Salary Calculations – What is the true cost of employment?

Have you just hired a new employee? You will certainly wish them success. You will probably have agreed on a base salary or an hourly wage. These gross wages, however, are just the beginning of the real cost the company bears for the hiree. 

It is important to define the precise terms of their employment in the agreement signed with the employee. Make sure no collective agreement or extension order applies to the industry/sector. Any additional regulations will eventually inflate these costs.

Costs that Apply to the Employer

In this article we will go into more detail regarding the costs carried by the employer. We will refer to costs mandated by the labor law, without taking into consideration any collective agreements or any other special terms that may be valid while the person is employed by the company. These are just some main guidelines, and for each individual section, there are exceptions and additions that are outside the scope of this article.

The Theory

We will start the calculation at the gross salary. This is the base salary on which the employer and employee have agreed. This base salary can be defined at an hourly, daily, or monthly rate. Within the contract signed between the two parties, it is important to clearly define the terms of employment. As of 1/1/17, the salary will increase to the amount of NIS 5,300. The obligation to pay income tax falls on the employee. In practice, the employer deducts the income tax directly from the employee’s pay slip and transfers it directly to the tax authorities.

Transportation/Commuting Expenses

The transportation reimbursement employees are entitled to receive is determined by the law of minimum per month. According to the employment, payment will not exceed the amount of ILS 22.6 per day.

Social Security

The social security payment is calculated on the basis of the gross salary, and is split between the employee and the employer. The employee’s share is deducted from their salary, and is transferred to the National Insurance Institute directly by the employer. The employer’s share, which is higher than the employee’s, is transferred to the National Insurance Institute. 

As of 10/2016 the amounts due are as as follows:

On a monthly salary of up to ILS 5,678, 3.45% will be paid by the employer, and 3.5% by the employee. 

Above that amount (and up to a ceiling of NIS 43,240 per month), the employer pays 7.5% and the employees pays 12.5%.

Provisions for Pension

The pension provision is calculated on the basis of the gross salary. Both the employee and the employer must contribute. The pension provision under law as of 10/2016 is as follows: the employee contributes 5.75% of their salary and the employer another 12.25%. Starting from 1/17, the employee’s share is expected to increase by 0.25%.

Severance Pay

If the employee is terminated after one year, they are entitled to full compensation, according to the terms of the contract. In addition to that, the employee will receive another 2.33% of their monthly gross salary, for each year of work.

Vacation Pay

Every month, the vacation days due to the employee are indicated on the pay slip, and they can be exercised throughout the year. When the person leaves their job, any remaining unutilized vacation days will be paid in the pay slip. As of 10/2016, the vacation days due to an employee who works full-time 5 days a week, are approximately 11 days for a year of work. As of 1/1/17, vacation days were increased to 12.

Sick Leave and Pay

Every month, sick days are accrued on the employee’s slip. They are entitled to exercise with a note from their physician. For the first day of the illness, no amount is due. From the second day 50% of wages are due, and from the third day 100%. As of 10/2016, a full-time employee is entitled to 18 sick days.

Wage Calculation – What is the direct monthly cost of hiring an employee?

Sick leave pay (paid only if the employee was ill) and supplement to severance pay (only if stipulated by the individual contract) were not taken into account for this calculation.