What Is Israeli Severance Pay (Pitzuim) and Why Does It Matter in 2026?

Israeli severance pay, known as Pitzuim (פיצויים), is a mandatory statutory benefit under the Severance Pay Law 5723-1963 that entitles most employees to one month’s salary per year of service upon dismissal. This right applies automatically from the completion of one full year of employment with the same employer — and it cannot be contractually waived. Unlike many Western countries where severance is discretionary or negotiated, in Israel it is a legal baseline with serious consequences for non-compliance.

For foreign companies employing people in Israel — whether directly, through a branch, or via an Employer of Record — understanding Pitzuim is not optional. As of 2026, the Israeli Labour Court continues to uphold employees’ severance rights vigorously, and cases of foreign employers caught off-guard by lump-sum severance liabilities at termination remain extremely common. The good news is that with the right structure in place from day one, Pitzuim liability can be managed entirely through monthly contributions and eliminated as a balance-sheet risk.

CWS Israel is a SIA (Staffing Industry Analysts) member and has managed severance obligations for Israeli employees on behalf of dozens of global companies over the past 12 years. Every employment contract we issue is structured from day one to comply fully with Israeli severance law — including the mandatory Section 14 arrangement described below.

Who Is Entitled to Severance Pay in Israel?

An employee in Israel becomes entitled to Pitzuim once they have completed one full year of employment with the same employer and are dismissed without a finding of gross misconduct. The entitlement is one month’s final salary for each year of service, calculated on a pro-rata basis for partial years beyond the first.

There are several important nuances that foreign employers often miss:

📄 Dismissal vs. Resignation: The general rule is that Pitzuim is owed upon dismissal, not voluntary resignation. However, the law specifies a number of circumstances in which a resigning employee retains severance rights — including resignation due to a serious deterioration in working conditions, relocation of the place of work, illness that prevents the employee from continuing in their role, pregnancy, or reaching retirement age. Foreign employers must treat these resignation scenarios with particular care.

💰 Part-time employees: Part-time employees are entitled to Pitzuim calculated on a pro-rata basis relative to their actual working hours compared to a full-time role. There is no minimum hours threshold — if the employment relationship exists for a year or more and ends in dismissal, the entitlement is triggered.

🛡️ Fixed-term contracts: An employee on a fixed-term contract who is not renewed at the end of their term is treated as having been dismissed — and is therefore entitled to Pitzuim if they have completed at least one year of employment. This is a common compliance failure for foreign companies that structure Israeli engagements as rolling fixed-term contracts.

💼 Gross misconduct threshold: An employer can be exempt from paying Pitzuim only where the employee’s conduct met a very high threshold of severity — typically involving deliberate fraud, theft, a fundamental breach of trust, or criminal conduct. Poor performance, a personality clash, or even a pattern of lateness does not meet this bar. The courts set and interpret this threshold strictly, and foreign employers who attempt to withhold Pitzuim for ordinary misconduct typically face adverse Labour Court rulings.

How to Calculate Israeli Severance Pay

The Pitzuim calculation is straightforward in principle: the employee’s final monthly gross salary multiplied by their total years of service (with partial years calculated pro-rata from the second year). The calculation always uses the final salary, not an average — which means salary increases in the final months of employment directly increase severance liability.

As of 2026, a standard Pitzuim calculation looks like this:

• Employee gross monthly salary: ₪20,000
• Years of service: 4 years and 6 months
• Pitzuim entitlement: ₪20,000 × 4.5 years = ₪90,000

Without the Section 14 arrangement in place, this ₪90,000 would be an immediate cash liability payable to the employee at termination, in addition to any notice pay and other statutory obligations. For a company with multiple Israeli employees on higher salaries and longer tenures, these unmanaged liabilities can reach hundreds of thousands of shekels — appearing as a sudden obligation on the balance sheet at the worst possible moment.

It is also critical to note that the calculation cannot be based on a salary figure below the current statutory minimum wage. As of 2026, the Israeli minimum wage is ₪5,571.75 per month — and Pitzuim must always be calculated on the actual gross salary if it exceeds this figure.

The Section 14 Arrangement: The Right Way to Manage Pitzuim from Day One

The Section 14 arrangement (named after Section 14 of the Severance Pay Law) is the mechanism by which employers discharge their entire Pitzuim liability through monthly pension fund contributions, eliminating any future lump-sum obligation. As of 2026, the vast majority of Israeli employment contracts — including every contract issued by CWS Israel — operate under Section 14.

Under Section 14, the employer contributes 8.33% of gross monthly salary into the employee’s pension fund as the severance component. This is paid alongside the standard employer pension contributions (6.5% of gross salary as of 2026), making the total mandatory employer pension contribution 14.83% of gross salary. When the employment ends — for any reason, including voluntary resignation — the accumulated balance in the pension fund belongs to the employee and discharges the employer’s full Pitzuim obligation.

Three conditions must be satisfied for Section 14 to be valid:

1. The employment contract must explicitly include a Section 14 arrangement clause, signed by both parties before employment begins.
2. Every monthly contribution must be made in full and on time, without exception, throughout the entire employment period.
3. The employer must not impose any conditions on the employee’s ability to access the fund upon termination.

