As international companies grow their footprint and tap into new markets, understanding local hiring laws and employment structures becomes vital to building sustainable operations. In this 17-part series, we guide foreign businesses through the legal and strategic aspects of employment in key global jurisdictions.
This installment brings us to Israel—a global innovation hub with a highly skilled workforce, strong tech ecosystem, and a regulatory environment that balances business agility with employee protections. Foreign companies looking to hire in Israel must consider factors such as local labor laws, statutory benefits, and whether to establish a legal entity or explore alternatives like independent contracting or employer-of-record services. Choosing the right hiring model can help mitigate compliance risks while aligning with operational goals in this dynamic market.
Authored by Gideon Koren
Aliant Law Firm in Israel
- Are there alternatives to direct employment?
In Israel there are two primary alternatives to direct employment. We emphasize that the nature of the employment mainly effects the employer’s costs in contracting with the employee, but while there are additional employment options that are not direct, some of those options do not reduce the costs that the employer is required to bear. The two alternatives may offer flexibility, but they do not necessarily reduce the employer’s legal or financial obligations.
Here are the details:
(1) Subcontractor Employment
Under this model, the individual is paid a fixed, pre-agreed amount against a tax invoice and usually on a monthly basis.
- Legal Considerations:
Israeli labor law classifies many employee rights as non-waivable. Therefore, even when the employee issues invoices, the employer may still be obligated to provide all mandatory benefits if the relationship meets the criteria of standard employment.
- Practical Implications:
The legal classification of the relationship is based on factors such as work location, supervision, and integration into the organization and not solely on the method of payment. Thus, the employer may still be responsible for pension contributions, vacation, sick leave, and other statutory benefits.
(2) Employment via HR or Employment Company
Under this model, the employer (A) contracts with an external HR or employment company (B), which formally employs the worker.
Employment Status:
The worker performs services for A but is legally employed by B.
Cost Structure:
A pays B the full cost of the worker’s services, along with a service fee. B handles all salary payments, tax deductions, and benefits, relieving A of direct administrative and legal responsibilities.
- Is it necessary to set up a local entity in order to hire an employee?
There is no legal requirement in Israel to establish a local entity in order to employ workers. Individuals, partnerships, and companies alike may legally employ staff. Businesses may choose to work with employment or HR companies instead of setting up a local entity.
Cost Considerations: Employing staff directly may involve additional costs, including: Initial business registration, hiring a certified public accountant (CPA), Monthly reporting to tax and social security authorities, issuing pay slips, Managing pension and benefit contributions. Businesses with substantial staffing needs typically compare these costs with those associated with outsourcing employment through a third-party employment or HR company.
- Direct employment vs. independent contractor: what about costs?
An individual’s classification as an employee is determined by the nature of the relationship, not how they are paid. Key criteria to evaluate and classify employment status includes the degree of supervision by the employer, the level integration into the employer’s organization, a permanent work location and schedule, the dependency on a single employer, etc. If these elements are present, the individual is likely to be considered an employee and entitled to full statutory rights, regardless of whether they are paid a salary or issue an invoice. The worker would still be entitled to receive wages and payments related to social rights such as pension fund payments, vacation leave, sick leave, convalescence payment, etc. As a result, the costs to the business would also be similar. Some cost differences may arise when working with an HR or employment company, primarily due to service fees or contractual arrangements.
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