The rules on severance pay in detail

By law, as a general rule, an employee who is dismissed after completing at least one year of service is entitled to statutory severance pay. This is calculated based on the employee’s monthly base salary multiplied by the number of years of service (pro-rated when applicable). Additional contractual payments may be considered to be part of an employee’s salary for the purpose of severance pay. The determining factor is whether the payment is conditional in nature. If the payment is preconditioned upon the occurrence of a particular event (e.g. in the case of a bonus), the payment would usually be treated as a salary increment, rather than a salary component and therefore would not be taken into account when calculating severance pay.

In Israel it is very common - and usually mandatory - for an employer to put in place a managers’ insurance policy or a pension fund (‘pension arrangement’) for its employees. The employer’s payments to the Pension Arrangement are often partially on account of or in lieu of statutory severance pay (the ‘severance fund’). Upon termination, the employer must transfer the pension arrangement to the employee. To the extent that payments to the severance fund were made on account of severance pay, the employer must pay the employee the amount of any shortfall between the amounts accrued in the severance fund for the employee and the amount of the statutory severance pay to which the employee is entitled by law.

Alternatively, the parties may choose to adopt a so-called ‘Section 14 arrangement’. This arrangement provides that the amount accumulated in the severance component can be paid in full satisfaction of the employer's statutory severance pay obligation. This means that, at the time of termination, the employer need only release the amount accrued in the severance component, subject to compliance with required conditions. A Section 14 arrangement also provides that the accrued amounts of the severance component will usually be released to the employee however the employment relationship ends, including resignation, which generally would not entitle an employee to severance pay. 

Employees are not entitled to any additional payments, unless a binding legal source such as a collective agreement that stipulates additional payments applies.

Note that employers sometimes also provide contractual redundancy pay schemes that offer payments that are more generous than the statutory ones.

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Author: Herzog Fox & Neeman

Date: December 2019