In Israel, when calculating severance pay, commission generated by employees must be taken into account, and the court will not grant validity to an employee’s waiver of this cogent right. Contributor Shira Lahat  Partner at Israeli law firm – Yigal Arnon & Co.

Recently, The Labour Court in Tel Aviv ruled on a claim by an employee that commission paid to him should be included in the calculation of his severance pay. Conversely, the defendant company claimed that the employee had, on two separate occasions, signed documents whereby he confirmed that he would not be entitled to any commission when calculating his severance pay.

Facts of the Case
The defendant was engaged in advertising and signage. Each month, the defendant paid the plaintiff a “basic salary” and a “commission” component for sales made during that period. Approximately ten months after starting work, the plaintiff signed a “declaration” confirming that the commission component would not be taken into account when calculating his severance pay. Subsequently, after six years, the defendant closed the company’s advertising department and transferred the plaintiff to its subsidiary company where he was asked to confirm in writing that he had received all monies owed to him by the parent company and that he would not have any claim against the parent company. After approximately four years, the plaintiff was dismissed by the subsidiary company and received severance pay calculated on his basic salary only.

The Labour Court determined that in accordance with Regulation 9 of the Severance Pay Regulations, commission paid to the plaintiff is crucial when calculating severance pay. The court’s decision contained the following elements.

Firstly, there was no dispute that the plaintiff worked as a salesperson and that he was paid monthly for sales made each month. Payment of commission was not contingent upon the fulfillment of any condition. An effort was required by the plaintiff to increase his commission, and if he did not make any sales- he did not receive any commission.

Secondly, the fact that the commission amount changed from month to month did not derogate from the nature of that payment, as it was not caused due to a change in the plaintiff’s terms of employment, but by the employee’s performance.

Thirdly, this was not an “incentive” as the company claimed. According to the ruling, an “incentive” is a payment contingent upon the fulfillment of a condition such as: setting a target which the employee must achieve before receiving any payment.

Fourthly, the “commission” component constituted a significant part of his monthly salary, and at a certain stage, it was even higher than the basic salary.

Fifthly, it was not proven that the basic salary paid to the plaintiff was higher than the market’s standard basic salary paid to sales agents.

Sixthly, when the plaintiff was promoted to a sales manager, he received a salary that in total was only slightly higher than the salary plus the average commissions he received before then. This indicates that the commissions were seen as part of the employee’s remuneration.

With regards to the waiver declaration that the employee signed after approximately ten months’ employment, the court ruled that the employee could not forego sums whereby the value was not known at the date when the declaration was signed, and which were certainly not specified in the document. In any event, employees should not be bound by a waiver of a cogent right. Regarding the declaration that was signed upon the transfer to the subsidiary company, the court determined that signing the declaration/waiver was presented to the employee as a condition for his continued employment, and therefore was not valid.

The court also determined that even if the employee signed the documents knowing that they were not valid, this should not be regarded as “an act of bad faith” as the company asserted and even if the court would be of the opinion that there had been an act of bad faith on the part of the employee, this would not be sufficient to deprive him of his cogent rights.

This update provides summary information and comment on the subject areas covered. Employment law is subject to constant change either by statute or by interpretation by the courts. While every care has been taken in compiling this information, we cannot be held responsible for any errors or omissions. Specialist legal advice must be taken on any legal issues that may arise before embarking upon any formal course of action.