Israel, start-up nation, has become an attractive destination for foreign investors and corporations. Israel’s entrepreneurial outlook, coupled with cutting-edge innovation, has start-ups sprouting up all over, ripe for foreign involvement. Day after day foreign companies purchase Israeli businesses or set up shop in Israel. Additionally, many individuals moving their lives to Israel are looking to either start businesses in Israel or expand their current businesses into Israel.

Employment law in Israel is dynamic and relies not only on the letter of the law, but also on rapidly changing case law. At the same time, Israeli employment law is highly regulated, and there are a wide variety of rules and standards that obligate the parties to an employment relationship (even if they might want to come to alternative arrangements). Therefore, as businesses move into Israel, it is imperative that they consider the employment aspects of such a move and be equipped with a thorough, up-to-date understanding of Israeli employment law.

Who is the Employer?

One of the first questions that a business moving into Israel will need to decide is who is to employ the business’s employees. Companies need to consider that managing payroll for employees requires opening and maintaining accounts with the Israel Tax Authority and the National Insurance Institute for withholding purposes, as well as handling contributions to provident funds and other benefits.

If a foreign corporation acquires an Israeli company, this is the simplest of situations regarding the mechanics of employing employees. The Israeli company typically remains the employing entity, and continues as before even though ownership has changed hands. Of course, thoroughly reviewing the Israeli company’s past dealings with its employees and any potential points of exposure for the foreign corporation is critical.

If a corporation or individual is establishing a new company in Israel, then they will need to ensure that they are set up for employing and paying employees, including provident fund contributions, withholding and providing employees with pay slips for each pay period (monthly). The company will, of course, have to open accounts with the aforementioned authorities for withholding purposes.

In cases in which a foreign entity would like to maintain a very small business presence in Israel, including a few employees, without actually establishing an Israeli corporation, the company might consider employment through and employer of record – a local business that employs employees and handles all aspects of payroll on behalf of other companies. Keep in mind, however, that even when using an employer of record, questions regarding the tax implications of a foreign corporation’s business presence in Israel may still arise, and the corporation should always seek advice regarding this matter. Additionally, one of the more common lawsuits in Israel concerns misclassification of service providers as employees. Therefore, any mechanism of employment via another party should be carefully reviewed in advance. 

Employee Rights and Benefits – The Basics

It is important to gain a basic understanding of Israeli labor and employment law. Employment statutes in Israel set minimum mandatory terms and conditions of employment, which cannot be waived by an employee (i.e. an employee and employer cannot agree upon any employment terms that are less than the minimum prescribed by law). An employment agreement can provide for more beneficial terms than the statutory entitlements. Rulings from the labor courts have added additional obligations and refined others.

It is important that those planning to acquire or open a business in Israel are fully aware of these employer obligations, and the costs associated with them. The following is a very brief overview of some of the basic employee rights and benefits:

Minimum Wage

The statutory monthly minimum wage is NIS 5,300 as of 2017 and is periodically updated.

Working Hours, Overtime and Weekly Rest

The typical workday in Israel is 8.6 hours and the typical workweek in Israel is Sunday to Thursday and is 42 hours, though there are many employees who work from Sunday to Friday.

Any working hours in excess of the regular daily or weekly hours are considered overtime, and are entitle the employee to additional compensation. That said, global salary, which includes compensation for overtime, has become a market standard Israel. It is imperative that employers ensure that they are structuring their global compensation in compliance with law, lest they be liable to employees for additional compensation.

Every employee is entitled to a weekly day of rest of no less than 36 consecutive hours. Employment during the weekly day of rest is prohibited without a general, industry-wide or specific workplace permit issued by the Minister of Labor. The process for requesting and attaining said permit is lengthy.

Paid Time Off

All employees are entitled to paid time off, the minimum amount of which is dictated by the scope of the employee’s position and their period of service with the employer. Many employers, of course, choose to offer more leave.

Sick Leave

All employees are entitled to paid sick leave. Employers are only required to pay full salary after a few days of consecutive absence, however certain employers choose to offer full sick pay from the first day of absence.

