Many global companies are looking for a way to hire employees in Israel without establishing a local entity. The model that makes this possible is called Employer of Record (EOR). Instead of dealing with bureaucracy, authority registration, and complex labor laws, you can transfer all legal liability to a certified local partner. Your company continues to manage the employee day-to-day, while the EOR handles all formal aspects: contracts, payroll, taxes, contributions, and social rights.
Estimated reading time: 12 minutes
Key Takeaways
- The EOR model allows hiring in Israel without a local entity.
- The EOR assumes full legal liability for the employment.
- The solution prevents “Contractor Misclassification” risks.
- Employees receive full social rights, identical to direct employment.
- Onboarding can be completed within days.
- Service includes payroll, tax reporting, and termination handling.
Table of Contents
What is the EOR model and how does it work?
An Employer of Record (EOR) is a third-party organization that becomes the legal employer of your workforce. Legally, the EOR signs the employment contract, pays the salary, deducts taxes, and contributes to pension funds. Operationally, your company defines the tasks, goals, and performance management.
This distinction is crucial: The EOR is not a recruitment agency finding you temporary staff. Nor is it just a payroll provider. It is the legal employer for all intents and purposes, including liability for compliance with Israeli labor laws. This allows you to employ workers in Israel without opening a local entity and without worrying about missing a regulatory obligation.
Why foreign companies choose an EOR instead of opening a branch
Establishing a subsidiary or branch in Israel is a process that takes months. It requires registration with the Registrar of Companies, opening files with the Income Tax Authority and National Insurance, hiring a local accountant and lawyer, and ongoing maintenance of all financial and legal aspects.
In contrast, with an EOR, you can start employing within days. This solution is ideal for companies testing the Israeli market before a major investment, or those hiring 1-10 employees where a full entity setup isn’t financially justified. The savings are not just in time, but also in legal fees, accounting, and ongoing management.
Your Security Comes First: Why You Must Work with a Licensed Provider (No. 1565)
In a complex market, knowing who you work with is essential. In Israel, the law requires a specific license to employ workers on behalf of others. NETO operates under Registered Manpower Contractor License No. 1565 issued by the Ministry of Labor. This isn’t just a formal paper; it’s your insurance policy.
The significance of working with a regulated, licensed body:
- Funds Secured by Guarantees: The regulator requires us to deposit bank guarantees against employee wages. Your money and your employees’ salaries are secured and legally protected.
- Clean Record: The license is granted only after strict checks for no criminal record and no labor lawsuits, alongside proven experience of years managing thousands of employees.
- Financial Efficiency: Our economy of scale works for you. We secure cheaper currency exchange rates and lower transfer fees, transferring the salary to the employee immediately (usually within one business day) after receiving payment.
To view our official Contractor License, click here.
Legal risks reduced by the EOR model
One of the biggest challenges in international employment is the risk of misclassification. Many companies pay workers as “Contractors” or freelancers, but in practice, an employer-employee relationship exists. In such cases, Israeli authorities may demand retroactive payment of social rights, severance, and penalties.
The EOR prevents this risk by employing the worker as a salaried employee from Day 1. The worker receives a compliant contract, a proper paystub, pension contributions, and all rights defined in Labor Laws. Additionally, the EOR handles reporting to tax authorities and National Insurance, ensuring no gaps or omissions.
Scenario: A US Tech firm wants to hire a developer in Tel Aviv
Suppose a San Francisco software company finds a talented developer in Israel. They don’t want to open a subsidiary and don’t want to deal with Israeli bureaucracy. What are the options?
Option 1: Pay them as an independent contractor. Simple in the short term, but creates legal risk. If the developer works only for the company, receives daily instructions, and uses company tools, they may be considered an employee. In case of a lawsuit, the company would have to pay retroactive severance and social benefits.
Option 2: Hire via EOR. The company signs an agreement with NETO, the developer is onboarded as a salaried employee with all rights, and NETO handles the rest. The company pays one monthly invoice covering salary, employer costs, and a management fee. Simple, legal, and safe.
The difference between EOR and Payroll-only
Payroll providers calculate salaries and issue paystubs, but they do not assume legal liability. They are not the employer. If there is a regulatory issue, the responsibility remains with your company.
EOR is completely different. The Employer of Record is the entity signing the employment contract. It is responsible for ensuring the worker receives all rights, reports are filed on time, and labor laws are followed. If something goes wrong, the EOR stands before the authorities.
