Israel

Contractor Classification in Israel

Businesses hiring in Israel should understand the legal distinction between independent contractors and employees. Businesses hiring independent contractors under the guise of employment risk facing fines in addition to restitution of employee benefits that were supposed to be paid. In Israel, several important aspects must be considered by both companies and contractors before establishing a relationship. It’s crucial to work with a partner like Worksuite when engaging contractors abroad to establish a compliant and legal hiring framework.

There are two distinct legal statuses that govern the relationship between a hiring organization and its employees (מָעֳסָק, mo’osak) or independent contractors (עצמעי, atzmai). A standard employment contract (הסקהם עבודה יסהי, hskhm ebudh ishi), a well-demonstrated presence of subordination among other specific contractual obligations, indicates the traditional relationship between an employer and an employee. An independent contractor agreement, also called a commercial agreement, indicates a freelance engagement whereby an independent contractor agrees to provide a defined piece of work for a set amount of money.

Israeli independent contractors are highly valued among businesses across the globe thanks to their motivation, expertise, and proficiency in English. Israel also has one of the largest numbers of startups in the world.

Israeli labor and civil laws are constantly subject to revision and policy changes. In addition, the country’s legislation defines very specific taxation rates and procedures for independent contractors. It is important to work with a partner like Worksuite to ensure that you have an engagement framework that properly classifies freelancers able to work as independent contractors.

Employment Laws

In Israel, employment relations are regulated by various national legal acts, collective bargaining agreements, and local labor courts. The following legal acts are primary when determining the nature of employment relationship:

There are two types of work modes in Israel:

Full-time (משרה מלאה, mshrh mlh)
Part-time (מסהרה קהלקיס, mshrh khlkis)

Two types of employment contracts can be concluded:

Open-ended (בִּלְתִּי מֻגְבָּל, פָּתוּחַ, bִlְtִy mֻgְbָl, pָsukhַ)
Fixed-term (חוזה עבודה לתקופה קצובה, khuzh ebudh lskufh ktsubh)

Collective bargaining agreements (CBAs) may apply.

Employment contracts can be concluded verbally for workers with Israeli citizenship. Written contracts are required for foreign professionals. In addition, a written notice explaining the terms and conditions of the employment must be provided shortly after the employment start date.

An employment agreement must be concluded in a language spoken both by the employer and the worker.

Independent contractors can render services as:

Sole traders whose services are not subject to VAT (עוסק פטור, osek patur)
Sole traders whose services are subject to VAT (עוסק מורשה, osek morshe)

Independent contractor engagements are not regulated by any specific legal acts. Instead, they are covered by specific provisions of the contract and rulings formulated by labor courts.

Hiring Practice

Candidates are recruited externally through advertising and job boards. An applicant must submit their CV to the employer.

Selected applicants receive an offer letter, and a written contract, if concluded, must be provided upon the start of employment. In Israel, any employment contract that does not specify the duration of the agreement is considered to be open-ended by default.

The following aspects must be collected and included in the contract or notice, in addition to special clauses, if applicable:

Names of the employer and employee; employee’s family members
List of duties
Duration of the contract for fixed-term agreements
Name of the direct supervisor
Information on CBAs
Salary and payment frequency
Working hours
Social benefits
Pension fund details
Employee’s bank account

Employers reserve the right to perform background checks during the hiring process.

The probation period must not exceed 3 months.

Through professional employer organizations or directly.

Contractors can be hired directly or via a third party, such as a staffing agency. Contractors may be found via word-of-mouth, job boards, social networks, industry bodies, or other forums. Although hiring practices vary, the contractor may be asked to provide a CV, portfolio, and references and possibly sign an NDA.

An independent contractor agreement must clearly stipulate that the freelancer is free to organize their work and his/her working time for an agreement to be considered valid and not regarded as an employment contract. Apart from that, an independent contractor agreement contains the same details pertaining to the nature of the assignment. The following aspects must be stipulated:

Pay rates and arrangements
Scope of services
Contract duration
Termination terms

There is no limitation on the use of independent contractors and they are allowed to be employees of the company at the same time.

Tax Documents

The tax year runs from 1 January to 31 December.

Employers withhold taxes on the payment of salaries.

