Employee Rights in Company Liquidation and Employer Bankruptcy
When an employer collapses, the National Insurance Institute steps into its shoes and pays employees unpaid wages, severance pay and pension contributions that were never transferred, under Chapter 8 of the National Insurance Law. This guide explains who is eligible, what is paid and up to what ceiling, how the claim is filed since the Insolvency Law, and what happens when the company goes into rehabilitation rather than liquidation.
When National Insurance steps into the employer's shoes
A salaried employee whose employer is the subject of a bankruptcy order, a liquidation order, or an order to open proceedings is entitled to a benefit under Chapter 8 of the National Insurance Law. The employer may be a sole trader, a company, a partnership or a cooperative society. The benefit covers unpaid wages and severance pay, as well as the debt to the employee's pension fund for sums the employer was required to deposit and did not.
The idea is simple: the employee is a creditor who cannot wait for the end of insolvency proceedings, which sometimes last years. The National Insurance Institute pays the employee, and takes the employee's place in the queue of creditors against the estate.
On 15 September 2019 the Insolvency and Economic Rehabilitation Law came into force and changed the eligibility conditions and the way the claim is filed. Information written before then, including instructions to file the claim with the liquidator, no longer applies to proceedings opened since.
Who is eligible and who is not
Eligible for the benefit:
- A salaried employee.
- A foreign worker, and a worker from the Palestinian Authority or from Judea and Samaria, provided they hold a valid residence permit.
- A member of a cooperative moshav or a kibbutz for at least seven years, and a member of a renewing kibbutz, if they worked in the society's enterprise or on its behalf.
- Survivors of a salaried employee who died and was entitled to the benefit.
- The pension fund itself, for the sums that were not deposited in it.
Not eligible:
- A self-employed worker.
- A shareholder in a closely held company, that is, a company controlled by no more than five people. This is the point that surprises small business owners: someone who was both a shareholder and an employee of their own company is not protected.
- A foreign worker, or a worker from the Palestinian Authority, without a valid residence permit.
What is paid, and up to what ceiling
The amount of the benefit is the employer's debt to the employee, up to the maximum set by law. The maximum amounts as of 1 January 2026:
- NIS 134,966 for wages and severance pay.
- NIS 20,764 for payments to pension funds.
For a member of a cooperative society the ceiling for wages and severance is NIS 83,056, and for a member of a renewing kibbutz NIS 103,820. Linkage differentials are added to the payment of wages and severance from the day the debt claim is received until the day of actual payment. Income tax, national insurance contributions and health insurance contributions are deducted from the benefit.
The ceiling is updated every year. The amounts above were checked against the National Insurance Institute's benefit page, and the amount in force on the date of the order must be verified.
The wage components taken into account are not only the base salary: the claim is examined and calculated under the National Insurance Law and in accordance with the Annual Leave Law, the Advance Notice Law and the Severance Pay Law, so that redemption of leave, pay in lieu of notice and convalescence pay may also be included, subject to the type of proceeding.
Liquidation, opening of proceedings or rehabilitation: the difference in payment
Since the Insolvency Law, the type of order made against the employer determines not only how the claim is filed but also what is paid and when. The difference matters most when the company is still operating:
| Type of proceeding | What National Insurance pays |
|---|---|
| An employer who is a sole trader | Unpaid wages and severance pay |
| A corporation, order to open proceedings | Unpaid wages only, up to five months' wages |
| A corporation, liquidation | Unpaid wages, the other wage components and severance pay |
| A corporation, economic rehabilitation | The other wage components and severance pay are paid only after the rehabilitation plan has been approved, or the business has been sold and the employee did not return to work |
The logic: under an order to open proceedings the company may still recover, so only what the employee needs to live on in the meantime is paid. If the proceeding ends in liquidation, the rest is paid. If it ends in rehabilitation, the question is whether the employee returned to work in the rehabilitated company or not.
An employee who received five months' wages under an order to open proceedings has not "exhausted" their rights. The other components and the severance pay await the outcome of the proceeding, and it must be followed and the claim completed in time.
