Labor Law Lawyers

Employee Rights When an Employer Goes Bankrupt or a Company Is Dissolved

One of the critical functions of the National Insurance Institute is the payment of employee entitlements when an employer enters bankruptcy or a company undergoes dissolution. These payments cover wages, pension contributions, and severance pay, as well as most other social benefits, for a period of up to 12 months.

By Igal Mor, Adv. & Notary

Accuracy in Legal Advice. Excellence in legal support.

When an Employer Becomes Insolvent

In today’s challenging economic environment, it is not uncommon for employers to encounter financial difficulties, shut down operations, and enter bankruptcy proceedings. Similarly, companies that employ workers sometimes go through a liquidation process. In many of these cases, the employer is left with outstanding financial obligations to employees, who are denied the wages and benefits they are legally owed. The employee not only loses their job but may face an economic crisis due to unpaid wages, severance pay, pension contributions, and other social entitlements.

The good news is that the National Insurance Institute steps in to pay employees’ rights in place of the employer, covering up to 12 months of entitlements. If an employee passes away before receiving these funds, their survivors are entitled to claim them.

Where Should the Claim Be Filed?

Ordinarily, when claiming benefits from the National Insurance Institute, the application is submitted to the relevant local branch. However, employee claims arising from an employer’s bankruptcy or a company’s liquidation follow a different procedure — they are submitted to the liquidator or trustee appointed by the court. Each claim must be accompanied by supporting documentation, which may include proof of employment, pay slips, and a termination letter. After the liquidator or trustee approves the claim, it is forwarded to the National Insurance Institute, which may approve or reject it in whole or in part. Once approved, the funds are transferred directly to the employee’s bank account.

Claims to a Pension Fund

As noted, claims for employee rights paid through the National Insurance Institute must be submitted to the trustee or liquidator for approval before being forwarded for processing. The exception to this rule involves claims for pension fund contributions held by insurance companies, which should be submitted directly to the insurance company rather than to the liquidator or trustee. In most cases, the pension fund management company will file a collective claim on behalf of all affected employees, relieving individual employees of the need to do so independently. However, employees should verify whether such a claim has been filed, and if not, submit their claim to the fund company for processing.

What Employee Rights Does National Insurance Cover?

In cases of employer bankruptcy or company liquidation, the National Insurance Institute steps into the employer’s shoes and pays the employees’ entitlements for up to the last 12 months, subject to regulatory ceilings. The covered rights include all wages — including overtime, commissions, and bonuses — as well as convalescence pay, clothing allowances, 13th-month salary, and vacation pay. In addition, National Insurance will make pension contributions on behalf of the employee and pay severance compensation, as detailed below.

Pension Contributions and Severance Pay

If the employer failed to transfer pension contributions (whether the employer’s portion, the employee’s portion, or both) to the insurance company, the National Insurance Institute will supplement these amounts to the fund, including linkage differences from the date the debt was created until the actual payment date, up to the applicable ceiling. This ceiling is updated periodically.

Regarding severance pay: in the event of employer bankruptcy or company liquidation, affected employees are legally entitled to full severance compensation. If the employer made partial deposits to the insurance company and the severance fund, National Insurance will cover the shortfall. If no deposits were made at all, National Insurance will pay 100% of the severance compensation owed to the employees.

Why Legal Representation Is Essential

The process of claiming employee rights through the Liquidation Fund and the National Insurance Institute requires specialized legal knowledge and expertise. It is therefore critically important to obtain professional legal guidance from an attorney who specializes in labor law, insolvency proceedings, and National Insurance claims.

The labor law department at Mor & Co. Law Firm specializes in legal representation in employment and labor law matters throughout Israel. We understand the importance of protecting the legal rights of both employers and employees, and we are here to assist you with professional, personalized representation at every stage of the legal process.