How severance pay is calculated in Israel

Severance pay follows a simple formula, yet this is exactly where money goes missing. Below is how the calculation works and what to verify.

The basic formula

For a monthly-salaried employee: the last salary multiplied by the number of years worked. A partial year counts proportionally — one twelfth for each month. For an hourly employee, the last salary is replaced by the average number of hours over the past twelve months, multiplied by the last hourly rate.

What belongs in the base

Base salary.
Seniority increment.
Cost-of-living increment.
Professional and education increments.
Sales commissions.
Regular bonuses that are in practice part of the salary.

What does not

Overtime pay.
Travel expenses and car maintenance.
Telephone, per diem and expense reimbursements.
One-off bonuses and holiday gifts.
Recreation pay (dmei havraa).

The guiding principle: a payment that reimburses an expense or is one-off stays out of the base; a permanent element of the remuneration goes in. The label on the payslip is not decisive — the Labour Court looks at the substance. The classic dispute is over «travel», paid as a flat sum to everyone regardless of any actual commuting.

Changes in scope of employment

If the employee moved from full-time to part-time or the other way round, severance is calculated in segments: each period according to its own scope and salary. A single calculation «by the last salary» will almost always produce the wrong figure — usually in the employer’s favour.

Section 14 and the pension fund

Where a section 14 arrangement applies, the severance component accumulated in the pension fund replaces the payment and stays with the employee regardless of why the employment ended. But section 14 only applies where it was put in writing, and only from the date it took effect — earlier periods are calculated under the ordinary formula. Check whether the actual contributions cover the full sum: if they were made on a partial base or arrived late, the employer must top up the difference.

What else to check

Unused holiday days, which are paid out in cash.
Recreation pay for recent years.
Payment in lieu of prior notice, where the dismissal was immediate.
Completeness of pension and study-fund contributions across the whole period.
Unpaid overtime and work on rest days.

Checking the employer’s figure

When a sum is offered, break it down: how many years were counted, which salary served as the base, and what was deducted as «already accumulated in the fund». The gap is almost always in one of those three places — missing seniority, an understated base, or credit for contributions that are not actually in the account. A fund statement covering the whole period answers the last question in minutes.

Deadlines

Severance must be paid when employment ends; delay converts it into withheld wages with a statutory penalty on top. The general limitation period for labour claims is seven years, so it is worth recalculating the entire employment, not just the final year.

This article is general information and does not replace legal advice.