Section 14 of the Severance Pay Law: The Complete Guide for Employers and Employees

Section 14 of Israel’s Severance Pay Law is not just a technical clause in the statute book—it represents a fundamental shift in the way severance pay is managed in Israel. Simply put, the section stipulates that the monthly contributions an employer transfers to your severance fund (a provident fund or pension fund) replace the severance payment you would otherwise receive at the end of your employment period.

In practice, the right to severance transforms from a large lump-sum check awaiting you at the end (contingent on the employer’s ability to pay) into a monthly, accessible, and secure savings fund accrued in your name from day one. A deep understanding of this mechanism is crucial, as any slight deviation from the rules can prove costly for both the employee and the employer.

The Social Security Revolution of Section 14

Before Section 14 came into full effect, severance pay was a kind of “promise in the air.” It was a future obligation of the employer, a “notional account” that grew only on paper based on seniority and final salary. This old model created immense uncertainty. Employees were entirely dependent on the financial stability of their workplace, and we have all heard stories of companies collapsing and employees losing all their severance benefits. The situation was not easy for employers either—they bore the risk of a massive future payment that they could not always plan for.

The new arrangement, which is based on Section 14, reversed the picture. Instead of a promise, the employer deposits, like clockwork, 8.33% of your salary directly into a personal severance fund in your name every month. Thus, the severance money shifts from being a “theoretical liability” to a living, breathing “savings account.”

The Shift from Liability Concept to Savings Concept

The most significant change brought by Section 14 of the Severance Pay Law is the transition from a concept of future liability to a concept of ongoing savings. Think of it this way: in the past, severance pay was like a post-dated check written by the employer, which could only be cashed on the day of dismissal (if at all). Today, Section 14 ensures that the employer deposits “cash” into your savings account every month.

This dramatic change ensures that the money is not only accrued securely but is also invested in the capital market and can potentially earn a return over time, just like your pension savings. This means the employee becomes the owner of these funds from the moment they are deposited.

Dual Rationale: Protecting Both Employee and Employer

The logic behind this section is twofold and serves both parties in the employment relationship:

• Employee Protection: The mechanism ensures you receive your accrued severance funds, no matter what happens. Even if the employer faces financial difficulties, enters a stay of proceedings, or, heaven forbid, goes bankrupt—the money is already yours, in a protected personal fund.

• Employer Protection: Monthly contributions make the severance expense predictable and plannable. This removes a large, vague, and stressful future obligation from the employer’s balance sheet, allowing for a more prudent and efficient budget management.

In fact, the legislation, which came into widespread effect in 2008, created a quiet revolution. Before then, only special collective agreements or individual approvals allowed such a mechanism to exist. Since then, almost every employer is obligated to contribute these funds monthly, and they are considered severance for all intents and purposes. If you wish to delve deeper, you can find detailed information on the history and conditions of Section 14 on the Kol Zchut website.

To clearly summarize the change, here is a table highlighting the key differences.

Quick Comparison: Severance Pay Before and After Section 14

This table summarizes the main differences in the calculation and payment of severance pay before and after the implementation of Section 14.

As can be seen, the shift to the Section 14 model has created certainty, security, and transparency for both sides—a crucial step that has made the labor market a fairer and more secure place.

Section 14: How It Really Works, and Why Everyone Gets Confused

To truly understand Section 14 of the Severance Pay Law, knowing just the bottom line is not enough. You must dive into the small details that operate it, as any minor oversight can be costly for both parties. This mechanism is not “autopilot”—it requires conscious agreement and precise actions from both the employer and the employee.

It all begins and ends with clear agreement. Section 14 cannot be unilaterally imposed on an employee or retroactively applied to past periods. The agreement must be documented in black and white, usually as an express clause in the employment contract.

The Legal Foundations: Agreement and Expansion Order

The legal basis for implementing the section stands on two legs. The first, as mentioned, is the employee’s agreement. The contract must state in clear terms that the monthly contributions the employer deposits into the pension fund for the severance component will replace the severance payment at the end of the term. Without such an agreement, the entire structure collapses.

The second leg is the Expansion Order Regarding Comprehensive Pension Insurance in the Economy, known to all of us as “Mandatory Pension.” This order sets the minimum rates the employer must contribute. Section 14 relies on these rates but allows the employer and employee to agree on a higher contribution, up to the ceiling of 8.33% (equal to one monthly salary per year).

