Key Takeaways

  1. Compliance with Israeli labor laws and tax requirements can be difficult because the country does not have a written constitution or a single act of labor laws.
  2. Payroll outsourcing helps companies in Israel and those working with employees in Israel ensure compliance with Israeli labor and tax laws.
  3. Payroll outsourcing has its challenges, including reduced control over payroll functions and data security risks.
  4. For companies working with employees in Israel, an Employer of Record can be a better alternative to payroll outsourcing providers as it offers a more comprehensive employment management service.

Located close to the Mediterranean Sea, Israel is a West Asian country with a booming economy, especially in sectors like agriculture, technology, and tourism. Israel is rated 35th out of 190 nations in the World Bank Ease of Doing Business rating, making it an excellent location for setting up businesses.

Despite this, companies in Israel and those looking to expand to Israel have several legal factors to consider, particularly concerning payroll and tax. This is why many companies in Israel choose to outsource their payroll functions to third-party providers.

What is Payroll Outsourcing in Israel?

Israel does not have a written constitution or an act containing all labor laws. Instead, companies in Israel and those working with employees in Israel have to comply with several labor laws codified in various law books like Basic Laws, the Work and Rest Hours Law, the Annual Leave Law, and the National Insurance Law.

This can make it challenging for companies to ensure compliance with payroll and tax regulations, making them liable to fines and non-compliance claims. To minimize these risks, many companies outsource their payroll functions to experts rather than handle them in-house.

Payroll outsourcing in Israel involves companies hiring a payroll outsourcing provider to manage their employees’ payrolls and taxes. These payroll outsourcing providers understand the complications of the Israeli payroll and tax laws, making them suited to ensure that client companies comply and mitigate risks of liability. 

Payroll outsourcing providers typically calculate payroll, distribute payslips, and file compliance reports. They also handle tax-related compliance, from calculating and withholding taxes from employees’ payments to remitting them to the appropriate authorities.

Depending on the arrangement, some providers also handle social security, health insurance, and pension contributions. Both local Israeli companies and international companies working with employees in Israel can benefit from payroll outsourcing. 57% of companies say that outsourcing their payroll function allows them to focus on their core operations.

How Does Payroll Outsourcing Work in Israel?

When a company hires a payroll outsourcing provider to handle its payroll function in Israel, the provider typically first ensures that the client company meets all legal requirements and is registered correctly with Israeli tax authorities.

Then, the provider starts gathering employee data like employment contracts, tax forms, and social security information. They try to determine the payment structure, from the base salary to benefits and other monetary bonuses employees are entitled to. They ensure that all the employee data they’ve collected are in accordance with Israeli labor and tax laws.

Once compliance has been confirmed, the payroll outsourcing provider calculates and processes the payroll. They remove the deductions required by the law like taxes, national insurance contributions, and social security contributions. Many providers use computer software for this process to ensure accuracy.

Once payroll has been processed, the payroll provider typically disburses the employees; salaries to the company’s bank or any other payment method agreed upon. Israeli labor laws state that employees must receive their salaries at least once a month.

Many payroll providers also offer post-payroll reports. They file tax reports with the Israel Tax Authority and other local bodies​, whether annually or monthly. They also audit the companies’ payroll records, ensuring transparency and compliance.

Israel Labor Law and Payroll Compliance

There are several laws and regulations guiding Israeli employment contracts, and companies that have been proven non-compliant with those laws face the consequences. The Minimum Wage Law of 1987 requires that employees in full-time positions should not be paid less than the minimum wage, which, as of April 2024, is ILS 5,880.02 per month or ILS 32.3 per hour.

Employers in Israel are required to set up pension funds for their employees, contributing an amount equal to 6% of their monthly salary to the funds. The employees themselves are to contribute 5.5% of their salary to the funds.

The Work and Rest Hours Law of 1951 requires that employees work for no more than 42 hours per week, with a maximum of 9 hours per day. For employees who have to work overtime they are entitled to 125% of their regular salary for the first two hours beyond the standard workday and 150% for additional hours.

This law also dictates that employees should get at least 36 consecutive hours of rest, typically over the weekend. The hours of rest should include the workers’ day of worship based on their religion. Israel has a progressive income tax system that ranges from 10% to 50% depending on a worker’s earnings.

