Why Foreign Companies Need a Legal Structure to Hire in Israel
If your company wants to hire someone in Israel — whether it’s a software engineer in Tel Aviv, a sales manager in Haifa, or a remote worker who just made aliyah — you face an immediate legal question: how do you do it compliantly?
Israeli labour law is strict, well-enforced, and applies to every employee working in Israel regardless of where their employer is based. A foreign company cannot simply pay an Israeli worker in USD via bank transfer and call it a day. That arrangement exposes the worker to gaps in social rights and exposes the company to penalties, back-payment claims, and reputational risk.
There are three legal ways to hire in Israel:
- Set up an Israeli subsidiary (Ltd. / Bv”M) — takes 3–6 months, costs ₪15,000–₪40,000 in setup fees, and creates ongoing accounting and tax obligations.
- Engage the worker as a self-employed contractor — legal only when the relationship genuinely meets the “substance over form” test. Israeli courts reclassify sham contractors as employees and impose back-pay claims.
- Use an Employer of Record (EOR) — the fastest, most compliant option for most foreign companies hiring 1–12 employees in Israel.
This guide walks through the step-by-step process for each path, with a focus on the EOR route that most international companies choose.
Step 1: Decide Which Legal Route Fits Your Situation
Before anything else, answer three questions:
- How many employees will you hire? — Up to ~8–12, EOR is almost always cheaper. Beyond that, a subsidiary may break even.
- How long will the arrangement last? — Short-term or uncertain? EOR gives you exit flexibility without long-term entity obligations.
- Does the worker function like an employee or a genuine independent professional? — If they work set hours, use your equipment, and have one client (you), they fail the Israeli contractor test. Use EOR.
See our full EOR vs. subsidiary cost-benefit analysis if you’re weighing both options.
Step 2: Choose an Israeli Employer of Record
If you’ve opted for the EOR route, your next step is selecting a provider. Key criteria:
- Owns its own Israeli entity — some global EOR platforms sub-contract to local partners, adding risk and response lag.
- Transparent pricing — EOR fees in Israel typically range from $500–$2,000/month per employee depending on the scope of services. Ask what’s included.
- Local compliance track record — Israeli labour law includes mandatory pension from month 6, Bituach Leumi (National Insurance) filings, annual Dmei Havraah (recuperation pay), and strict termination procedures. Your EOR must know all of these.
- English-language support — if your team is abroad, you need an EOR that communicates fluently in English, not just in Hebrew.
CWS Israel has operated as an Israel-based EOR since 2014, with compliance verified by PwC. We own our Israeli entity, speak English natively, and onboard new employees within 48 hours of receiving the signed service agreement.
Step 3: Sign the Client Service Agreement
Once you’ve selected an EOR, you’ll sign a Master Service Agreement (MSA) that defines:
- The scope of the employment relationship (the EOR is the legal employer; you manage the work)
- The monthly invoice structure (base salary + statutory on-costs + EOR fee)
- Liability allocation — the EOR handles employer obligations; you remain responsible for the employee’s day-to-day direction
- Termination terms — both for ending the employee’s contract and for exiting the EOR arrangement
Step 4: Draft a Compliant Employment Contract
The EOR issues the employment contract in the employee’s name, but the terms are agreed with you. Under Israeli law, employment contracts must include:
- Start date and position title
- Gross salary in NIS (or a contractually fixed FX rate if paying in foreign currency)
- Working hours (Israel’s standard is 42 hours/week, Sun–Thu)
- Pension fund details (mandatory from month 6, or from day 1 if the employee has prior coverage)
- Notice period (minimum 1 month for employees with over 1 year of service)
- Applicable collective agreements, if any
Step 5: Register with Israeli Authorities
Your EOR handles all of this on your behalf, but it’s useful to know what’s happening:
- Bituach Leumi (National Insurance Institute) — the EOR registers as the employer and files Form 102 monthly, covering both employee and employer contributions.
- Income tax (Mas Hachnasa) — the EOR withholds income tax at source via payroll and reports to the Israel Tax Authority.
- Pension fund — a mandatory pension policy is opened with an Israeli provident fund manager from month 6 of employment (or earlier if contractually agreed).
- Severance (Section 14 arrangement) — employer contributions of 8.33% of gross salary go into the employee’s pension to cover future severance obligations.
Step 6: Onboard the Employee
With CWS Israel as your EOR, onboarding typically takes 48 hours from signed MSA to employee’s first day. We handle:
- Employment contract signing
- Pension fund enrollment
- Bituach Leumi registration
- Payroll system setup
- Employee welcome communication
You manage the employee’s work, tools, and objectives. We handle the paperwork and the compliance.
Step 7: Ongoing Payroll and Compliance
Each month, the EOR:
- Processes payroll in NIS and transfers salary to the employee’s Israeli bank account
- Files Form 102 with Bituach Leumi by the 15th of the following month
- Remits income tax withholdings to the Tax Authority
- Manages pension contributions
- Tracks annual leave accrual, sick day balances, and overtime
- Issues monthly payslips (tlushot) in Hebrew, with an English summary
You receive a clean monthly invoice in USD (or the currency of your choice), with a full breakdown of salary, statutory costs, and EOR fees.
Annual Obligations to Budget For
Beyond monthly payroll, there are annual obligations that often surprise foreign employers:
- Dmei Havraah (recuperation pay) — ₪5,987 per year (2026 rate) for the first 5 years of service, paid annually between June and September.
- Annual leave increase — statutory leave accrues from 14 days in year 1 up to 28 days from year 7+ (under the Annual Leave Law 5711-1951).
- Salary adjustments — minimum wage in Israel is ₪5,880/month (2026), indexed periodically.
When to Consider Setting Up Your Own Entity Instead
The EOR model is cost-effective for most companies hiring 1–12 employees in Israel. Beyond that threshold, the monthly EOR management fees typically exceed the annualised overhead of running your own subsidiary. Our EOR vs. local entity calculator helps you find your exact breakeven point.
Ready to Hire in Israel Legally?
CWS Israel has been helping foreign companies hire in Israel compliantly since 2014. We handle the contracts, payroll, Bituach Leumi, pension, and all annual obligations — so you can focus on the work.
Learn more about our EOR services or contact us for a free consultation and employer cost estimate.
