Pension Rights and Severance Pay in Israel

If you are a company or organization planning to operate in Israel or currently operating in Israel, you may need to employ Israeli workers. If that is the case, you will need to know the Israeli laws governing pensions and severance pay. This article by lawyers specializing in Israeli labor law at our law firm will give you a brief explanation of the most frequently asked questions.

Pension Provisions

Any employee who is an adult (21 for males, 20 for females) is entitled to a pension provision by the employer. Pension provisions include a pension fund, “executive” insurance, or a provident fund. These payments do not replace the severance pay owed to the employee if the contract with the employer is terminated, unless otherwise agreed in the employee contract (collective contracts or contracts subject to the approval of the Minister of Labor).

In any case, the employer is required to set aside at least 6% of the employee’s salary or the average wage in the economy (whichever is lower) every month for the employee’s pension insurance. This pay is considered to be a compensation component on account of the severance pay owed to the employee. In turn, the employee is obliged to set aside 5% of his remaining pay for the pension insurance.

Severance Pay

Severance pay is owed to the employee provided they worked with the employer for at least one year. The pay is calculated on a yearly basis, based on the employee’s current wages. The pay is calculated as one month’s wage per year employed, based on the average wages of the last year of employment. Unless otherwise specified in a contract, severance pay is only paid to employees who were fired rather than employees who quit voluntarily.

“Article 14” Agreement regarding Severance Pay

Should the employee and employer specify this in the employee’s contract (such a contract is colloquially known as “Article 14” of the severance pay law), the employer may pay the entirety of the employee’s severance pay (8.33% of the employee’s monthly paycheck) in advance and on a monthly basis into the employee’s pension insurance. The funds are the employee’s property, and he will receive them when his contract is terminated, even if the employee is the one to terminate it. This form of severance pay is not retroactively increased to account for any raises the employee may have received.

Advantages and Disadvantages regarding an Article 14 Contract

The agreement has positive and negative aspects for both the employer and the employee. Having the severance pay advanced is better for a new employee who may not last long in the organization. A long-standing employee will lose a fair deal of money as his paycheck increases, but this does not retroactively affect the severance pay already paid to him. Conversely, if the employer believes the employee may soon leave voluntarily, an Article 14 agreement would entitle the employee to severance pay that they would not otherwise receive.

To summarize, an Article 14 contract is better from the employer’s perspective when contracted with an employee who is expected to be employed for a long period of time. The benefits of such a contract with a young employee likely to leave in search of better opportunities are minimal.