A critical point for employers: Even if you contribute to the pension as required, but failed to obtain the employee’s express agreement to apply Section 14—these deposits will not necessarily exempt you from paying severance. You may find at the end of the employment relationship that you need to pay full severance, in addition to all the money you already transferred to the fund. Double payment.

What is Included in the Calculation and How Much Exactly is Contributed?

This is perhaps the most common mistake: many employers think the contribution is only based on the base salary. This is wrong. The law requires contributions to be made from all salary components from which severance pay is derived.

So, what makes up the “Determining Salary”?

• Base Salary: The foundation of everything.

• Seniority Increment: If applicable, it is included.

• Cost-of-Living Allowance: If paid.

• Fixed Commissions: If commissions are an integral and constant part of the salary (e.g., for a salesperson), they must be included in the calculation.

In contrast, components like expense reimbursements (travel, per diem) or a global payment for overtime that does not reflect actual work are generally excluded. The full contribution rate that grants exemption is 8.33% of all these components.

Deposit Deadline: Why Not to Miss Even by a Day?

The law leaves no room for interpretation regarding timing. The money must be transferred to the employee’s provident fund or pension fund within 7 business days of the day the salary was paid. In any case, no later than the 15th of the month following the work month.

A late deposit is not a minor matter. It is considered a delay in wage payment for all intents and purposes, exposing the employer to painful fines and late-payment interest. More importantly: systematic delay or cessation of contributions can be considered a “material deterioration of working conditions.” In such a situation, the employee can resign with the rights of a dismissed employee and demand full severance pay, regardless of the money already accrued (or not accrued) in the fund.

From the Employee’s Side: That Money is Yours, Period

Section 14’s greatest advantage for the employee is certainty and ownership. From the moment the money enters the fund registered in your name, it is absolutely yours.

Here are the main rights you should know:

• Full Ownership: The funds belong to you, even if you resigned. The employer cannot demand them back, except in extreme and exceptional cases where the Labor Court disqualifies severance (e.g., in case of theft from the employer).

• Release of Funds: Upon termination of employment, the employer must provide you with Form 161 and sign a fund release form. This is the document that allows you to withdraw the money (subject to tax laws) or leave it in the fund to continue saving for retirement.

• Transparency and Control: You have the full right to receive reports from the entity managing your money, track the employer’s deposits, and ensure everything is running smoothly.

Understanding these rules is not “general knowledge,” but the key to fair implementation of Section 14, one that allows employers to manage risks smartly and ensures employees’ social security is fully preserved.

The Economic Significance of Section 14

Section 14 of the Severance Pay Law is much more than a technical arrangement. In fact, it is a powerful economic tool that directly impacts both the employer’s cash flow and the employee’s financial security. Understanding these implications is critical, whether you manage employees or plan your future.

The Employer Manages Risks, The Employee Accrues Capital

From the employer’s perspective, the transition to Section 14 is a strategic move that removes significant uncertainty from the balance sheet. Instead of dealing with a future liability that grows and grows, and whose final size depends on the employee’s seniority and future salary, the expense becomes a monthly contribution. It is fixed. It is predictable.

This change allows for much more accurate budget planning. It neutralizes the risk of what is called a ticking “severance pay time bomb,” a risk that exists especially with veteran employees whose salaries have jumped significantly over the years.

And from the employee’s side? Here, the economic significance is no less dramatic. Instead of their severance “lying dormant” as a theoretical promise in the company’s books, it becomes a living and breathing financial asset from day one.

These funds, deposited monthly, immediately begin to work for the employee. They are invested in the capital market and accrue returns and compound interest over time. This accrual can significantly increase the final amount available to the employee upon termination of employment, much more than if the money had remained “dormant.”

In the long run, the monthly contributions make the severance component an integral part of the employee’s pension savings portfolio. This simply reinforces their financial security towards retirement.

However, it is also important to understand the weak point. In cases of sharp and rapid salary increases, it is entirely possible that the amount accrued in the fund (deposits + profits) will be lower than the amount that would have been received under the old method—a calculation based on the final salary multiplied by seniority.

Scenarios of Severance Gap and the Need for Completion

To understand the potential gap, let’s look at a simple numerical example:

• Employee Name: Dani

• Employment Period: 10 years

• Starting Salary: 8,000 NIS

• Salary at Termination: 20,000 NIS

1. Standard Severance Calculation (Without Section 14): Dani would be entitled to 20,000 NIS multiplied by 10 years, totaling 200,000 NIS. Simple and clear.

