First, an extremely bare-bones overview. In Israel, from the end of their first year of employment, an employee who has either been fired from their job or who quits under certain circumstances is entitled to receive severance pay (pitzu’im פיצויים) equal to one month’s of the their final salary for each year of employment. From the employer’s point of view, this law can be something of a headache.
There are two reasons for this. First, benefits under the law are calculated according to the employee’s current salary and without reference to any previous rates. Second, the opportunity to receive additional cash on termination can sometimes encourage employees to act in such a way so as to ensure they get fired.
The mandatory pension law has reduced the issues somewhat, but not entirely, as you shall see below.
Clause 14 of the Severance Pay Law helps to mitigate these issues in two key ways.
- Requirement to calculate severance at the final salary. This is replaced with the obligation to make monthly deposits equal to 8.33% of the employee’s monthly salary into a pension fund as the “severance” element. Why 8.33%? 8.33% is equal to 1/12. Each month you deposit 1/12 of the employee’s monthly salary and by the end of the year you have, voila! 12/12, or one full month’s salary.
- Eligibility for full severance only if employee is terminated. The eligibility to severance payout is amended so that the employee is entitled to these funds, including any accrued interest on them, whether they are terminated or quit. The employer gives up rights to the money from day one.
No muss, no fuss.
Without this clause, employers may find themselves liable for additional payments as employees leave. Let’s take as an example an imaginary employee, Yossi. Yossi starts to work NIS 12,000 per year, stays at that rate for five years and then moves to a new position at a rate of NIS 20,000 year. During this time, his employer makes Mandatory Pension Law contributions based on Yossi’s salary. These include 6% towards severance pay. Per law, these mandatory contributions are treated like Clause 14 amounts. They don’t have to be trued up to the current salary rate and the employee has full rights to them. However, it’s 6% and not 8.33%.
Six months into his new role, Yossi is fired. He just sucks. At this point, the employer will need to “catch up” the missing 2.33% (8.33% – 6%) in contributions. This will be calculated at his final, higher salary. That works out about to roughly NIS 2,600 (20,000 monthly salary x 5.5 years x 2.33%). To compare, the additional cost of making 8.33% contributions all along works out to about 1,600. If the employer elected to make the absolute minimum contribution under the Mandatory Pension Law, that is, based on the monthly salary in the market (lower than Yossi’s salary), the true up would jump to approximately 4,000.
Applying Clause 14 requires that the employer and employee agree to the application of Clause 14, and the employee needs be provided with a copy of the regulation in which the terms of the Clause are detailed. You can see the text here. Both of these should be incorporated into your employment contract template.
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