If any of these conditions is breached — even once — the Section 14 arrangement is legally void. The employer then faces full Pitzuim liability calculated on the final salary and years of service, in addition to the pension fund balance already accumulated. This “double liability” scenario is precisely what CWS Israel’s EOR model prevents. Our PwC annual compliance review verifies that every contribution has been made correctly, every contract clause is properly worded, and no technical defects exist that could undermine the Section 14 arrangement.

Factor	With Section 14 (Correct Setup)	Without Section 14 / Defective Setup
Monthly cost to employer	8.33% of gross salary into pension fund	0 paid monthly — lump sum owed at termination
Termination liability	Zero — fully discharged by fund contributions	Full Pitzuim lump sum payable in cash
Resignation entitlement	Employee keeps fund regardless of resignation reason	Only in specific legally defined resignation circumstances
Balance sheet risk	None — liability fully provisioned in pension fund	Accruing liability grows with salary increases
Missing a contribution	Must be corrected immediately — voids arrangement if not	N/A — but compounds lump-sum liability
Recommended for foreign employers	✅ Yes — mandatory in every CWS Israel contract	❌ No — significant legal and financial risk

The Shimua Hearing: A Mandatory Step Before Any Dismissal in Israel

Before serving notice of dismissal — for any reason, including gross misconduct — an Israeli employer is legally required to conduct a Shimua (שימוע) hearing. A Shimua is a formal pre-termination hearing in which the employer presents the grounds for dismissal to the employee, and the employee is given a genuine, documented opportunity to respond before any decision is finalised.

The Shimua requirement is not a procedural formality that can be waived. It is a substantive legal obligation enforced by the Israeli National Labour Court. Employers who dismiss an employee without conducting a proper Shimua — even where the substantive grounds for dismissal are entirely valid — expose themselves to awards of additional compensation from the Labour Court, typically ranging from one to six months’ salary, on top of any Pitzuim owed.

A compliant Shimua process in 2026 includes the following steps:

1. Written advance notice: The employee receives written notice of the hearing date, the grounds being considered, and their right to bring a representative.
2. A meaningful interval: Typically 48–72 hours between the notice and the hearing, giving the employee time to prepare their response.
3. The hearing itself: Conducted in a language the employee understands, with all points recorded in writing. CWS Israel conducts Shimua hearings in English for our clients’ Israeli employees.
4. A documented decision: The employer must genuinely consider the employee’s response before issuing a final dismissal notice. A Shimua that is conducted as a formality — where the decision has already been made — can be challenged as invalid.

CWS Israel as the legal employer of record conducts every Shimua hearing on behalf of our clients, in English, and maintains compliant documentation. This removes one of the most significant procedural risks foreign employers face when terminating Israeli employees.

Total Employer Cost: Severance in the Context of Israeli On-Costs

Pitzuim is one of several mandatory on-costs that foreign employers must account for when budgeting for Israeli headcount. The full picture of statutory employer contributions in Israel as of 2026 includes:

• 💰 Pension — employer contribution: 6.5% of gross salary (mandatory from month 6 of employment)
• 💰 Severance (Section 14) — employer contribution: 8.33% of gross salary
• 💰 Bituach Leumi (National Insurance) — employer share: 3.55%–7.6% of gross salary depending on salary bracket (as of 2026)
• 💰 Disability insurance (Ochden): 2.5% of gross salary
• 💰 Dmei Havraah (annual recovery pay): ₪5,900+ per year (2026 rate, varies by sector)
• 💰 Keren Hishtalmut (professional development fund): 7.5% employer / 2.5% employee (not legally mandatory for all employees but effectively standard in the high-tech sector)

In total, the employer cost of an Israeli employee typically runs 25%–35% above gross salary when all statutory contributions are included — a figure that frequently surprises foreign companies budgeting solely on the salary figure. CWS Israel’s Employer Cost Calculator provides a full real-time breakdown for any salary level, including all statutory on-costs, so you can budget accurately before making your hiring decision.

For a comprehensive overview of all Israeli employer statutory obligations, see our Employer of Record Services page or our Israeli Employment Law for Foreign Companies guide.

Common Mistakes Foreign Employers Make with Israeli Severance Pay

Over 12 years supporting global companies with Israeli employees, CWS Israel has observed a consistent set of mistakes that expose foreign employers to significant Pitzuim liability. The five most common are:

1. Not including a Section 14 clause from day one. This is the most expensive mistake. Without the clause in the original employment contract, the employer cannot retroactively apply Section 14 protections — meaning the entire employment period generates uncapped lump-sum liability.

2. Missing monthly pension contributions. Even a single missed monthly contribution can void the Section 14 arrangement. Foreign employers managing Israeli payroll manually or through a global payroll provider without specialist Israeli expertise frequently miss contributions during transitions, system migrations, or leave periods.