2. Section 14 Calculation (Estimate): Here, the story is different. His monthly contributions were based on a lower salary for most of the period. Even if we add a nice annual average return of 5%, the total amount accrued in the fund would be about 165,000 NIS (this is a rough estimate for illustrative purposes only).

In this case, a gap of about 35,000 NIS is created to the employee’s detriment. This is precisely where the legal mechanisms for severance completion come into play. If the employment contract or a collective agreement stipulates it, the employer will be required to supplement the difference between the amount accrued in the fund and the amount due based on the final salary calculation.

The impact of Section 14 of the Severance Pay Law on the Israeli economy is enormous, and this can be seen in the scope of accrual in severance funds. Data from the Capital Market, Insurance and Savings Authority show that in 2023, a total of approximately 36 billion ILS was accrued in severance funds in Israel. Of this, a staggering 28 billion ILS was accrued under the Section 14 mechanism. This represents an increase of about 25% compared to 2018, when the average monthly contribution per employee was about 1,200 ILS. You can read more about this data and its impact.

Ultimately, understanding the economic advantages and disadvantages for both sides is the key. It allows employers to manage their obligations smartly and employees to plan their future correctly, while being aware of the possibility of needing to demand severance completion in case of salary jumps.

Common Mistakes That Can Cost You Dearly

Ostensibly, implementing Section 14 of the Severance Pay Law seems like a simple technical matter. But in the field, the reality is much more complex, containing pitfalls that many employers and employees fall into, even in good faith. Defective implementation can spark expensive legal disputes, infringe on employee rights, and cause enormous financial and reputational damage to employers.

The field is full of stories of inattention to a small detail that led to devastating results. An employer might find themselves paying double severance, and an employee might discover after years of work that a significant portion of their savings has simply vanished. Understanding the common mistakes is the first and most important step to avoiding them.

Mistake 1: Relying on “It Will Be Fine” – Lack of Explicit Written Agreement

This is the most basic and dangerous mistake of all. Many employers contribute funds for pension and severance as required and assume everything is in order. They forget the most critical component: obtaining explicit, signed consent from the employee to apply Section 14.

Without a clear clause in the employment contract, or in a separate appendix, stating in black and white that the monthly contributions replace severance pay—all the money deposited is considered simply an additional social benefit. The implication? At the end of the employment period, the employer may find themselves required to pay full severance pay, in addition to all the funds already deposited into the fund over the years. A painful and costly mistake.

How to avoid this?

• Ensure your employment contract includes a specific and unambiguous clause applying Section 14. The wording must be absolutely clear, making it explicit that contributions at a rate of 8.33% of the determining salary constitute a full substitute for severance pay. Leave no room for interpretation.

Mistake 2: Partial Calculation of the “Determining Salary”

This is where many competent people fall short. Employers contribute based on the base salary only, ignoring other salary components. The law is clear: the severance contribution must be made from all salary components considered part of the regular salary for work, such as:

• Base salary

• Fixed increments (seniority, cost-of-living, professional)

• Sales commissions that are an integral part of the salary

• Fixed premiums and bonuses

Ignoring these components creates a growing “hole” in the severance accrual. This gap, accumulating month after month, can reach tens of thousands of shekels and become a justified cause for a lawsuit by the employee upon termination of employment.

The key is to ask about every salary component: “Is this a regular and ongoing payment for the work?” If the answer is yes, chances are it must be included in the contribution base.

Precisely such issues have made Section 14 a central and contentious topic in Israeli labor law. The number of lawsuits on the matter is constantly rising; between 2018 and 2023, there was an increase of about 40% in the number of cases in Labor Courts directly dealing with the section. A report by the Ministry of Labor found that about 15% of the employees examined did not receive full contributions, leading to an average loss of about 18,000 ILS per employee. You can read more about the report’s findings and implications.

Mistake 3: Dragging Feet – Late Deposits and Delayed Fund Release

The law leaves no room for doubt and sets clear timetables for depositing the funds. Late deposit is not just an administrative problem—it is considered a delay in wage payment for all intents and purposes and can lead to painful fines and interest. Worse, repeated delays or cessation of deposits can be considered a “material deterioration of working conditions,” giving the employee the right to resign with the rights of a dismissed employee and demand all their rights.

Another critical mistake occurs upon termination of employment. Employers sometimes delay the release of funds to the employee, either due to lack of knowledge or as a tool for pressure. Your obligation as an employer is to provide the employee with Form 161 and sign all required release documents within 15 days of the termination of the employment relationship. Every day beyond that is a violation of the law.

How to act correctly?

