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A precedent-setting ruling by the National Labor Court regarding compensation for a freelance recognized as an employee

CPA Dan Rabin was hired by the Ministry of Justice in 2005 and was defined as an "internal contractor." There is no dispute that in the contract between the parties CPA Rabin was defined as an external contractor and not as an employee. CPA Rabin's position was Proper Management Department Director at the Registrar of Associations (a unit in the Ministry of Justice). In 2012, the contract between the parties was terminated and Rabin CPA filed a lawsuit against the State of Israel with the Regional Labor Court for the amount of ILS 2,001,058.

In his lawsuit, CPA Rabin claimed that despite the agreement between the parties, which stated that he was an external contractor and not an employee - there was an employee-employer relationship between the parties and therefore, CPA Rabin is entitled to social rights as an employee as well as various compensations.

The State of Israel argued that there was no employer-employee relationship between the parties and therefore the claim should be dismissed. The State further claimed that CPA Rabin has an education relevant to the matter and understands well the consequences of the agreement he had signed and therefore it cannot be determined in retrospect that there was an employer-employee relationship between the parties. The state further claimed that if CPA Rabin had been paid as an employee, his salary would have been lower than the payment he received as a self-employed person, and therefore, even if he would be recognized as an employee, he should not be awarded any compensation.

The Tel Aviv Regional Labor Court ruled that according to the totality of the evidence presented to it, it must be determined that CPA Rabin accountant was an employee of the state and there was an employee-employer relationship between the parties. The regional court ruled that at the beginning of the contract, CPA Rabin was not given the option to choose between a contract as a contractor and a contract as an employee. The Regional Court also ruled that although at the end of the engagement between the parties CPA Rabin was given the opportunity to be accepted as a civil servant and refused - this does not constitute a lack of good faith on the part of CPA Rabin.

However, although it was determined that CPA Rabin was an employee of the state, CPA Rabin was not awarded any compensation. The reason for that is that the court made a comparison between the payment paid to CPA Rabin, which was about ILS 25,000 a month, and the salary of an employee at a similar position, who earned ILS 15,779 per month.

Accordingly, the court ruled that the difference between the two amounts covered the full social rights of CPA Rabin and therefore no amount should be awarded to him.

Therefore, the final result of the judgment was that although it was determined that there was an employee-employer relationship between the parties, the financial claim of CPA Rabin was fully rejected and no compensation was awarded to him.

CPA Rabin did not accept the Regional Labor Court's ruling and filed an appeal with the National Labor Court.

CPA Rabin's appeal was merged with two other appeals, all of which addressing the issue of "freelance" and the question of whether there was an employee-employer relationship between the freelancer and the client.

Due to issue being an extremely fundamental issue and in light of the need for a uniform and clear ruling on this matter, the National Labor Court is hearing all three unified appeals in a panel of 7 judges and 2 public representatives. In its ruling, the tribunal sought to establish clear guiding principles for dealing with this complex issue, which has been occupying all labor tribunals in recent years.

The main part of the ruling of the National Labor Court, which covers 190 (!) pages, was written by the President of the National Labor Court, the Honorable Justice Varda Weirt-Livne.  In accordance with the judgment of the Honorable Justice Weirt-Livne, the following is a summary of the tests that must be performed when a claim is submitted for acknowledging an employee-employer relationship between a client and an external contractor:

First, it is necessary to examine whether the usual criteria for determining an employee-employer relationship were met between the parties. The main test in this matter is the integration test, in which it is examined whether the contractor or service provider has integrated into the client's organization / company / business; it is also examined whether the service provider had an actual business of their own. It should be noted that there are many additional auxiliary tests, and the totality of the tests and their application are at the discretion of the tribunal.

The Honorable Justice Wirt-Livneh states that to the extent that the employer proves that the service provider acted in bad faith (for example - refused offers to be accepted as an employee by the employer) - the more weight shall be given to the parties' agreements that the service provider is an independent contractor and not an employee.