Companies are obliged to pay for mandatory health and pension insurance, make annual severance and National Insurance Fund contributions, as well as withhold personal income tax (מס הכנסה, mas hachnasa) in addition to other corporate taxes, such as the overall VAT מע’מ, ma’am).

Independent contractors must pay:

Personal income tax – 10-50%
National Insurance Fund – 2.87% (on the first ILS 6,331 (EUR 1700) earned per month); 12.83% on the part of the income between ILS 6,331 and ILS 45,075 (EUR 12,300)
Health insurance – 3.1% on the first ILS 6,331 earned per month; 5% on the part of the income between ILS 6,331 and ILS 45,075
VAT – 17%

Payer's Tax Withholding & Reporting Requirements

Employers must withhold the following deductions for each employee:

National Insurance Fund (המוסד לביטוח לאומי, HaMossad LeVituach Leumi) – 3.55% (on the first ILS 6,331 (EUR 1700) earned by employee per month) and 7.6% (on the part of the income between ILS 6,331 and ILS 45,075 (EUR 12,300)); 0.59-2.65% for non-residents
Pension – 6.5%
Disability (non-mandatory) – 2.50%
Severance Pay Fund – 8.33%
Health insurance – 3.1% (on the first ILS 6,331 earned by employee per month) and 5% (on the part of the income between ILS 6,331 and ILS 45,075))
Personal income tax – 10-50%

Contractors declare their expected income and pay monthly contributions to the National Insurance Fund, as well as VAT (if applicable)

Payer’s Withholding / Reporting Requirements for Independent Contractors:

N/A

Remuneration

Employers are expected to pay their staff via automatic payroll deposits to their bank accounts in Israeli shekels.

There is no obligation to pay independent contractors monthly. Employers are responsible for providing consistent compensation. There are no standard payment terms. Remuneration frequency is to be agreed upon between the contractor and the employer. Payments become due after the contractor issues an invoice. Currencies other than the Israeli shekel are allowed.

Workers’ Rights

In Israel, employees enjoy the following rights:

Paid annual leave – 14-20 days depending on the length of the employment
Sick leave – 90 days; 1.5 days per month. The first day is unpaid, days two and three are paid at a rate of 50%. From the fourth day onwards – 100%
Maternity leave – 15 weeks during the first year of employment, 26 weeks after
Paternity leave – 5 days; parents are also allowed to split maternity leave
Bereavement leave – 7 days
Premium payment rate for overtime work – 125% for the first two hours and 50% for any hour thereafter
Termination notice – based on the duration of employment, from 1 day to 1 month
Severance pay – one month’s salary for each year of service; available after the first year of employment

Independent contractors are not entitled to any employee rights unless otherwise stipulated in the contract.

Benefits

All employees must have health and pension insurance, which the employer is required to pay for. Insurance contributions are deducted from employees’ salaries and are paid by employers. Employees may be granted additional internal benefits not otherwise governed by labor laws. The majority of employers provide disability insurance, although it is not mandatory.

Health and pension benefits are granted by the state.

There is no protection from a sudden termination of the contract.

Third-party benefits granted by professional employer organizations may apply when an independent contractor is hired through such an organization (i.e. umbrella company) and is considered its employee.

When Paid

Monthly, usually on the last day of the month.

Typical contractor invoices are issued monthly on net 30-day terms. Each invoice usually includes the following details:

Invoice number and date
The client’s name and address
The contractor’s bank details
Agreed payment terms and due date

Employment Laws

In Israel, employment relations are regulated by various national legal acts, collective bargaining agreements, and local labor courts. The following legal acts are primary when determining the nature of employment relationship:

There are two types of work modes in Israel:

Full-time (משרה מלאה, mshrh mlh)
Part-time (מסהרה קהלקיס, mshrh khlkis)

Two types of employment contracts can be concluded:

Open-ended (בִּלְתִּי מֻגְבָּל, פָּתוּחַ, bִlְtִy mֻgְbָl, pָsukhַ)
Fixed-term (חוזה עבודה לתקופה קצובה, khuzh ebudh lskufh ktsubh)

Collective bargaining agreements (CBAs) may apply.

Employment contracts can be concluded verbally for workers with Israeli citizenship. Written contracts are required for foreign professionals. In addition, a written notice explaining the terms and conditions of the employment must be provided shortly after the employment start date.

An employment agreement must be concluded in a language spoken both by the employer and the worker.