• Implement an orderly process: Define a clear work procedure with the accounting department or insurance agent to ensure deposits are made like clockwork.

• Do not delay fund release: Upon termination of employment, deal with the paperwork immediately. Even if there are other disputes with the employee, it is absolutely forbidden to delay the release of severance funds that belong to them by law.

• Maintain open communication: Explain the process to the employee, provide them with all necessary information, and help them realize their rights with the severance fund quickly.

Avoiding these mistakes is not just a matter of complying with the dry law, but part of prudent, responsible, and fair business conduct. Investing in auditing, professional advice, and structuring processes in advance will save your organization enormous legal and financial risks and ensure proper employment relations.

Checklist for Implementing Section 14 in the Organization: How to Do It Right

Proper implementation of Section 14 of the Severance Pay Law is much more than a monthly deposit of funds. It is a meticulous process requiring attention at every major juncture in the employee’s life—from their first day to their last.

Many tend to think the main thing is to transfer the money, but this is exactly where the costly mistakes begin. Orderly conduct is not just compliance with legal requirements; it is smart risk management that provides peace of mind and financial stability to the organization.

To ensure you are covered from all angles, we have prepared a practical checklist that breaks down the process into three critical stages. Treat it as a guide to preventing mistakes, minimizing unnecessary friction, and creating proper and healthy employment relations.

Stage 1: Employee Recruitment and Onboarding

The foundations for correct implementation of Section 14 are built here, even before the employee has had their first coffee. A correct start at this stage is the key to preventing future misunderstandings and lawsuits.

• Drafting the Employment Agreement: This is the most critical stage of all. You must ensure the employment contract includes an explicit, clear, and unambiguous clause stating that the monthly severance contributions will replace the severance payment upon termination of employment. Without this clause, all the funds you contributed may be considered an additional benefit only, and you will find yourself paying twice.

• Informed Consent: Do not settle for a signature. Ensure the employee has read, understood what they are signing, and even dedicate a few minutes to verbally explain the meaning of the arrangement. Full transparency at this stage builds trust and closes the door to future claims of “I didn’t know” or “I didn’t understand.”

Stage 2: Ongoing Management During Employment

Day-to-day conduct is where plans become reality, and where most mistakes occur. Adherence to the rules at this stage ensures full compliance with the law and preservation of employee rights.

• Correct Calculation of Determining Salary: Do not fall into the common trap of contributing only from the base salary. The law requires including all fixed salary components—commissions, premiums, fixed bonuses, and any other increment that is part of the regular salary. Conduct a periodic review to ensure your calculation is up-to-date and accurate.

• Timely Deposits: The law is very clear on this matter. The funds must be transferred to the provident fund within 7 business days of the salary payment date, and no later than the 15th of the following month. Delays, even by one day, are considered delay in wage payment and open the door to sanctions.

• Documentation in the Pay Slip: The pay slip must reflect the contributions made in a transparent and clear manner, including an accurate breakdown into the mandatory deposit component and the severance component. Orderly documentation is your first line of defense in any dispute.

It is important to remember that rigorous ongoing management of contributions is not a luxury, but a legal obligation. Any slight deviation from the rules can open the door to lawsuits and significant financial costs for the organization.

The following infographic demonstrates this exact path—from the common mistake, through the painful legal outcome, to the correct way to prevent it all in advance.

As can be seen, every mistake, no matter how small, can lead to severe legal consequences. On the other hand, implementing correct procedures constitutes an effective shield against these risks.

Stage 3: Termination of Employment

Termination of employment is the test moment for all your conduct. An orderly and respectful process at this stage is critical to maintaining the company’s reputation and preventing unnecessary last-minute conflicts.

• Issuing Form 161: Immediately upon termination of employment, it is mandatory to fill out and submit Form 161 (“Employer’s Notice of Employee’s Retirement from Work”) to the tax authorities. This is a vital document for the employee to settle their rights with the Income Tax Authority, and any delay on your part directly harms them.

• Releasing the Funds: The law gives you 15 days from the date of termination to provide the employee with an official release letter to the severance fund. Do not wait for the last minute. Delaying the release of funds is a violation of the law.

• Clear Communication: Take a moment to explain the process to the employee, provide them with all the documents in an orderly manner, and be available for questions. Open and good communication can neutralize many misunderstandings in advance and end the relationship positively.

To make the process even more systematic, here is a summary table that will help you ensure you have not missed anything important.

Rigorous implementation of this checklist will transform the management of Section 14 in your organization from a complex and stressful process into a systematic and efficient one, protecting both the business and the employees.