Convalescence Pay

Following completion of one year of employment with an employer, employees are entitled to convalescence pay, the amount of which is set statutorily. This is a benefit unique to Israel, the product of a time when much of the work in Israel was physical labor. Entitlement to convalescence pay is dictated by the employee’s term of service.

Travel Expenses

Employees are entitled to reimbursement for daily travel expenses from home to the workplace and back. The maximum daily reimbursement that employers are required to pay employees is updated from time to time.

Pension Scheme

Employers are obligated to provide employees with a comprehensive pension scheme, which includes pension contributions (made by both employer and employee) and severance contributions (made by the employer only).

Unless the employee is entitled to a beneficial pension scheme according to a collective bargaining agreement or a personal employment agreement, the minimum contribution rates are set by law.

Education or Study Fund

While not a required benefit, this has become something of a market standard in some industries, particularly the tech industry, so it warrants brief mention. Education funds (originally created to help individuals save for education expenses, hence the name) are tax-exempt savings funds. Contributions are made by both employer and employee.

End of Employment

According to Israeli law, an employer is permitted to dismiss any of its employees, subject to limitations by law, the employee’s employment agreement and/or any applicable collective bargaining agreement.

There are certain legal limitations on dismissing pregnant employees, employees on maternity leave and after returning to work, women staying in shelters for abused women, employees who have been called up for military reserve duty, employees on sick leave, employees undergoing fertility treatments, bereaved families and disabled employees.

Prior to making a final decision regarding employee dismissal, the employer must hold a hearing process with the employee in question, affording the employee an opportunity to state their case in an attempt to persuade the employer against dismissal. Maintaining proper procedure throughout the hearing process, as dictated by case law, is crucial. 

Prior Notice and Severance

Employees are entitled to written notice prior to dismissal, as specified by law and according to the duration of employment. An employee may be entitled to a longer notice period, if so specified in their employment agreement.

In general, in the case of dismissal and under other circumstances, employees are entitled to severance payment according to the Severance Pay Law, 1963. That said, many employers today handle severance in accordance with a specific legal arrangement under which all or a portion of the employer’s contributions to a severance fund (made monthly together with pension contributions) are in lieu of severance pay. Proper structuring of this arrangement in the employment agreement, as well as in practice, is essential for avoiding future severance liability.

Please note that the above is with respect to the minimum requirements of all employers by law; however, sectoral bargaining agreements and extension orders in various industries require that employers provide their employees with more beneficial terms and conditions, both in terms of increased amounts and rates with respect to the above benefits, and additional benefits not mentioned above.

Pregnancy and Parental Leave

Businesses entering the Israeli market should also be aware of employee’s maternity/parental leave rights, as provided by law.

Every person who is a salaried employee and gives birth is entitled to maternity leave. Parents who have a child through surrogacy and parents who adopt a child are also entitled to parental leave upon receiving the child. The length of a person’s maternity or parental leave is dictated by term of service with the employer.

Part of the leave is paid by the National Insurance Institute while part is unpaid leave. In addition to maternity pay provided by the National Insurance Institute, employers have various obligations with respect to the employee’s continued pension and severance contributions while on leave.

Transferring Employees

Should there be a need to transfer employees from one organization to another within Israel, there are two methods for doing so: (1) transfer with continued employment; and (2) fire and rehire. Both methods are common in Israel today, each offering advantages and disadvantages.

Ultimately, the optimal transfer method will depend on the given situation, taking into account future needs as well as any potential past exposure with respect to employees.

Engaging with Contractors and Job Staffing Agencies

Israel has quite specific laws and regulations when it comes to outsourcing jobs in the workplace, and the penalties for non-compliance can be hefty.

To help ensure contractors’ compliance with labor and employment protections, Israeli law places a set of obligations on those who engage with certain types of contractors (most notably for receipt of cleaning, security and manpower services). These obligations include a variety of oversight measures by those who receive services, in an effort to ensure that employees of contractors are receiving the terms and benefits due to them by law.

Additionally, employers should be sure to engage only with cleaning, security and manpower contractors and recruitment agencies that possess a valid license to contract for said services.

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