Who ordered §14 and didn’t get it? or: Why did my company’s value drop in the DD?
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Who ordered §14 and didn’t get it? or: Why did my company’s value drop in the DD?

July 20, 2024
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Almost any Israeli employer or employee is familiar with "Section 14" and employers usually ensure that employees sign an agreement to "Section 14" - a signature which since 2008 is redundant - but in practice, in many cases the conduct is not duly made and not only do conflicts arise when employees retire but when a company is sold, as part of the due diligence process, the budgetary "holes" are revealed and cause a significant decrease in value for the company.

In the past, when an employee was terminated, the employer had to pay severance pay as a multiple of the last salary multiplied by the number of years of work, and the employee was not entitled to this if he resigned. While this prevented employees from resigning (and therefore sometimes employees would behave in a manner that would lead to their termination), the employer was required to pay out of pocket a large sum at once and in many cases the employees had no one to cash from. To prevent this, commencing 2008, the arrangement in Section 14 of the Severance Compensation Law (optional until such time) was applied to all employees in Israel, and generally requires pension provisions and monthly severance compensation deposits by the employer, and sets that an employee is entitled to the deposited amounts upon termination, whether he resigned or was terminated. The Labor Courts made it clear that even if the salary has increased over the years, the employer is not required to complete the amounts to the level of the last salary and the employee is only entitled to the deposited funds.

The issue becomes complex when the employer did not duly make the full contributions from commencement of employment - either because the employee started working before 2008 (when the mechanism was applied to all employees), or failed to duly make monthly deposits based on the full salary (e.g. when the employer ignores setting aside amount for any fixed salary component, including a fixed right to commissions, bonuses, or other fixed payments), or if the employer set aside only 6% for severance pay (instead of the required 8.33%, when the law requires, for some reason, payment of only 6% - a puzzling mechanism that prevents the certainty that the law is intended to produce for both parties). In such cases, the employer will be required to pay the employee a supplement upon termination of employment based on the last salary. Thus, for example, in a case discussed at the Tel Aviv Labor Court in July, 2024, an employer did not deposit continuously and not based on the full components of the salary and was therefore required to complete the compensation according to the salary of the last month of employment. In another case, which was discussed at the National Labor Court in November, 2017, an employee commenced working before 2008. The Court found that it is necessary to check what is the product of the last salary multiplied by the number of years, subtract from this the amount that exists in the fund (including profits accumulated over the years) and the employer is required to pay the difference.

It is important to note that the issues raised go beyond the field of Labor Law and ultimately affect the value of the company. In a merger or acquisition of a company, these issues come up in the due diligence of the company and in many cases affect the value of the company. In that case, the employer may be required to pay huge sums at once to cover the exposure to the employees or the value of the company would decrease by at least this amount. Be that as it may, it is very important to be regularly accompanied by a lawyer with expertise in the field, in order to understand which salary components are required for a regular provision each month to the funds, and how to treat employees for whom the provision was not made, and thereby avoid exposure in the future.