Questions Every Employee and Employer Must Ask About Section 14

The world of Section 14 of the Severance Pay Law can feel complex and confusing. That is completely natural. Both employees and employers often find themselves with essential questions, and uncertainty on this matter can lead to costly mistakes with legal and financial implications.

Precisely for this reason, we have compiled the most burning questions from the field, with clear, practical, and straight-to-the-point answers.

Can the employer force me to join Section 14?

The answer is absolutely not. The application of Section 14 is a step that requires the full, informed, and written consent of the employee. Typically, this is enshrined in the initial employment contract or in a dedicated appendix signed later.

An employer who decides “unilaterally” to contribute funds according to Section 14, without obtaining a clear signature from the employee, takes an enormous legal risk. Labor Courts may view these contributions as an additional social benefit, leading to an almost absurd scenario: the employer will have to pay full severance pay at the end of the employment, in addition to all the money already deposited into the fund over the years.

I decided to resign. What happens now with the severance funds?

This is precisely the greatness of Section 14, and its most significant advantage for you as an employee. The funds the employer contributed for the severance component absolutely belong to you, even if you chose to leave on your own initiative. The employer cannot demand them back or prevent you from receiving them.

The moment the money was deposited into the provident fund or pension fund in your name, ownership of it passed to you. Except for extreme and exceptional cases determined by a court ruling (such as theft from the employer or breach of trust), that money is yours, period.

I am an hourly worker, is this relevant to me too?

Absolutely yes. Section 14 of the Severance Pay Law is a sweeping law that applies to all employees in the Israeli economy, regardless of how they receive their salary. It does not matter if you work on a global monthly salary, are paid by the hour, work shifts, or are compensated based on commissions.

The obligation to contribute applies to the determining salary for severance, and it is calculated according to your actual scope of employment.

How can I ensure the employer is really depositing the money correctly?

You have the full right to know that everything is running smoothly, and the process is simple and transparent. There are two main ways to track deposits:

1. The Monthly Pay Slip: This is your first line of defense. Every month, open your pay slip and look for the details of the social contributions. You should see separate and clear lines for mandatory deposits (employee and employer portions) and the severance component.

2. Direct Contact with the Managing Entity: Once a quarter, your provident fund or pension fund sends you a detailed report. But there is no need to wait. At any given moment, you can call them or log into your personal area on their website and check that the employer’s deposits are indeed coming in on time and in the correct amount.

Summing Up the Game: What Do We Do Now?

A true understanding of Section 14 of the Severance Pay Law is not just a matter of compliance—it is a first-rate business decision. For employers, correct implementation of the section transforms a future, vague liability into an ongoing, predictable, and controlled expense. This is the key to financial certainty. For employees, it is a critical security mechanism that ensures their severance funds are protected, even if the company, God forbid, runs into difficulties.

Throughout this guide, we have delved into every aspect: from the legal basis, through the economic implications for both sides, to the pitfalls and most common mistakes to avoid. The conclusion is sharp and clear—ignoring the small details here can end in an expensive legal dispute, damage to reputation, and preventable harm.

So, What is Your Next Step?

Now, the ball is in your court. Whether you are an employer responsible for a team of employees or an employee seeking to secure your financial future, it is time to act. Do not wait until the moment of termination to discover gaps, misunderstandings, or “black holes” in the agreement.

Proactive action today is the saving of tomorrow. A professional review of employment contracts and ongoing contributions is not an expense, but an investment. It saves headaches, prevents potential lawsuits, and saves capital on future legal costs.

Here are a few practical steps to implement immediately:

• For Employers: Conduct an internal audit of your employment contracts. Ensure the wording of Section 14 is accurate and up-to-date, that contributions are made from all mandatory salary components, and that your processes align with the latest rulings of the Labor Courts.

• For Employees: Open your employment contract and quarterly pension report. Check in black and white that the section indeed applies to you, and that the employer is depositing the correct amounts, on time.

Dealing with the complexity of labor law requires more than general information from the internet; it requires expertise and a strategic view.

Correct management of employment relations and commercial agreements is the basis for the safe growth of any business. At RNC Group, we specialize in accompanying companies and organizations in dealing with complex legal challenges, while building a strategy tailored to prevent risks and secure your interests. For more information and to schedule a consultation, visit our website.

Disclaimer: The information in this article is provided for informational purposes only and does not constitute legal advice or a substitute for individual legal advice by a qualified attorney. One should not rely on the contents of this article for taking or refraining from taking action.