Employer-employee relationship: how the Labor Court decides whether you are an employee or an independent contractor

Service page: Employment lawyer: dismissals, wages and severance pay.

Employee or independent contractor: what decides?

The law has no definition of “employee”, and the tests were developed by case law. The Labor Court does not settle for what is written in the contract: it examines the substance of the relationship between the parties (Labor Appeal 15868-04-18 et al., National Labor Court, expanded panel, 7 April 2021 — “the Kota case”, paragraphs 9–10).

The main tool is the “mixed test”. At its center is the integration test, and alongside it there are “secondary tests” (HCJ 5168/93, as summarized in the Kota case, paragraph 9). The court does not decide by a single test: it learns the answer “from the cumulative weight of all the tests” (the Kota case, paragraph 9).

What is written in the contract, and how the parties saw the relationship, is one of the secondary tests, and its weight increases mainly when the other tests are not decisive (the Kota case, paragraph 10).

The integration test: the positive aspect and the negative aspect

The integration test has two aspects, and they are cumulative (the Kota case, paragraph 10):

The positive aspect — are you part of the organization? The court checks whether there is an enterprise into which one can be integrated, whether the work is necessary for its regular activity, and whether the person doing the work is part of the organizational structure and not an outside party. Among the features examined (the Kota case, paragraph 10):

• supervision of the working hours and the place of work, of the allocation of tasks and of the make-up of the team;
• how central and essential the work is to the employer’s activity;
• the continuity of the relationship, and the power to assign changing tasks;
• control over how the work is done, and subordination to the employer;
• exclusivity and the connection to the workplace;
• whether the person doing the work relies on other employees, the place where the work is done, the method of payment, and who supplies the materials.

The negative aspect — do you have a business of your own? Here the question is whether the integration took place through an independent business of the person doing the work (Labor Appeal 300021/98, as summarized in the Kota case, paragraph 10). The features: bearing risks, benefiting from efficiency, owning equipment or means of production, and bearing expenses (the Kota case, paragraph 10).

The secondary tests: subordination, personal nature, tax, and how the parties saw the relationship

When the scales do not tip to one side, the court gives weight to additional signs (the Kota case, paragraph 10; Labor Appeal 300256/98, as summarized there):

A freelancer recognized as an employee: what are they owed, and what can the employer offset?

In 2021 the National Labor Court, sitting as an expanded panel of seven judges and two public representatives, set principles for the accounting when someone who worked as “self-employed” is recognized as an employee retroactively (Labor Appeal 15868-04-18 et al., 7 April 2021). With the agreement of all the members of the panel, one of the cases was decided “in accordance with the new principles for the method of accounting”, as set out in paragraphs 63–73 and 122–125 of the President’s opinion and in paragraphs 12–27 and 44–46 of the opinion of Judge Davidov-Motola (the Kota case, “conclusion”). According to the President’s opinion (the Kota case, paragraphs 65–67):

1. A comparison with the cost of an employee. The consideration paid as “self-employed” is compared with the employer’s cost under the “alternative wage”, that is, the wage that would have been paid had the person been defined as an employee from the start, including the social benefits and the National Insurance contributions.
2. The burden is on the employer. The alternative wage has to be proved by the employer, for example by the wage of a parallel employee, wage tables in a collective agreement or a professional opinion.
3. No alternative wage proved? The rights are calculated according to the consideration actually paid, and there is no offset.
4. Alternative wage proved? The rights awarded to the employee can be offset up to the amount of the gap between the consideration paid and the employer’s cost under the alternative wage. Any remaining gap stays with the employee: the employer is not entitled to a refund beyond the offset against the rights awarded.
5. Non-monetary compensation. In addition to the calculation, according to the President’s opinion the starting point is that non-monetary compensation should be awarded, and the burden of persuading the court that it should not be imposed lies on the employer. The court considers, among other things, who dictated the engagement model, the good faith of the parties, the ratio between the consideration paid and the wage of an employee, and the length of the employment (the Kota case, paragraph 67).

The three cases were heard together in the same judgment, and their outcomes appear in the “conclusion”. Each case is assessed on its own circumstances, and no outcome of another case can be derived from this.

How many years back?

According to the Kota case, the calculation is made for all the months of work, but for no longer than the limitation period — the seven years before the claim was filed (paragraph 66). This is the general limitation period in the Prescription Law, 5718-1958 (חוק ההתיישנות, התשי״ח-1958) (sections 5 and 6). Some rights have a shorter period; for example, a claim under the Annual Leave Law, 5711-1951, becomes time-barred within 3 years (section 31). Details: Limitation period for wage and employment claims.

For the employer: before engaging a freelancer

• Check the reality, not only the contract. If the work is done at hours you set, within the team and exclusively for you, the signs point toward an employment relationship, even when the contract says “independent contractor” (the Kota case, paragraph 10).
• Keep records. If the person is recognized as an employee retroactively, the burden of proving the alternative wage is on you, and the starting point is that non-monetary compensation will also be awarded, unless you persuade the court that it should not be imposed (the Kota case, paragraphs 66–67).
• Draft an agreement that fits the reality. What goes into a contractor agreement: Independent contractor agreement. Support on the employer’s side: Legal support for employers. What you must give an employee in writing: Notice to employee about terms of employment.

For the employee: do you think you were classified wrongly?

• Keep invoices, correspondence, shift schedules and records of your hours.
• If throughout the relationship you behaved as if there was no employment relationship between you, the burden of proving that there was an employment relationship lies on you (the Kota case, paragraph 12, referring to Labor Appeal 300064/96).
• Check how much time has passed: seven years for most components, three years for annual leave.
• A claim is heard in the Regional Labor Court. The stages: Proceedings in the Labor Court; the monetary components: A wage claim against an employer.

Frequently asked questions

I signed a “freelancer” contract. Does that mean I am not an employee?

Not necessarily. What is written in the contract, and how the parties saw the relationship, is one of the secondary tests, and the court weighs all the tests together (the Kota case, paragraphs 9–10).

Is a freelancer who works with only one client an employee?

Exclusivity is one of the features the court examines in the positive aspect of the integration test, but no single feature decides on its own (the Kota case, paragraphs 9–10).

What can the employer offset if I was recognized as an employee?

Only if it proved the “alternative wage”: then the rights awarded can be offset up to the amount of the gap between what was paid to you and the cost of an employee at the alternative wage. If it did not prove it, the rights are calculated according to what was actually paid (Labor Appeal 15868-04-18, paragraph 66).

Who has to prove what the alternative wage was?

The employer (the Kota case, paragraph 66).

Is non-monetary compensation also due?

According to the President’s opinion in the Kota case, the starting point is that non-monetary compensation should be awarded, and the burden of persuading the court that it should not be imposed lies on the employer; the court considers, among other things, who dictated the engagement model and the good faith of the parties (paragraph 67).

How many years back can you sue?

According to the Kota case, the calculation does not exceed the limitation period of seven years before the claim was filed (paragraph 66; sections 5 and 6 of the Prescription Law). A claim under the Annual Leave Law becomes time-barred within 3 years.

Who decides whether there was an employer-employee relationship?

The Labor Court, according to the tests in the case law (the Kota case, paragraphs 9–10).