How to comply with local employment laws in a world with no boundaries?

Foreign companies employing Israeli workers should consider establishing a local entity or branch to ensure clear legal compliance

Netta Bromberg 09:1813.10.20
As a result of Covid-19, in recent months, many employers have closed their offices and required their employees to work from home, sometimes indefinitely. Employers and employees alike have learned that people no longer need to be present at an office to get work done.


Work is now being performed almost solely from home, and since a home can be anywhere, work is conducted without geographical boundaries. As a result, the question of where the employer's offices are located becomes irrelevant on both the local and global levels.


Netta Bromberg. Photo: Nimrod Glickman Netta Bromberg. Photo: Nimrod Glickman



This has created another unique situation. Israelis who relocated to countries around the world are now either requesting to return to Israel to be close to their family or being asked by their companies to return home in order to save costs. For a company that already has an Israeli connection, such a scenario presents few problems. The question is how can this work for an Israeli employed by an international company with no connection to Israel. and what are the legal requirements in such a situation?


A basic rule is that there is no impediment to employing an Israeli in Israel through a foreign legal entity. At the same time, such employment has legal consequences and exposures. These consequences lead to the conclusion that it is often advisable for a company to consider the establishment of a local entity or at least a local branch in Israel.


If the employer does not establish a local branch or legal entity, and the employee continues to be employed by a foreign entity, the parties must determine what law will apply to their relationship, especially in case of a future legal dispute. This determination must be clear and agreed upon and must apply to all the terms of the employment agreement and its appendices. It is also important to remember that the primary test for determining the employee's working conditions under Israeli law is the test of maximum affiliation. Therefore, if the work is performed in Israel for the Israeli market, if the employee resides in Israel, and if the employer is an Israeli corporation, it is likely that working conditions will be determined by Israeli law. Hence a clear stipulation in the employment agreement between the parties is particularly important.


Beyond that, it is essential to remember that Israeli workers' employment conditions are subject to relatively strict regulatory requirements. The working conditions of a person employed in Israel under Israeli law cannot be less than those outlined in Israeli labor legislation. For example, the employee's salary cannot be lower than the minimum wage in Israel, nor can the employee's right to vacation days, sick days, and convalescence benefits, which are not always paid or calculated in other countries in a manner consistent with Israeli law. It is also important to remember that an employee in Israel is entitled to pension insurance. This entitlement is based on the period of time spent working for the employer and the existence of a previous pension plan. In the absence of a local legal entity, it is vital to find a suitable and appropriate alternative for the employee's entitlement to pension insurance and severance pay. Due to the chance your employees' working conditions will be determined by Israeli law, it is important to stipulate conditions that do not fall short of those applicable under Israeli law.


Another issue that needs to be managed is the question of the continuity of the employee's rights. If a new legal entity is established, continuity in the employee's working conditions from the previous place of employment to the new place of employment should be clarified, especially if there is a geographical and legal disconnect from the previous employer.


Another option for a contract between the parties is that of a service agreement. At the same time, keep in mind that despite the parties’ determination of the contract type, in cases where the question of the classification of the parties' relationship reaches the Israeli labor courts, the courts will examine the nature of the contract and not its technical definition. Therefore, in such an agreement, it is important to determine in advance various provisions related to compensation, tax liability, and social security contributions. Likewise, the contract should include a provision, in accordance with Israeli case law, including offset alternatives if the service provider later claims there was an employee-employer relationship between the parties.


Additionally, if the employee is employed by a foreign legal entity, they must pay social security contributions and deduct and withhold tax for work in Israel. Under these terms, the employee’s status is closer to that of someone who is self-employed than an employee. Of course, this is something the employer and employee must consider when determining the worker's employment conditions. In some cases, the employee's occupation can also affect how Israeli authorities classify the relationship.


The examples listed here include different types of exposure for foreign entities. When considering the contract between a foreign employer and a worker in Israel, it is essential to take into account all of these exposures. Of course, if the foreign company employs more than one employee in Israel or develops its products and manufactures them in Israel, it is crucial to reexamine the contract type. In these circumstances, the conclusion favors establishing a local legal entity (or branch) that directly employs the workers.


Netta Bromberg is the head of the Employment Department at Barnea Jaffa Lande