Unpaid Leave in Israel – The impact on Employee Pay

When an employee  takes unpaid leave in Israel—commonly referred to as “Chalat” (חופשה ללא תשלום)—it can significantly affect their salary, benefits, and legal contributions. Whether the leave is for a few days or extends over several months, understanding the financial and compliance implications is essential for both employers and employees.

Below is a clear breakdown of how unpaid leave impacts employee compensation and the key considerations employers—especially Employer of Record (EOR) providers—must keep in mind.

1. Salary Adjustments During Unpaid Leave in Israel

Employees on unpaid leave do not receive a salary for the days they are absent.

• For monthly salaried employees, pay must be prorated according to the number of days actually worked.
• For hourly or daily employees, wages are calculated based on the actual days or hours worked.

Formula for Monthly Employees:

Adjusted Salary = (Monthly Salary ÷ Total Working Days in Month) × Actual Days Worked

2. National Insurance (Bituach Leumi) & Health Tax Contributions

Unpaid leave has different implications depending on the length of the absence:

• Less than one full month:
  Contributions for Bituach Leumi and Health Tax are deducted from the reduced salary.
• More than one month:
  The employee becomes personally responsible for direct payments to the Israeli National Insurance Institute (Bituach Leumi).

⚠️ Note for EOR Employers:
Even if the employee is unpaid, reporting and compliance obligations remain. EORs are expected to report the absence and maintain proper insurance coverage, even if they are not the “direct” employer.

3. Pension & Severance Contributions

• During unpaid leave, mandatory pension (פנסיה חובה) and severance fund (פיצויים) contributions pause, unless the employer opts to continue them voluntarily.
• If the leave lasts more than three months, the employee may lose pension insurance coverage unless alternative arrangements are made for continued, voluntary contributions.

4. Annual Leave, Sick Days & Seniority

• Annual Leave: No paid vacation days accrue during unpaid leave.
• Sick Days: These also do not accrue during the unpaid period.
• Seniority:
  • If leave is less than 6 months, seniority is typically preserved.
  • If leave exceeds 6 months, it may affect entitlement to benefits tied to tenure (e.g., severance eligibility).

5. Tax Implications

• With no income during unpaid leave days, the employee may drop to a lower tax bracket, which could reduce tax deductions.
• If unpaid leave is taken for part of a month, employers must adjust tax withholding accordingly, based on actual earnings.

6. Special Considerations for EOR Employers

For Employer of Record (EOR) arrangements, unpaid leave poses specific challenges:

Compliance Obligations Remain

• Even without pay, EORs must report the absence and ensure contributions (e.g., Bituach Leumi) are properly handled.

Expense Reimbursements May Become Taxable

• If an employee on unpaid leave continues to receive reimbursements (e.g., for work-related expenses), these may be considered taxable benefits.

Employment Status Risks

• Prolonged unpaid leave may raise questions about termination or changes in employment status under Israeli labour law. It’s crucial to assess the legal and contractual implications for extended leaves.

Summary Table: Effects of Unpaid Leave

Final Thoughts

Unpaid leave in Israel is not as simple as taking time off without pay. It affects payroll, tax, social contributions, pension rights, and long-term benefits. Employers—especially EOR providers—must understand their ongoing obligations to remain compliant while supporting employees during periods of absence.

For businesses employing in Israel, clarity around unpaid leave policies is essential to avoid legal pitfalls and maintain a responsible, compliant payroll operation.