United States: Legal Updates Regarding Israeli Law

Last Updated: August 22 2016
Article by Richard I. Scharlat

Employment Appeal 28597-03-11 Dabush Light – Jordanian Locks Holdings (2005) Limited. Decided on February 11, 2015.

Jordanian Locks transferred the ownership of its plant to another company. The employees continued to work at the factory under the new owner, which sent letters of dismissal to the Jordanian Locks employees informing them of their immediate termination as a result of the change of ownership.

Jordanian Locks paid its former employees severance pay for termination of their employment, but refused to compensate them for any additional notice period.

The National Labor Court ruled that the obligation to give employees prior notice before termination (or, alternatively, financial compensation in lieu of notice) is mandatory and applies even when the workplace continues to exist and a new employer is willing to hire the workers and to continue to employ them without a break in their employment. In other words, an employer that wishes to transfer the ownership of its business to another entity should notify employees in advance of this intention, and thus give the employees the choice as to whether to continue working with the new owner. An employer that does not do so will be required to compensate the employees for lack of prior notice.

The National Labor Court based its decision on two grounds:

The first argument

The Law of Notice of Dismissal and Resignation - 2001 states that "an employer that wishes to dismiss a worker will give him or her advance notice under this law." In other words, the provision regarding the duty of an employer to give the dismissed employee notice is a mandatory one that must be adhered to.

The second argument

"[T]he continued existence of the workplace" does not mean that the employees automatically give their advance consent to move to the new employer. Some employees may not be interested in continuing to be employed at the workplace under new owners. In such circumstances, if employees do not receive advance notice from their former employer (or money in lieu of notice), the purpose of the law, which is to enable the employee to prepare for the termination of his or her employment, is thwarted.

The National Labor Court also made clear that an employee's right to prior notice before termination of his or her employment does not depend on whether the employee continues to work at the same workplace after the termination.

Significant recent case law: As part of a claim by a contractor who was recognized retroactively as an employee, an employer may effect an offset or receive monies that were overpaid by the employer as a result of its failure to account for the difference between the employee's compensation as a contractor and the salary of an employee.

Employment Appeal 3575-10-11 Anat Amir - The Israel News Company Limited. Decided on January 21, 2015.

The appellant was engaged by the Israel News Company as an assistant stage manager for six years. The parties entered into an agreement which classified the appellant as providing independent services. The appellant's compensation for providing such services was a significantly higher amount than the salary that would have been due to her had she been classified as an "employee."

The question before the National Labor Court concerned whether the employer was entitled to an offset or a refund of monies that had been overpaid to any member of its staff that was initially classified as a contractor and then later was retroactively recognized as an employee.

The prevailing case law held that it was possible to effect an offset or refund of amounts that had been overpaid to a person who was retroactively recognized as an employee only where there was a substantial difference between the compensation paid to the person as a contractor and the salary that would have been paid had he or she been properly designated as an employee.

In the case in question, the National Labor Court overturned existing case law and stated that there is no need to demonstrate a substantial difference between the compensation as "a contractor" and salary as "an employee."

The National Labor Court also stated that the calculation of social benefits to which the newly classified "employee" would be entitled, should be based on the salary as "an employee."

The rate of offset or refund will be the difference between the cost of the alternative salary as an employee, together with social benefits on that salary, and the cost of the total compensation as a contractor.

If the difference in costs is in favor of the employee, he or she will be entitled to that difference. If the difference in costs is in favor of the employer; the employer may be entitled to that difference. The National Labor Court clarified that its ruling was valid in cases in which there had been a basis for the parties to assume that it was possible to enter into an independent contractor relationship, such as in cases where the employee determined the type of engagement. However, in cases where the employer knew that it was engaging someone as a contractor who should have been properly classified as an "employee," the social benefits to which the employee will be entitled will be calculated on the basis of his or her compensation as contractor.

Co-authored by Richard Scharlat (Partner, Dentons New York) and by the following lawyers with the Israeli firm of Fischer Behar Chen Well Orion & Co.: Ron Sitton (Partner), Shay Teken (Partner), and Moran Friedman (Associate). Fischer Behar Chen Well Orion & Co. is one of Israel's premier full-service law firms and offers its clients professional excellence and personal attention across the spectrum of multidisciplinary business legal services. Richard Scharlat is not admitted to practice law in Israel and does not practice law in Israel.

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