Following this examination, the Honorable Justice Weirt-Livneh states that it must be examined whether the employee is entitled to financial compensation, i.e. compensation for social rights as an employee, by virtue of the labor laws in Israel. This test is done by comparing the salary a freelance would have earne had he been an employee, compared to the salary actually paid to him. This burden is imposed on the employer. That is, the employer must provide evidence and prove what the salary of an employee would have been in a position equivalent to the freelancer, or prove the salary that would have been paid to an employee in other ways. If the employer had not met this burden - the rights of the freelancer recognized as an employee will be calculated according to the consideration received by the freelancer as a self-employed person.

The dissimilarity or difference between the consideration received by the freelancer as a self-employed person and the salary that he was supposed to receive as an employee - must be deducted from the amount due to the freelancer from the employer. On the other hand, the employer shall not be entitled to a refund of the "surplus" paid to a freelancer, if there was one.

The essential innovation in the judgment of the Honorable Justice Weirt-Livne is the ruling that after the "financial" inspection, i.e. the examination of the compensation paid to the freelancer compared to the salary they would have earned as an employee, another inspection shall be performed which may charge the employer by considerable sums . This is compensation that is not based on a monetary calculation but on the principle of "mental distress", "loss of promotion at work", "lack of good faith" and such components. The Honorable Justice Weirt-Livneh ruled that the burden of convincing the court that this compensation should not be imposed on the employer - rests with the employer!

This is a revolutionary ruling that worsens the situation of employers - since now the rule will be that the employer must be required to pay a freelancer who was recognized as an employee, his rights as an employee and non-pecuniary compensation, when so far, there was no such obligation in a ruling with regards to non-pecuniary compensation.

With regards to the amount of the compensation, this is at the discretion of the tribunal, when the tribunal is to consider the degree of bad faith on the part of the employer or employee, who dictated the model of the contract between the parties, the amount of the compensation paid to the employee, whether the employee was offered to be employed by the employer, and more.

Back to CPA Dan Rabin's appeal against the State of Israel - Ministry of Justice:

The National Court ruled that there was an employee-employer relationship between the parties. Therefore, the remuneration received by CPA Rabin as an external service provider must be examined, compared with the remuneration as an employee. The court ruled that another accountant, employed in Rabin's accounting department as an employee, earned ILS 15,779 compared to CPA Rabin who earned ILS 24,861 plus VAT. Therefore, the national court ruled that the above difference covers all the rights of CPA Rabin as an employee.

Now, and in accordance with the new ruling by the Honorable Justice Weirt-Livne, the court has turned to set forth the "non-financial" compensation due to CPA Rabin.

In other words - even though it was determined that CPA Rabin received all his rights as an employee, including all the various social rights - the National court is still examining the amount of additional compensation that CPA Rabin is rntitles to from the employer. The court ruled that in the first place there was no doubt that this was an employee; The employer, i.e. the State of Israel, dictated the form of the contract between the parties; CPA Rabin lost the rights of a civil servant; CPA Rabin could not have participated in internal tenders; and more.

In light of all that, the National Court ruled in favor of CPA Rabin an amount in the sum of ILS 120,000.

The National Court also ruled that the state must pay CPA Rabin legal expenses in the amount of ILS 30,000 in respect of the two tribunals (the regional court and the national court).

In conclusion, the National Court states that despite the fact that in the comparison betwee a service provider and an employee, CPA Rabin was not econimically deprived, in the "dry" snse of the word - he still deserves compensation of a very significant amount. As stated, the ruling of the National Labor Court benefits the service providers, the freelancers, and makes it harde for the employers.

In light of that, we strongly recommend all our clients, to prepare accordingly with regards to contracts with service providers, and obtain appropriate advice in advance, in order to avoid paying high compensation, as was done in the above judgment.

 

  • Appeal 7338-10-17, Dan Rabin v. the State of Israel - Ministry of Justice, granted on 7/4/21 in the National Labor Court, Jerusalem.

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