Contracting in Israel for Foreign Residents

Contracting in Israel for foreign residents
Photocredit - Raz Chorev

Contracting in Israel for foreign residents, or hiring contractors to work in Israel, is a complicated matter. Like anything, there are pros and cons to contracting in Israel, versus working or employing people directly. We’ll try to cover the highlights:

Contracting In Israel  – Hiring Contractors

If you are a company or organization operating in Israel, you may need to hire or contract with local workers. First, let’s consider whether you need to hire local people as employees, or should local contractors or freelancers be a better option.

Our starting point would be to look at Employees Vs. Freelancer rights in Israel:

Employees have the right to sick leave, severance pay, pension and education funds and allowances, as well as other perks and benefits.

When looking at employing people on a full-time basis, for a prolonged period of time, it may be worth the investment, as the complexity of payroll will outweigh the benefits of having a dedicated team.

Alternatively, you may wish to avoid these complications and contract a freelance worker.

It’s important to note the distinction between hiring or employing a worker and contracting a freelancer. An employee represents a long-term, ongoing commitment from both sides.

A freelancer contractor is a service provider with no commitment (from either side) to continue the engagement beyond a predefined period or project.

In addition, the contractor, as a service provider, isn’t entitled to any employee benefits. Instead, their rate is higher, to compensate on the risk they are taking, and should cover their own business expenses (insurance, accounting, legal, marketing, etc…)

Though common usage refers to a freelance contractor being “hired,” they are in fact contracted. The matter is more than a pedantic triviality as a court may take note of the exact terms used in the contract or official documents.

Freelance Contractor or Employee?

A labour court may consider a freelance contractor to be an employee, assuming one or more of the following tests prove true:

  • the “contractor” spends an extended period of time working with the same employer, or
  • is exclusively or near-exclusively “contracting” with the same employer, or
  • is routinely present and involved in company business to the same extent a full-time employee would be, or
  • is vital to the functioning of the division in which he works, or
  • is directly and constantly supervised by the employer, or
  • is dependent on the employer for the means to keep working (tools, expenses), and
  • has no sub-contractors or replacements in his position.

If the contractor is determined to be an employee who was paid less in terms of overall benefits based on a contract that defines him as an independent contractor, the court may disregard the terms of the employment contract and force the employer to retroactively grant the employee all the financial benefits associated with the status of a full-time employee – vacation days, pension insurance, severance pay, etc.

On the other hand, the employer may claim that working as a freelance contractor, the employee received a higher pay than a regular employee in the same position and ask to deduct said extra funds from the overall financial benefits owed to the employee.

Payroll for Employees and Contractors

Having the above distinctions in mind, it’s vital to clarify the roles and commitments required before engaging an employee or a contractor. Once everyone is clear on the terms of engagement, CWS Israel will make the necessary arrangement with the local authorities in Israel to ensure compliance with Israel’s tax and employment regulations and requirements.

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