How the claim is filed
The method of filing depends on the date of the order:
- Order to open proceedings from 15 September 2019 onwards: the claim for unpaid wages and severance is filed directly with the National Insurance Institute, on form 5305. A copy goes to the Commissioner of Insolvency and Economic Rehabilitation Proceedings.
- A permanent liquidation order or a bankruptcy order up to 14 September 2019: the claim is filed with the office-holder appointed in the proceeding, and from there, after approval, to National Insurance.
- A claim for a debt to a pension fund, in every case: filed as a "regular creditor's claim of the pension-fund type" on the website of the Commissioner of Insolvency Proceedings, according to the Commissioner's instructions. In practice, the fund's management company usually files a general claim on behalf of all the employees, but this must be verified with it and not assumed.
If National Insurance rejected the claim, the decision may be appealed to the competent insolvency court, within the time limits set by law. This is an appeal to a court and not an internal objection, so it requires preparing a case file rather than a letter.
Documents and the filing deadline
12 months. A claim filed more than 12 months after the date on which the order was made, and not accompanied by a detailed and reasoned request for an extension with supporting documents, will be rejected. This is the most important deadline in the whole process, and it runs from the date of the order, not from the day the employee learned of it.
The claim is accompanied by:
- The last 12 payslips from the workplace.
- The dismissal letter.
- Bank statements for the account into which the salary was paid, for the period of the debt claimed and for the two months before and after it.
- Confirmation of bank account ownership with the employee's details, the bank, the branch and the account. An employee living abroad also attaches a Swift code or IBAN.
- A report of deposits and withdrawals from the pension fund.
- A power of attorney, where the claim is filed through a representative, referring expressly to the benefit claim and the related actions.
Foreign workers and workers from the Palestinian Authority also attach a population registry form, a residence permit or work permit valid for the period claimed, and Payment Division reports or a printout of permits, as the case may be.
Pension and severance pay
Where the employer did not transfer to the pension fund the sums for the pension component, whether the employer's share or the employee's share deducted from wages, National Insurance completes them to the fund with linkage differentials, up to the ceiling for payments to pension funds. This completion is what rescues the continuity of pension insurance and the disability and survivors' cover, so it is no less important than the wages themselves.
As for severance pay, termination of employment due to the liquidation or bankruptcy of the employer entitles employees to full severance pay under the Severance Pay Law. To the extent the employer deposited into the severance fund, National Insurance completes the shortfall up to full severance pay; if nothing was deposited, the benefit covers the severance pay in full, subject to the ceiling.
Where an employee died before the sums were paid, the survivors are entitled to the benefit in the employee's place.
In summary
The collapse of an employer triggers an insurance mechanism in which National Insurance pays the employee and takes the employee's place in the queue of creditors. The benefit covers wages, severance pay and pension contributions up to a ceiling that is updated every year, but what is paid and when depends on the type of order: opening of proceedings, liquidation or rehabilitation, and each behaves differently.
The complexity lies in the meeting of three bodies of law, the National Insurance Law, the Insolvency Law and the protective statutes under which the components are calculated, and in one unforgiving deadline: 12 months from the date of the order. A claim filed correctly, in full and on time is examined quickly; an incomplete claim comes back for completion, and an unexplained delay ends it. Preparing the claim properly, and certainly appealing a rejection, requires professional legal representation by a lawyer specialising in labour law and insolvency.
If your employer has entered insolvency proceedings and you do not know whether an order was made, which order, or what you are owed, contact us promptly. The time that has passed since the date of the order is the first thing we will check.
What people ask most often
Where is the claim filed?
How long is there to file?
What is the ceiling?
I was also a shareholder in the company. Am I eligible?
The company is under an order to open proceedings and still operating. What is paid?
National Insurance rejected the claim. What can be done?
All Labour Law Department pages
Has your employer entered insolvency proceedings?
Tell us when the order was made, which type, and what you are still owed. That is enough to say what is paid now, what waits, and how much time is left to file.