Kafala Abolition: Reform in right direction

In a groundbreaking labour reform, Saudi Arabia has officially scrapped nearly seven decades-old Kafala (sponsorship) system that bridled foreign workers’ employment and residency to their employers. The move, announced in June 2025, is a part of the Kingdom’s broader Vision 2030 reforms, is expected to revamp the rights of more than 10 million migrant workers, including over 2.5 million Indians. The Kafala system required foreign workers to have a Saudi sponsor, usually their employer, who controlled their visa and legal status. This meant that workers couldn’t change jobs, leave the country, or even renew their residence permits without the sponsor’s consent and their legal standing was solely dependent on their employer. This method was created to control labour through commercial sponsors and reduce state bureaucracy. However, in reality, it led to massive power disequilibrium. Workers had virtually limited options against employers that threatened deportation, withheld wages or confiscated their passports. Human rights bodies have often called it modern day slavery and have long raised concerns that this system often led to worker exploitation and abuse, as employees were left with little legal recourse if their employers withheld salaries or passports.

The Kafala system garnered global attention prior to the 2022 FIFA World Cup in Qatar, as thousands of migrant labourers, mainly from South Asian nations such as India, lost their lives while enduring extremely harsh working conditions during stadium and infrastructure construction. Saudi regime has now replaced sponsorship with a contract-based system and explicitly grants much greater worker freedom like Worker mobility, Exit/entry rights, Formal contracts, Legal protections, Transition rules. 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. 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 labour courts and grievance mechanisms, so they can report abuse or non-payment without fear of retaliation. However, the implementation of this historical reform is still unfolding, and some categories (such as domestic workers, informal labour) may not be fully covered immediately. Nonetheless, officially the era of sponsorship is over and it aligns Saudi Arabia with global labour norms and paving its way towards VISION 2030.

The Business Implications for Companies operating in Saudi Arabia and other Gulf nations has far-reaching effects on workforce strategy, operations and investment outlook due to annulment of Kafala. Most importantly in domain of talent and workforce strategy like labour mobility will ease hiring and redeployment. Companies can recruit from a wider pool, 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. The Compliance policy of companies will also be redefined in a significant way. With Kafala gone, Saudi employers have one fewer layer of legal risk related to sponsorship abuses. However, the spotlight on labour practices is only sharpening. Multinational firms and investors now face heightened scrutiny of their labour and ESG (environmental, social, governance) standards. Ensuring all contracts and policies comply with the new rules is critical.

Aligning with international labour 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. In terms of cost management and operational execution, basic wage inflation is likely as the labour market liberalizes. 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 up skilling or automation to optimize their workforce. Overall, the reform is a signal that Saudi Arabia is liberalizing its economy to foreign capital.

Foreign investors often cite labour 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 neighbours 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 labour will face a structural shift: tighter labour freedoms typically mean higher wage floors and more rapid churn, squeezing profit margins for low-end labour-intensive sectors. In sum, firms should recalibrate business policies as increased costs may be offset by better-skilled employees and improved risk profile.

The move is poised to exert a significant influence on Indian and other expatriate businesses as the annulment of Kafala will entitle migrant work force to safer working conditions, freedom to switch employers, swift repatriation and grievance redressal and strengthened India – Saudi bilateral labour cooperation. Given that over one-fifth of Saudi’s labour 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 revamp 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 labour environment, reducing hidden costs of delays and disputes.

The Indian government has already welcomed the change as a progressive step towards migrant welfare and rights protection 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. In essence, abolishing the Kafala system is a watershed moment for the Gulf labour market. For businesses operating in Saudi Arabia and beyond, it means adapting to a more dynamic labour regime. By proactively reviewing and updating HR practices, shoring up compliance, Reassessing cost and staffing models and leveraging new opportunities in expansion and investment planning as strategic advantage, companies can mitigate risks like higher turnover or costs and capitalize on opportunities like a more motivated workforce and improved investment climate.

Zubair Mushtaq, Research Scholar in Department of Commerce, Kashmir University