Employers are responsible for withholding and remitting the correct amount of tax from their employees’ payments. Inaccurate or late filings can make an employer liable for non-compliance claims. Employers must also contribute a percentage of their employees’ salaries to the National Insurance Institute (NII) to cover benefits like healthcare insurance, unemployment insurance, social benefits, and maternity leave.

The law also dictates that employees are entitled to paid leave from work. For example, employees can have 1.5 days of sick leave per month and are entitled to paid annual leave that ranges from 10 to 24 days, depending on the employee’s length of service. Female workers can have up to six weeks of paid maternity leave, while male employees have the option of partial paternity leave.

What are the Benefits of Payroll Outsourcing in Israel?

One of the key benefits companies that outsource payroll functions can enjoy is compliance with payroll and tax laws. Since Israel does not have one codified act containing all employment laws, companies that handle payroll functions in-house are at risk of oversight, and this can result in legal troubles for such companies.

Payroll outsourcing providers are experts in the field. With this expertise, they can help ensure that companies comply with all local labor laws regarding payroll and tax. Companies can also save costs by outsourcing payroll functions. A Deloitte study found that 64% of companies that outsource consider cost-saving as a primary factor.

Managing payroll in-house requires hiring a department for that and buying the resources they need. Outsourcing eliminates this cost and also allows businesses to scale efficiently since they only need to pay for the services they need.

What are the Downsides of Payroll Outsourcing in Israel?

Payroll outsourcing also has its downsides, one of which is reduced control over payroll processes. Companies that outsource their payroll functions have to hand over control to a third party, and this can cause problems if the provider’s services or working methods do not align with the client company’s needs. These challenges can impact employee satisfaction.

Another downside companies need to consider before outsourcing their payroll function is potential data security risks. Companies will have to share employees’ sensitive information with a third party, from social security details to bank account details. While many payroll outsourcing providers have security measures in place, there are still risks of data breaches and mishandling of information.

How to Choose a Payroll Outsourcing Provider in Israel

There are some important factors companies need to consider when choosing a payroll outsourcing provider in Israel. First, you need to ensure that the provider has compliance experience as this is one of the most important requirements of payroll functions.

The provider must be an expert in Israeli labor laws and tax requirements. It is better to choose providers with a proven track record in payroll management, particularly in Israel. An experienced provider will have testimonials and reviews from clients they have worked with to show their capabilities.

Another factor to consider is if the provider has the resources needed to meet the requirements of modern-day payroll functions. For example, they should have up-to-date payroll software that can smoothly integrate with your systems. They should also have security measures to protect your employees’ information, such as data encryption systems, backup systems, and more.

Pricing transparency is another important factor to consider. The pricing structure should have no hidden costs, and the client should understand how the fees tally with the services provided.

How Much Does Payroll Outsourcing Cost in Israel?

Payroll outsourcing providers in Israel typically charge either a flat fee, a percentage of employees’ payments, or they charge per employee, per month. However, the final cost is determined by several factors.

The size of the businesses, the number of employees to be managed and the specific services required all play a role in how much the provider will charge. Small companies with only a few employees can expect a more affordable cost compared to large enterprises with a large number of employees.

Payroll Outsourcing Alternative: Employer of Record

International companies working with employees in Israel may want to consider working with an Employer of Record (EOR) instead of a payroll outsourcing firm. An EOR offers a wider range of services that can be beneficial to such companies. It employs workers on behalf of an international company, playing the role of the legal employer and being liable for all compliance requirements.

This means that with an EOR in Israel, a company can work with employees in Israel without having to set up a legal entity. The EOR handles all legal and administrative tasks, from payroll and tax compliance to HR-related functions. This way, the client company can focus on core business without being liable for non-compliance issues.

Conclusion

Payroll outsourcing can be beneficial for companies in Israel as it brings the expertise and efficiency of payroll service providers into the companies’ payroll functions. Payroll outsourcing ensures that companies comply with the complicated Israeli labor and tax laws.

Multinational companies with employees in Israel may find EORs to be better alternatives to payroll outsourcing because of the comprehensive legal and administrative services they offer.

Ready to optimize payroll in Israel? Remote People’s payroll outsourcing services offer efficiency and compliance. Contact us today to discuss your payroll needs in Israel.