ISRAEL: DISTINGUISHING BETWEEN INDEPENDENT CONTRACTORS AND EMPLOYEES IN ISRAEL – AND WHY IT MATTERS
In Israel, employees are entitled to rights under Israeli law, such as sick leave, severance pay, pension and other employee benefits. Some unscrupulous employers may want to “contract” their employees, as independent contractors, to avoid the necessity of paying employee benefits and would try to circumvent statutory obligations entitled to employees.
While other, well-intentioned employers may mistakenly classify an employee as an independent contractor. However, under Israeli labor law, the Labor Court may still seek, as a matter of policy, to apply rules on recognizing employment relationships on the retrospective calculation of the rights of “independent contractors” as employees, when cases involving claims of the existence of an employee-employer relationship arise.
An independent contractor may be deemed to be a full-time employee by the Labor Court if one or more of the following tests are proven:
- The “contractor” spends an extended period working with the same employer.
- Exclusively or near-exclusively “contracting” with the same employer.
- Routinely present and involved in company business to the same extent a full-time employee would be.
- Is vital to the functioning of the division in which he/she works.
- Is directly and constantly supervised by the employer.
- Is dependent on the employer for the means to keep working (tools, expenses).
- Has no sub-contractors or replacements in his/her position.
In a recent precedential ruling, the National Labor Court set new principles and rules for categorizing the nature of the relationship between the parties in cases where a court deems an independent contractor an employee. Here, The Labor Court is sending out a strong message to employers, who are employing or wants to contract employees, under the guise of independent contractors. Now, more than ever, it is crucial for employers to make sure that they correctly classify their employees as actual employees, and contracts with independent contractors truly reflect the requirements as prescribed by the Labor Court and Labor law.
The Labor court sets out the following further requirements that have to be met in classifying a party as an independent contractor:
- The initiative to enter into a contract with an independent contractor should come from the contractor instead from the beneficiary of the service.
- The compensation paid to the independent contractor must be significantly higher than the salary paid to regular employees.
- The contractual structure between the parties must meet specific requirements set by the National Labor Court’s jurisprudence.
The risk for employers in incorrectly classifying employees as independent contractors is that a party may file a suit to the Labor Court to recognise the existence of an employment relationship. If the Labor Court concludes that an independent contractor was, in effect, an employee for the employer, the court will calculate outstanding employee benefits. In conclusion of such a calculation, the employee may receive monetary and non-monetary remedies. The calculation of remedies is made in two phases:
The first phase: Monetary Remedy
A calculation is made of the difference between rights that would have been paid to the employee, where he or she initially would have been recognised as an employee, and the compensation that was actually paid as an independent contractor. If the employer succeeds in proving the alternative salary the independent contractor would have been entitled to as an employee, any difference between employment cost (i.e., salary plus social benefits) and the compensation paid as an independent contractor, can be deducted.
To the extent the employee fails to prove an alternative salary, the rights will be calculated based on the compensation paid to the independent contractor. Therefore, it is advisable to include in contracts with independent contractors an alternative calculus if the independent contractor files suit for recognition of employment relations and payment of salary and social rights.
1.11.2. The second phase: Non-Monetary Remedy
The court may grant additional compensation at its discretion according to the individual circumstances of each case. The presumption is non-monetary compensation should be imposed upon the employer, and the employer must rebut this presumption. In granting such remedy, the court considers, inter alia, the level of each party’s good faith and the weight of the rights the employee did not receive because of the incorrect categorization (benefits the employer gave employees, employment security, advancement opportunities, etc.).
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