On Bears, Loans and Employment

February 21, 2020
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An employee approches the employer and asks for a loan. The employer lends the money to the employee and they agree that every month the employee will repay the money as a deduction from the salary. Is the employee actually obligated to repay the money as a deduction from salary ? Under the Israeli Labor Laws, not always! The labor law aims to assists employees and protect their rights. An important and worthy goal, but sometimes the legislator’s paternalistic embrace becomes a “bear hug” (in Hebew the idiom means an act that means to embrace but in fact causes damage). This is the case, for example, when it comes to loans to employees.
The Israeli Salary Protection Act sets a closed list of things that may be deducted from an employee’s salary. Debt under a written undertaking from the employee to the employer may be deducted from the salary, provided that the deduction does not exceed a quarter of the monthly salary. Even if the employer defines the loan as an advance payment of future wages, the law only allows the deduction of up to three months salary and then no more than a quarter of the monthly salary may be deducted. In other words, even if the employer gave money to the employee, it is not certain that the employer may deduct such from the salary (and the main issue arises when the employer has no other source to finance the repayment). Upon termination of employment, the employer may deduct from the last salary the balance of the debt, but not always is there enough to deduct from (especially when severance pay is paid every month to an external fund owned by the employee). Note that the aforsaid relates only the debts to the employer itself. In a case discussed in the Tel Aviv Labor Court in December, 2019, an employee borrowed an amount a senior employee. When the employment terminated, this amount was deducted from the last salary, but the Court, and rightly so, made it clear that sums which the employee did not owe to the actual employer may not be deducted.
What happens if an employee does not return a propery of the employer? May this be deducted from the salary? In a case heard at the Tel Aviv Labor Court in November, 2019, an employee did not return a cellphone and computer to the employer and the employer deduct their value from her last salary. The Court held that the employer needs to file a claim against the employee and may not deduct the amount from the salary.
An employer mistake is also not one of the things that may be deducted from the salary. Thus, for example, if an employer mistakenly paid an employee beyond the amount due (for example, an employer transfers a higher amount because of a mistake in calculating the tax required to be withheld), it is not certain that the employer may deduct that from the next salary. Certainly, “fines” cannot be deducted for disciplinary or other “offenses”. For example, in a case discussed at the National Labor Court in June 2015, an employer overpaid an employee due to a mistake in the calculation of the amount requied to be withheld. Upon termination of employment the employer sought to set-off the overpaid amounts from the last paycheck but the Court held that each case should be examined on its merits by applying tests such as who contributed more to the mistake, how much each party relied on the mistake and how fair each party was to the other. In that case, because the mistake was on the part of the employer, the employer continued to overpay even after learning of the mistake and the employee relied on the funds erroneously paid to him, deduction may not be made and, in fact, the employer is not entitled to repayment of the amount at all.
Many employers who feel wronged by an employee’s behavior choose to act unilaterally and hurt the employee at the most sensitive place, the income. Undoubtedly this is also caused by frustration of honest employers from the labor law that in may cases work to the benefit of the employee on account of the employer in order to assist the employee (and without understanding that in fact the employee is hurt by the “assistance”). The meaning of this is that employers are hesitant because of this to assist employees that need urgent funding because of the apprehention that the funds may not later be set-off and the employees are the ones hurt by this. A classic “bear hug”…
In any case, it is important to remember that care should be taken when it comes to rights due to an employee and not to act recklessly and unilaterally. In any case that amounts are contemplated to be lent to employees or if one intends to deduct funds from an employee’s salary, for whatever reason, it is important to first consult attorneys with expertise in the field.