Hiring Practice

Candidates are recruited externally through advertising and job boards. An applicant must submit their CV to the employer.

Selected applicants receive an offer letter, and a written contract, if concluded, must be provided upon the start of employment. In Israel, any employment contract that does not specify the duration of the agreement is considered to be open-ended by default.

The following aspects must be collected and included in the contract or notice, in addition to special clauses, if applicable:

Names of the employer and employee; employee’s family members
List of duties
Duration of the contract for fixed-term agreements
Name of the direct supervisor
Information on CBAs
Salary and payment frequency
Working hours
Social benefits
Pension fund details
Employee’s bank account

Employers reserve the right to perform background checks during the hiring process.

The probation period must not exceed 3 months.

Tax Documents

The tax year runs from 1 January to 31 December.

Employers withhold taxes on the payment of salaries.

Companies are obliged to pay for mandatory health and pension insurance, make annual severance and National Insurance Fund contributions, as well as withhold personal income tax (מס הכנסה, mas hachnasa) in addition to other corporate taxes, such as the overall VAT מע’מ, ma’am).

Payer's Tax Withholding & Reporting Requirements

Employers must withhold the following deductions for each employee:

National Insurance Fund (המוסד לביטוח לאומי, HaMossad LeVituach Leumi) – 3.55% (on the first ILS 6,331 (EUR 1700) earned by employee per month) and 7.6% (on the part of the income between ILS 6,331 and ILS 45,075 (EUR 12,300)); 0.59-2.65% for non-residents
Pension – 6.5%
Disability (non-mandatory) – 2.50%
Severance Pay Fund – 8.33%
Health insurance – 3.1% (on the first ILS 6,331 earned by employee per month) and 5% (on the part of the income between ILS 6,331 and ILS 45,075))
Personal income tax – 10-50%

Remuneration

Employers are expected to pay their staff via automatic payroll deposits to their bank accounts in Israeli shekels.

Workers’ Rights

In Israel, employees enjoy the following rights:

Paid annual leave – 14-20 days depending on the length of the employment
Sick leave – 90 days; 1.5 days per month. The first day is unpaid, days two and three are paid at a rate of 50%. From the fourth day onwards – 100%
Maternity leave – 15 weeks during the first year of employment, 26 weeks after
Paternity leave – 5 days; parents are also allowed to split maternity leave
Bereavement leave – 7 days
Premium payment rate for overtime work – 125% for the first two hours and 50% for any hour thereafter
Termination notice – based on the duration of employment, from 1 day to 1 month
Severance pay – one month’s salary for each year of service; available after the first year of employment

Benefits

All employees must have health and pension insurance, which the employer is required to pay for. Insurance contributions are deducted from employees’ salaries and are paid by employers. Employees may be granted additional internal benefits not otherwise governed by labor laws. The majority of employers provide disability insurance, although it is not mandatory.

When Paid

Monthly, usually on the last day of the month.

Employment Laws

Independent contractors can render services as:

Sole traders whose services are not subject to VAT (עוסק פטור, osek patur)
Sole traders whose services are subject to VAT (עוסק מורשה, osek morshe)

Independent contractor engagements are not regulated by any specific legal acts. Instead, they are covered by specific provisions of the contract and rulings formulated by labor courts.

Hiring Practice

Through professional employer organizations or directly.

Contractors can be hired directly or via a third party, such as a staffing agency. Contractors may be found via word-of-mouth, job boards, social networks, industry bodies, or other forums. Although hiring practices vary, the contractor may be asked to provide a CV, portfolio, and references and possibly sign an NDA.

An independent contractor agreement must clearly stipulate that the freelancer is free to organize their work and his/her working time for an agreement to be considered valid and not regarded as an employment contract. Apart from that, an independent contractor agreement contains the same details pertaining to the nature of the assignment. The following aspects must be stipulated:

Pay rates and arrangements
Scope of services
Contract duration
Termination terms

There is no limitation on the use of independent contractors and they are allowed to be employees of the company at the same time.

