International Employment Contract – Legal Information for Employers
Although we tend to think of the business world as a global village, the employment of international workers is only in its infancy, increasing primarily due to the worldwide shift to remote work. Foreign companies express great interest in employing Israeli workers. However, there are various legal hurdles to overcome. In this article, a lawyer specializing in labor law and commercial law from our firm explains in detail about international employment contracts and the issues that stem from them.
Our law firm in Jerusalem and Tel Aviv specializes in labor law. The firm provides a comprehensive legal solution for workplaces and employees on issues such as employment contracts, severance pay, labor dispute resolution, and more.
Remote Work – It’s Here to Stay
In recent years, new employment options have been created which were not available before. For a long time, there has been a worldwide discussion on moving to remote employment but, for various reasons, working from a single office and other forms of physical employment continued to be the most common model. The corona crisis has changed the rules of the game in this respect and created a critical mass of workers working remotely, fully or partially. Contributing to this was the advanced technology that has made it possible to hold virtual meetings (using applications such as Zoom), remote office management software, etc.
The trend of moving to remote employment is expected to grow in the coming years and become more international. It is likely that we will see more employers around the world starting to employ workers from countries other than their own, through an international employment contract. Foreign employers have already begun to express interest in employing Israeli workers in areas such as high-tech, biotechnology, start-ups, and more. Our office has recently received inquiries about the legal ways to employ Israeli workers. We therefore find it appropriate to explain here about key issues on the subject.
International Employment Contracts – Employment Options and the Obligations of Foreign Employers
There are two main options for foreign companies interested in Israeli workers. One is contracting. This is not actual employment, but payment for services provided by Israelis who are self-employed and who issue invoices for the payment due to them. Israeli who wish to work as contractors must open a file with the VAT (Maam) authorities, Income Tax (Mas Hachnasa) authorities, and National Insurance Institute (Bituach Leumi), report their income periodically, and pay these institutions on the basis of income.
The advantage of this form of engagement is cost savings for the employer. The company does not pay wages through a pay slip and, thus, is ostensibly exempt from responsibility for the workers’ social rights. However, this is also the weak point of contracting. It creates an opening for lawsuits demanding payment of social rights upon termination of the engagement. In 2002, the Labor Court issued a precedential ruling, following which contracting became legally recognized as a form of employment, and contractors were awarded severance pay and social rights in certain cases.
The second option is direct employment through an employment contract. In this type of engagement, as long as the workers are in Israel, it will be necessary to open a deductions file in Israel and withhold tax from the income. This is required under the Income Tax Ordinance. It may also be necessary to make contributions to a pension fund and provident fund. Employers will also have to protect the social rights of employees; that is, to take care of payments to the National Insurance Institute.
The aforesaid is relevant if the employee resides in Israel, or in countries with which Israel has not signed agreements on the subject. Israel currently has social security agreements with most countries in Central and Western Europe, as well as with Canada and Uruguay. Employees who make social security contributions in these countries are exempt from contributions in Israel.
What Alternatives Exist for Foreign Employers Who Want to Avoid Administrative Responsibility over Remote Workers?
In remote employment, if the foreign company prefers not to be bothered with salaries, taxation, and manpower, it has two main options: One option is to set up a foreign agency to handle these matters. This agency is called an Employment of Record (EOR) and is legally recognized as the employer of the company’s Israeli workers.
The other option is to hire an outsourcing company that specializes in these matters, called a Professional Employer Organization (PEO). The company’s Israeli employees will then be considered as employees of the PEO, and not as the company’s own direct employees.
The second option saves the costs of setting up a foreign company or agency, but its main drawback is problems with transparency and additional costs, due to the company’s inability to directly monitor the various administrative procedures. Of course, each of the options raises different legal issues, which are important to consider when choosing the best option for you.
International Employment Contract – Contact a Labor Lawyer
In this article we have explained about the various options available for foreign employers who wish to create an international employment contract. For questions and specific issues on the subject, a labor lawyer from our law firm will be happy to assist you. The firm provides legal advice and assistance to workplaces, employers, and employees on a wide range of issues.