The severance pay law (1963) is the law that defines the employee’s right to severance pay at the end of employment.
On a side note, there are criteria specifically defined in the law that determine under which circumstances an employee is entitled to severance pay. But, that is not what this blog post is about. However, there are 2 basic criteria that determine eligibility for severance pay in regular cases: An employee worked for at least one year and he was fired. If the employee resigns he forfeits the right to severance pay. (There are exceptions, but we won’t get into that right now).
Section 14 of the severance pay law is titled “severance and benefits” and it deals with cases in which both the employer and employee made contributions (via the payslip) towards pension or savings plans. According to section 14, the monies accumulated in the “severance pay” portion can be substituted for severance pay. Or in other words, by releasing the severance pay portion to the employee, the employer would then be exempt from paying any severance pay !
In 1998, the Minister of Labor signed an order enabling employers together with their employees to agree on enforcing section 14 at the place of employment. In this case, they do not need the Minister’s signature to enforce it. However, there are certain criteria that must be met in order to enforce section 14:
- The payments to the pension plan/ savings plan need to be the % defined in the general permit (including insurance coverage).
This means only full pension and not mandatory pension - There needs to be explicit agreement in writing between the employer and the employee, prior to start of employment.
This means that it is part of the work agreement and known in advance. - The employer needs to forfeit explicitly return of severance pay to him if the employee resigns.
This means that employee leaving employ for whatever reason would receive the severance pay that has accumulated in the pension plan and nothing more. - The monthly payments need to be paid on-time !
This means that the deductions from payroll need to be deposited into the pension plan by the 15th of each month. If the employer writes the check to the pension plan on the 15th and sends it via mail – that doesn’t count. One can easily see the date of deposit on the semi-annual statements the pension plan companies are required to send to the employees.
All of the above conditions need to be met in order for this to be legal.
The above is a risk for both sides: for the employee, forfeits his right to full severance pay, even when fired. On the other hand, the employer forfeits his right to reclaim severance pay from the fund in case of resignation.
The aforementioned permit from 1998 allows for retroactive enforcement provided it be in writing and within 3 months of starting the pension plan for the employee, no later.
So if your employer wakes up one day and decides that section 14 should apply to all employees – not so fast !
Employers who give Mandatory pension plan only – the law which came into effect starting Jan 2008 at lower rates than full pension plans are not eligible foe section 14 of the severance pay law.