Tax Documents

Independent contractors must pay:

Personal income tax – 10-50%
National Insurance Fund – 2.87% (on the first ILS 6,331 (EUR 1700) earned per month); 12.83% on the part of the income between ILS 6,331 and ILS 45,075 (EUR 12,300)
Health insurance – 3.1% on the first ILS 6,331 earned per month; 5% on the part of the income between ILS 6,331 and ILS 45,075
VAT – 17%

Payer's Tax Withholding & Reporting Requirements

Contractors declare their expected income and pay monthly contributions to the National Insurance Fund, as well as VAT (if applicable)

Payer’s Withholding / Reporting Requirements for Independent Contractors:

N/A

Remuneration

There is no obligation to pay independent contractors monthly. Employers are responsible for providing consistent compensation. There are no standard payment terms. Remuneration frequency is to be agreed upon between the contractor and the employer. Payments become due after the contractor issues an invoice. Currencies other than the Israeli shekel are allowed.

Workers’ Rights

Independent contractors are not entitled to any employee rights unless otherwise stipulated in the contract.

Benefits

Health and pension benefits are granted by the state.

There is no protection from a sudden termination of the contract.

Third-party benefits granted by professional employer organizations may apply when an independent contractor is hired through such an organization (i.e. umbrella company) and is considered its employee.

When Paid

Typical contractor invoices are issued monthly on net 30-day terms. Each invoice usually includes the following details:

Invoice number and date
The client’s name and address
The contractor’s bank details
Agreed payment terms and due date

Who classifies as an Independent Contractor in Israel?

Self-employment as an independent contractor is a popular income model for many individuals. The latest pandemic restrictions have prompted more and more Israeli professionals to work as self-employed independent contractors. Moreover, hiring independent contractors from Israel is currently a booming trend among tech giants from all over the world. More and more representatives of Israel’s highly-creative workforce choose to be their “own bosses” and engage with companies as freelancers.

In Israel, contractors are defined as “independent employees” rendering services to companies without direct supervision. Independent contractors and companies conclude a one-off commercial agreement that stipulates such cooperation. When the distinction is very unclear between employee and contractor, the labor courts may evaluate the overall situation and its characteristics to reach a conclusion.

Who is an Independent Contractor?

Any individual who independently and consistently carries out a gainful activity in the form of providing services for profit to a given organization, while not abiding by its internal legal directives under an employment contract is considered an independent contractor. Independent contractor engagement implies no professional subordination between the worker and the employer. The following criteria distinguish independent contractors from people who have an additional source of income from sources other than work:

Engagement in work for at least 20 hours per week
Average monthly income from freelancer contracts equals or exceeds 50% of the national average wage – ILS 5,276 (EUR 1400)
Engagement in work for at least 12 hours per week when average monthly income equals or exceeds 15% of the average wage – ILS 1,583 (EUR 430)

Under Israeli law, an independent contractor is NOT obliged to:

Perform work for a set period of time each day, nor from a specified location
Make arrangements with the employer to take time off from work
Follow the employer’s disciplinary procedures

The following aspects also distinguish between employees and independent contractors:

Lack of legally-binding supervision
Possibility to provide services to more than one organization at the same time
An ability to assign the work to another person

The following facts are evaluated by the Israeli tax authorities when determining the classification of a worker as an employee or an independent contractor:

Submittal of the legally required reports to authorities
The existence of a permit, license, authorization
The matters agreed upon in the text of the contract
Worker’s/operator’s degree of personal autonomy and independence
Tools, materials and supplies the worker works with
The time when the work is done
The place where the work is done
The principles of compensation
How direct expenses are reimbursed to the worker/operator
Responsibilities, warranty agreements and insurance policies
Termination policy
The existence of restrictions against taking on other assignments, the existence of a non-compete rule and confidentiality agreements

An independent contractor agreement must clearly state that there is no employer-employee relationship between the company and the contractor when it comes to performance of a specific piece of work stipulated in the contract, and that the latter must pay taxes on their own. In addition, an agreement must state thatif a contractor sues the company claiming existence of employment relationship, they would be obligated to reimburse for a certain percentage of the payments received from the employer. This clause protects the employer from financial losses since independent contractors are typically paid more than employees due to the fact that they pay their own taxes.

To become a contractor in Israel, a professional must choose an appropriate contractor category and register a self-employment profile (Tik) with the National Insurance Institute – an Israeli state social security agency. For this, a contractor needs to fill in and submit a multi-annual income report form and provide personal information to the Institute through its online portal. Upon registration, contractors get an estimate of their regular social security contributions. Then, an independent contractor must register with the Israeli Tax Authority to determine their VAT obligation status, obtain a self-employment certificate, VAT registration number, and apply for personal income taxation (מס הכנסה, Mas Hachnasa).