3. Misclassifying employees as independent contractors. The Israeli Labour Court applies a nine-factor test to determine employment status. When contractors are reclassified as employees — which happens routinely — the employer owes Pitzuim for the entire period of the engagement, typically as a lump sum with no Section 14 protection in place. Read our guide on Contractor vs Employee classification in Israel for full details.

4. Withholding Pitzuim for ordinary misconduct. As noted above, the bar for forfeiting Pitzuim is extremely high. Employers who withhold severance for performance issues, minor disciplinary matters, or attitude problems typically lose in the Labour Court and may face additional compensation awards on top of the Pitzuim owed.

5. Failing to conduct a proper Shimua. Even where the termination is entirely justified, skipping or inadequately conducting the Shimua hearing can result in additional compensation awards that significantly increase the total cost of the separation.

How CWS Israel Manages Pitzuim on Your Behalf

As the legal employer of record for your Israeli team, CWS Israel assumes full responsibility for Pitzuim compliance from the moment your employee is onboarded. Our EOR service includes every element of severance management:

Every employment contract issued by CWS Israel includes a correctly drafted Section 14 clause. Monthly severance contributions of 8.33% of gross salary are transferred to each employee’s pension fund without exception on the 15th of the following month — the legal deadline. Our PwC annual compliance review verifies the accuracy and completeness of every contribution. When a termination is required, CWS Israel conducts the Shimua hearing on your behalf, manages the notice period, and calculates and confirms the final severance position — all in English. Our multilingual team (English, Hebrew, Russian, Arabic) handles any communication with the employee or their representative.

CWS Israel’s EOR pricing covers all of this as standard — there are no surprise termination fees or severance management surcharges. Companies are typically onboarded within 48 hours of contract signature.

Frequently Asked Questions

What is the Pitzuim rate in Israel in 2026?

The statutory Pitzuim rate in Israel is one month’s final gross salary per year of service, calculated pro-rata from the second year. Under the Section 14 arrangement, which is standard in all CWS Israel contracts, employers contribute 8.33% of gross salary monthly into the employee’s pension fund to discharge this obligation progressively. This rate has remained unchanged under the Severance Pay Law since its amendment to reflect Section 14.

Is an employee entitled to severance if they resign in Israel?

Generally, Pitzuim is owed upon dismissal and not upon voluntary resignation. However, the Israeli Severance Pay Law specifies several circumstances where a resigning employee retains their severance rights — including resignation due to serious deterioration of working conditions, workplace relocation making the commute unreasonable, health reasons preventing continuation, pregnancy-related reasons, or reaching pension age. Under a properly implemented Section 14 arrangement, the accumulated pension fund balance belongs to the employee on departure regardless of whether they resigned or were dismissed.

Can I withhold severance pay if an Israeli employee committed misconduct?

Only in very limited circumstances. Israeli law permits an employer to forfeit Pitzuim when the employee’s conduct meets an extremely high threshold — typically deliberate theft, fraud, or a fundamental breach of trust. Poor performance, persistent lateness, attitude problems, or even a significant disciplinary incident usually does not meet this threshold. Employers who withhold Pitzuim for ordinary misconduct typically face adverse Labour Court rulings. CWS Israel strongly recommends seeking legal advice before withholding any severance payment.

What happens if I miss a monthly severance contribution under Section 14?

Missing even a single monthly contribution of 8.33% can legally void the Section 14 arrangement in its entirety. If the arrangement is voided, the employer owes the full Pitzuim lump sum (one month’s final salary per year of service) in addition to the pension fund balance already accumulated — creating a significant unexpected liability. CWS Israel’s payroll processes ensure contributions are transferred by the 15th of each month without exception, and our PwC annual compliance review confirms no gaps have occurred.

Do I need to conduct a Shimua before dismissing an Israeli employee?

Yes — a Shimua (pre-dismissal hearing) is a mandatory legal requirement before any termination in Israel, regardless of the reason for dismissal. The employee must be given advance written notice of the hearing, the specific grounds being considered, and sufficient time to prepare their response. Failure to conduct a proper Shimua can result in the Labour Court awarding additional compensation to the employee — typically one to six months’ salary — even if the grounds for dismissal were otherwise valid. CWS Israel conducts Shimua hearings in English on behalf of our EOR clients.

How does an Employer of Record handle Israeli severance pay?

When you use an Employer of Record like CWS Israel, we become the legal employer of your Israeli team members and assume full legal responsibility for Pitzuim compliance. We include a correctly drafted Section 14 clause in every employment contract, make monthly severance contributions of 8.33% without exception, and manage the entire termination process — including the Shimua hearing — on your behalf. This eliminates severance-related compliance risk entirely for the client company. Learn more on our EOR services page.

Is Israeli severance pay the same as pension contributions?

They are separate obligations that are paid into the same pension fund vehicle. The employer pension contribution (6.5% of gross salary as of 2026) provides the employee with retirement savings and disability and life insurance coverage. The severance component (8.33% of gross salary under Section 14) is legally distinct — it discharges the employer’s Pitzuim obligation. Both are paid monthly, both appear on the Israeli payslip, and both go into the employee’s chosen pension fund (Keren Pensia), but they have different legal bases and serve different purposes.