companies can mitigate risks (like higher turnover or costs) and seize the upside (a more motivated workforce and improved investment climate).

The rules of engagement in Saudi Arabia’s labor market have fundamentally changed: savvy leaders will change with them.

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