Contracting Models

Self-employed workers with their own business are classified as osek patur or osek morshe depending on the nature of their services and whether or not they are subject to VAT.

Osek patur is an independent contractor who provides services as a self-employed individual without forming a corporate entity, such as a limited company. Osek patur’s annual business turnover must not exceed ILS 102,292 (EUR 27800). Contractors who fall under this category are exempt from paying VAT. Freelancers with the following professions cannot register as osek patur:

Architect
Engineer
Private detective
Lawyer
Accountant
Doctor
Management advisor
Insurance agent
Psychologist
Dentist
Medical clinic
University professor & lecturer
Translator & interpreter
Artistic performer
Exam administrator
Author

Osek morshe is a self-employed professional whose annual business turnover exceeds ILS 102,292, or an individual who has a profession from the above list. Such contractors are subject to VAT, and thus they are entitled to reclaim it on business purchases.

Engagement Models

There are two primary engagement models for working with independent contractors in Israel.

A. Direct engagement of the worker as self-employed. Under this model, the hiring company engages directly with the independent contractor and draws up an agreement for the provision of services. The hiring company then pays the independent contractor directly.

B. Umbrella company. Companies operating under Employer of Record services in Finland come under one of two categories, but both are essentially designed to vet and engage freelancers compliantly as either contract employees or independent contractors on your behalf.

Staffing agency: Some contractors may work under an umbrella company. In this case, the contractor is responsible for finding and performing their work, but they are an employee of the umbrella company, which manages payroll and applies an administration fee on the contractor’s earnings.
Hiring partner: The hiring company can also work with a hiring partner who helps them vet potential contractors, set up contracts, ensure the contractor is properly classified, onboard and manage contractors, and make payments to them.

Contractor Payments

Independent contractors are typically paid upon issuing an invoice on net 30-day terms to the employer at the end of each month unless otherwise stipulated in the contract. Payments are made through direct deposits to their bank accounts or another preferred method stipulated in the contractor agreement.

Alternatively, companies may partner with wage processing providers. They can process wage calculations, prepare tax statements, and make deposits and withdrawals for contractors.

Terms, conditions, and frequency of payments can be settled between a contractor and an employer. Currencies other than the New Israeli Shekel can be used in Israel, and they are subject to fluctuating exchange rates, which may impact the contractor’s paycheck.

If you work with a hiring partner like Worksuite, it becomes significantly easier to streamline contractor payment processes. A dependable partner can help you hire contractors legally and pay them quickly, accurately, in New Israeli Shekels, and in a way that complies with Israeli regulations.

Contractor Taxes

Contractors declare their expected income and pay monthly contributions to the National Insurance Fund based on that declaration online, as well as VAT (if applicable) by the 19th day of each month. Personal income tax reports are submitted once a year by April 30 upon the receipt of a tax form in February. Non-Israeli tax residents are not subject to health insurance contributions, and their NIF contributions rate is determined individually upon application.

Independent contractors submit their own income tax reports. First, a freelancer must register on the online portal of the Israeli Tax Authority. Then, contractors are required to submit personal income tax returns through a dedicated self-service tool and make a payment here.

Gross Income Tax

Income tax in Israel is progressive depending on the contractor’s annual earnings. The following tax rates applied in 2022:

Up to ILS 77,400 (EUR 21,000): 10%

ILS 77,400 – ILS 110,880 (EUR 30,000): 14%

ILS 110,880 – ILS 178,080 (EUR 48,000): 20%

ILS 178,080 – ILS 247,440 (EUR 67,000): 31%

ILS 247,440 – ILS 514,920 (EUR 139,000): 35%

ILS 514,920 – ILS 663,240 (EUR 180,000): 47%

Above ILS 663,240: 47% + 3% surtax

Value-Added Tax

The majority of services, imports of goods and services, and the sales value of items are subject to a VAT of 17%. It is imposed on any transaction executed in Israel, on the import of goods by every person and on the provision of services. Export transactions, tourist services, residential rentals, and transactions executed in EILAT-free zone are exempt from VAT. Contractors whose annual business turnover did not exceed ILS 1,510,000 (EUR 410,000) may file VAT returns once in two months.