Israel fell into turmoil last month, amongst other reasons, due to a Supreme Court’s ruling regarding the deposit contributed by employers of foreign nationals working in Israel.This ruling is relevant and has significant implications on the future security of all Israeli employees’ pension savings. Had the Supreme Court not prevented the State from encroaching into these deposits, which are contributed for the benefit of foreign workers, the way to fully nationalizing the pension savings of each employee in Israel would have become extremely short.

Israeli labor and employment laws mandate a minimal threshold of rights for every employee: minimum wages, weekly rest hours, paid vacation, sick pay, severance pay and more. An employee’s agreement to deviate and accept lesser rights than those stipulated by law – has no validity. In this way, the State imposes a social paradigm of fair employment conditions and non-exploitation of employees, preventing a race to the bottom.

2008 marked an additional fundamental change to employee rights in Israel, the right to have one’s employer contribute (on a monthly basis) towards employees’ pension savings and termination severance pay. This addition anchored the recognition of a fundamental and basic principle, that a working person is entitled to a dignified living, spanning not only  the duration of his or her work-life, but also upon retirement. Prior to this legislative change, an employee was entirely dependent on being granted this right by his or her employer in an agreement. Naturally, some employees enjoyed stronger bargaining powers given their field of employment (such as those employed in the Hi-Tech sector) or by virtue of being members of a union that ensured more beneficial employment terms for its members.

By law, the funds contributed by employers to pension schemes are protected to ensure they provide for employees’ a livelihood following retirement. Under applicable law, the employers’ contributions towards severance pay “are non-refundable, non-transferable, may not be hypothecated nor forfeited”; high rates of taxation were imposed on employers withdrawing these funds; and employers who seek to deny an employee his or her severance pay must file a legal claim within 4 months of termination of employment and prove, why the employee is not entitled to severance pay. Labor courts repeatedly ruled that the denial of severance pay from employees is an extreme form of punishment limited for the most severe and rare transgressions, since “termination of employment is in and of itself a punishment”, and there is no justification to exacerbate the punishment by denying the funds intended to serve the employee and his or her family during unemployment periods. The employers’ contribution towards employees’ provident funds (pension) may not be denied under any circumstances, regardless of how the employment relationship ended. Recently, the State of Israel added an extra layer of protection to employees’ pension, mandating, through regulations, that the first layer of pension savings must be through a pension fund vehicle, rather than under a mangers insurance scheme.

A foreign worker is also entitled to contributions by his or her employer towards pension savings and severance pay, however, for practical reasons, the law stipulates that these are deposited on behalf of the foreign worker in a bank deposit, rather than in a pension scheme. The right of the foreign worker is inferior by comparison to that of his or her Israeli Citizen counterpart since the foreign worker is only entitled to receive the deposited funds when leaving the country’s borders. In this way, these contributions on account of pension savings and severance pay designed to protect the future livelihood of the worker, are being used to enforce Israel’s immigration laws. The Supreme Court ruling did not strike out this mechanism. A foreign worker will still receive the deposited funds only after exiting Israel.

What the Supreme Court did strike out (in a qualified manner and permitting the State to legislate otherwise), is the provision by which a delay in exiting Israel upon expiration of the foreign worker’s work permit, will gradually cause the de facto “nationalization” of the funds, reaching a full forfeiture of the funds, for the benefit of the State, in case the worker’s delay in leaving the country exceeds 6 months.

In a majority ruling, the Supreme Court, made clear that the social benefits of the foreign worker, which come in lieu of an employer’s contribution towards pension and severance pay, are the property of the worker, and therefore the State’s ability to encroach on these funds is limited (there is no absolute prohibition on encroachment, but the specific provision is too extreme).

To quote Thomas Jefferson, “the measure of society is how it treats the weakest members”. This is a moral principle, yet it goes beyond the mere boundaries of morality. For those out there that rushed to announce the ruling as too far-reaching and expanding the court’s limits, we suggest considering their own pensions. If these funds, were not declared as the individual property of each employee, and are not protected against State acts, the next target by any government could be to allow encroachment on the money that each and every Israeli employee saved during their working years.

Authors: Adv. Miriam Kleinberger-Attar and Adv. Noa Bar-Shir

More from Erdinast, Ben Nathan, Toledano & Co