A loan to an employee: what the employer may deduct from wages and from severance pay, and when it is prohibited

Service page: A claim against an employer for wages, pension and overtime.

You were dismissed, the final settlement of accounts arrived, and the employer announces that it is deducting NIS 30,000 “for the loan we gave you two years ago”. There is no agreement, no signature, only an oral claim. Or the opposite case: an employee left in the middle of repaying a loan, and the employer is unsure whether it may hold back the last salary. Both situations are governed by one section, section 25 of the Wage Protection Law, 5718-1958, and the answer in it is clearer than it seems. More guides on wages and deductions are collected in the employment law center.

Deducting a loan from the monthly salary: allowed, under the conditions of section 25

The common claim that “a loan may not be deducted from the salary” is not accurate. The Wage Protection Law prohibits deductions from wages, but section 25(a) lists a closed list of permitted deductions, among them a debt under a written undertaking and advances on account of wages:

What this means: an employer may deduct loan repayments from the salary only when there is a written undertaking by the employee (a signed loan agreement, or at least a document in which the employee confirms the debt and agrees to the deduction), and even then no more than a quarter of the wage each month. An advance on account of wages (“give me next month’s salary now”) is a different story: it can be deducted in full, provided the total advances do not exceed three months’ wages. A deduction that does not fit one of the paragraphs, for example a loan without a document, or a deduction of half the wage, is a prohibited deduction, and the amount deducted is wages that were not paid on time. What else must and may appear on the payslip: in the article on the payslip.

End of employment: what may be offset against the last wage, vacation redemption and severance pay

When the employment relationship ends, the quarter limit falls away. Section 25(b) allows the employer to deduct the whole balance of the debt from the last wage, including advances. According to Kol Zchut, the deduction at the end of employment applies to the last wage and to the end-of-employment payments that the employer pays itself (vacation redemption, recuperation pay and the severance top-up), provided the debt is clear, proven and not in dispute. What the employer cannot touch is the severance component accumulated in the pension fund or in managers’ insurance: this money belongs to the employee and is paid to them by the fund, and an employer may not delay its release as a means of pressure. An offset against the severance top-up must also be made transparently (written notice, details of the debt and of the payments made), because late payment of severance pay is dealt with in section 20 of the Wage Protection Law. How the severance pay itself is calculated: in the article on calculating severance pay.

Example: an employee earning NIS 12,000 gross received a loan of NIS 30,000 and signed an agreement to repay NIS 1,000 a month. The maximum monthly deduction is a quarter of the wage, NIS 3,000, so NIS 1,000 a month is lawful. After a year, a balance of NIS 18,000 is left and the employee is dismissed. The employer may deduct the balance from the last wage, from the payment for unused leave and from the severance top-up that it pays itself; if these amounts come to only NIS 15,000, it will have to sue for the remaining NIS 3,000, and the employee receives the severance component in the pension fund in full.

What must be in writing, and what happens without it

The written undertaking is a condition, not a recommendation. A good loan agreement includes the amount and the date the loan was given, the repayment schedule, the interest (if any), express consent to deduction from the wage, and an arrangement for the end of employment: whether the balance is repaid immediately, and from which payments. Alongside it, it is worth keeping proof of the money transfer and a record of every repayment. An employer who comes to the Labor Court with “everyone knew about the loan” and no document is in a difficult position: the burden of proving the debt and its amount is on the employer, and without a written undertaking the deduction itself was prohibited, even if the loan really was given. In such a case the right path for the employer is a claim, not a deduction. The choice between a deduction and a claim, and what is needed for the deduction to stand, are exactly the questions on which an employment lawyer is needed before the money is deducted.

An unlawful deduction was made from your wages: what do you do?

1. Ask for the document. Ask in writing for the loan agreement and for the details of the payments credited to the debt. If there is no signed document, write that you deny the debt and demand repayment of the amount deducted.
2. Check your payslips. A deduction of more than a quarter of the wage, or a deduction that does not appear on the payslip in a clear line, is a breach in itself.
3. Sue in the Regional Labor Court. An amount deducted unlawfully is wages not paid on time: you sue for its repayment and for compensation for late payment of wages under section 17 of the Wage Protection Law, and note the short limitation period in section 17A (one year from the date on which the wage is considered late, or 60 days from receiving the wage, whichever is earlier). The proceeding is also suitable for small amounts. See also: A wage claim against an employer.
4. Do not sign a “final settlement” that includes a waiver before you understand what was offset and why. A signed waiver makes a later claim very difficult.

The loan is larger than the severance pay: the employer sues the employee

When the balance of the debt is larger than the end-of-employment payments, the employer sues for the difference. A claim to repay a loan given within the employment relationship is usually heard in the Regional Labor Court, to which section 24 of the Labor Court Law, 5729-1969 gives exclusive jurisdiction in claims arising from the employer-employee relationship; a loan that has no connection to the work may be heard in a civil court. A contractual claim to repay a loan becomes time-barred under the Prescription Law, 5718-1958 seven years after the set repayment date, so a written repayment schedule is important for the employer too.

Tax: a low-interest loan is a taxable benefit

A loan the employer gives at an interest rate lower than the rate set in regulations under section 3(i) of the Income Tax Ordinance [New Version] (פקודת מס הכנסה [נוסח חדש]) is considered a wage benefit: the difference between the set interest and the interest actually paid is added to the employee’s wage as employment income, and income tax, National Insurance contributions and health insurance contributions are deducted from it. The imputed amount must appear on the payslip. An employer who ignores it exposes itself to a tax debt, and an employee who is surprised by a drop in their net pay should check whether this is the reason.

Frequently asked questions

My employer deducted 40% of my salary for a loan I signed for: is that legal?

No. Even when there is a written undertaking, section 25(a)(6) of the Wage Protection Law limits the monthly deduction on account of the debt to a quarter of the wage. A deduction of 40% exceeds what is allowed, and the excess is wages not paid on time: you can demand its repayment and sue for compensation for late payment of wages. The limit falls away only when the employment ends, when section 25(b) allows the whole balance of the debt to be deducted from the last wage.

I was dismissed and the employer says it will offset the loan against my severance pay: is that allowed?

It depends on where the severance pay is paid from. The employer cannot hold back or offset the money accumulated for the severance component in the pension fund or in managers’ insurance: it is paid to you by the fund, not by the employer. A severance top-up that the employer pays directly, as well as the last wage, the payment for unused leave and recuperation pay, may be offset against a debt that is clear, proven and based on a written undertaking. A debt whose existence or amount you dispute is not suitable for a self-help offset, and the employer has to sue for it.

I got a loan without interest from my employer: does it have tax consequences?

Yes. Under section 3(i) of the Income Tax Ordinance, a loan an employer gives an employee at an interest rate lower than the rate set in regulations is considered a benefit: the difference between the set interest and the interest you actually paid is added to the wage as employment income, and income tax, National Insurance (Bituach Leumi) contributions and health insurance contributions are deducted from it. The rate is updated, so it is worth making sure that the imputed amount appears on the payslip and is calculated correctly.