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What you need to know about employment contracts

Employment law - year end summary

Employee rights in Israel are regulated by a long list of laws, extension orders and collective bargaining agreements. The perception of labor law is that it is primarily protective of employees vis-à-vis employers, and indeed, a basic rule of law states that employee contracts cannot derogate from rights prescribed in laws, extension orders and collective bargaining agreements, but may only supplement them. In light of this stance and this rule of law, the importance of employee contracts has steadily diminished over the years and today, the sentiment among many employers is that an employee contract is not really meaningful and is merely a declarative document that employers should retain for the sake of good order. Many employers do not make employees customarily sign employment contracts at all, while others make use of an old outdated version of a contract. In fact, contrary to this attitude, an employment contract is exceedingly meaningful and important, if it is drawn up correctly.


Employment contracts help employers comply with their statutory obligations


The Notices to Employees and to Candidates for Employment Law (Employment Terms and Screening and Hiring Procedures) was enacted in 2002, which obliges every employer to issue written notice to every employee, specifying his or her principal  employment terms, but does not require the employee to sign the notice, nor does it require the inclusion of the employee’s obligations. The law defines a list of compulsory details for inclusion in the notice or, alternatively, in the employment contract that constitutes a substitute for this notice. If an employer fails to issue a notice or issues a notice that fails to comply with the law, this constitutes a violation of the law, for which the employer can expect fines and the employee can also sue for compensation as a result. In this instance, a correctly drafted employment contract can help employers comply with their statutory obligations, by including in the contract all of the details required by law, as well as the employee’s warrants and covenants that are not included in the statutory notice.

There are additional contract clauses that an employer can include in the contract in order to minimize its exposure, such as overtime clauses or clauses addressing deductions of an employee’s wage due to various debts (such as if an employee’s use of  gasoline, telephone, etc., exceeds the defined limit).

Employment contracts can be helpful in overcoming statutory restrictions. For example: employers are prohibited from requesting medical information from employees, due to the privacy protection law; however, a clause may be incorporated in the employment contracts in which the employees must warrant that there is no medical reason why they cannot perform their jobs according to the job description. Another example: employers are prohibited from demanding a ‘police certificate of no criminal record’; however, employment contracts enable employers to obtain warrants from their employees that they have not been convicted of particular offenses that relate to the positions for which they are candidates. Another example is the non-competition clause that many employers want to include in employment contracts. It is important to note that, even though the labor courts will not always enforce such a stipulation, if such a stipulation is not included in the employment contract, then the employer cannot file a motion to the labor court that relates to non-competition on the part of an employee. Another topic associated with competition is the issue of intellectual property, a topic that must be regulated in employment contracts, in clauses that define the proprietary rights to the intellectual property, that assure employees’ future cooperation and that regulate the matter of the consideration in respect of the intellectual property, etc.


Employment contracts expressly regulate contractual rights


Apart from the fact that employee contracts help employers comply with the statutory requirements, there are many employment rights that are purely contractual rights and are not anchored in laws, and therefore, the employment contract is the only possible instrument for regulating them. Therefore, the more explicit and detailed the employment contract is, the fewer are the uncertainties and the chances that disputes will arise over interpretation of these rights by the labor court. Examples of contractual rights not prescribed by law are bonuses, sales commissions, options, company car, telephone, etc. Commissions and bonuses are good examples of rights that labor courts are often petitioned to interpret as a result of the ambiguity of the arrangement or because they were not adequately defined in a contract. Consequently, it is important to regulate these rights clearly and unequivocally in an employment contract, including the eligibility criteria, the calculation methodology, the examination date, the payment date, etc. In Gimelstein vs. Yazamco Ltd., the national labor court (appellate level) was petitioned to deliberate a sales representative’s various bonuses (target-based bonuses and a profitability-based bonus), who also received sales commissions within the scope of his employment contract, and to rule whether or not they constituted a component of his wage.


Employment contracts help to assimilate procedures and policies


Employment contracts are also ideal tools for employers to define and assimilate procedures and policies on various issues, such as safety, the prevention of sexual harassment, attendance reports, protection of privacy, etc. Employment contracts constitute a convenient instrument for informing employees of the various work procedures without having to produce a thick procedure manual. This will not only add clarity to the work relations, but may also help employers to defend themselves during various legal proceedings, when the employer must prove that it took appropriate action to assimilate policies and took appropriate preventative measures. A prime example of this may be found in the ruling of the national labor court on the matter of an employer’s right to read its employees’ e-mail correspondence: in the Tali Iskof case, the national labor court ruled that in order for an employer to not be deemed as having infringed on its employees’ privacy, the employer must show that it had set a clear policy about the use of e-mails and had informed its employees about this policy.


Employment contracts help to reduce employment costs


Beyond the importance of an employment contract in terms of managing risks or minimizing legal exposures, it also constitutes an instrument for defining various arrangements that help regulate the cost of a position and reduce employment costs. Some arrangements can reduce the employment cost, provided that they have been expressly and accurately defined in the employment contract drafted by a professional. For example, the arrangement pursuant to Section 14 of the Severance Pay Law, whereby an employer will be exempt from paying supplementary severance pay in the event of a dismissal, will only be valid if it has been correctly worded and incorporated in the employment contract. A bonus will not be considered a wage component only if the bonus plan has been correctly structured, is defined as meritorious and as not constituting a guaranteed wage component. On the other hand, there are components that may be included in the wage, if they have been expressly defined as such in the employment contract, as was the ruling in the Orient Color Photography Industries (1986) Ltd. case on the matter of convalescence pay, travel expenses and holiday pay.

In summation, employers benefit from recognizing the importance of employment contracts and their contribution to both the legal aspects of employment relations, and to their labor relations in general, since they provide both parties with certainty and clarity. Employment contracts help employers to assimilate policies and procedures, to enhance their image and reputation, to reduce employment costs without adversely affecting motivation, and also help employers to minimize exposures to civil suits lodged by their employees, as well as exposures to enforcement proceedings by the Ministry of Labor relating to criminal and administrative matters, including in relation to the liability of managers who might be found personally liable for offenses committed by the employer’s corporation.