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Common Mistake: Assuming Hiring a Contractor is Easier
Many companies think paying a worker as an independent contractor is an easy fix. No contributions, no slips, no bureaucracy. But in Israel, like in many other countries, authorities examine the essence of the relationship, not just the title on the contract.
If employer-employee indicators exist—like set hours, organizational subordination, use of company tools, and lack of other clients—the worker may be classified as an employee even if they signed a contractor agreement. The result: retroactive charges for all rights, including pension, convalescence pay, vacation, and notice. The EOR prevents this scenario at the root.
What the onboarding process looks like with NETO
The process is simple and fast. In the first stage, you provide the employee details and desired employment terms. NETO prepares an employment contract compliant with Israeli law and sends it for digital signature.
Once signed, the employee is registered in the payroll systems and with National Insurance. Every month, NETO calculates the salary, deducts taxes and contributions, and transfers the paystub to the employee. All reports to authorities are filed automatically. The entire process can be completed within days, sometimes even minutes, but we guarantee 24-48 hours.
What is included in a full EOR service
Comprehensive EOR service includes everything needed for legal employment in Israel. It starts with a compliant employment contract and continues with full monthly payroll management: Gross to Net calculation, Income Tax deductions, National Insurance and Health Tax, and pension fund contributions.
The service also includes managing social rights such as annual leave, sick days, convalescence pay (“Dmei Havra’a”), and travel expenses. All periodic reports to tax authorities are filed on time, including Forms 102 and 126. Upon termination, the EOR handles the final account, severance calculation, and filing of Form 161 as required.
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Comparison: Direct Employment vs. EOR
Who is this service suitable for?
International companies entering the Israeli market for the first time are a natural audience. Instead of investing in setting up an entity before knowing if the activity will succeed, you can start with one or two employees and test the waters.
Small startups also benefit from the model. When there is no HR department and no resources for complex payroll management, the EOR takes the burden. Project-based companies hiring for defined periods find this a flexible solution requiring no long-term commitment.
Companies that have been burned by misclassification or fear such risks also turn to EOR. Instead of paying contractors and hoping for the best, they prefer to hire legally from Day 1. Furthermore, the EOR helps avoid misclassification risks by understanding the nuances between employees and independent contractors.
When is EOR not the right solution?
If you have dozens of employees in Israel and local commercial activity that includes sales, invoicing Israeli clients, or extensive operations, it might be better to open a local entity. The EOR is suitable for employment, not for full commercial activity in the local market.
Mandatory rights in employment in Israel
A salaried employee in Israel is entitled to a variety of rights by law. The Annual Leave Law dictates vacation days based on tenure. Convalescence Pay (“Dmei Havra’a”) is paid annually to employees who have completed a year of work. There is entitlement to paid sick days, travel reimbursement, and contributions to pension and severance pay.
The EOR is responsible for ensuring all these rights are applied. This includes correct calculation of vacation accrual, timely payment of convalescence pay, monthly fund contributions, and handling everything related to termination while protecting employee rights according to law.
Salary calculation & Paystub breakdown
The Israeli paystub includes several components. There is the base salary, and sometimes additions like bonuses, commissions, expense reimbursements, or imputed income (car, phone). Deducted from the gross are Income Tax, National Insurance, and Health Tax.
In addition to employee deductions, there are employer costs that don’t appear in the employee’s Net but are paid: contributions to Pension, Severance, and Study Funds (“Keren Hishtalmut”), as well as the employer’s portion of National Insurance. All these appear detailed on the slip.
What happens at termination?
When it’s time to end employment, the EOR handles the entire process. This includes legal notice, severance calculation (if due), release of funds, and filing required reports. The employee receives a final account settlement, and the company doesn’t need to deal with the details.
It’s important to note that termination in Israel is subject to clear laws. There is a mandatory notice period, a required hearing process (“Shimua”) in certain cases, and rules regarding severance. The EOR knows how to manage the process in a way that protects both the company and the employee.
What affects the cost of EOR service?
The EOR cost consists of several components. The largest is the salary itself, including all employer costs. Beyond that, there is a management fee charged by the EOR, usually a fixed amount per employee per month or a percentage of the total cost.
When comparing costs, look at the full picture. Yes, there is a management fee. But there is no entity setup cost, no legal or accounting retainers, and no need for payroll systems or an internal HR team. For companies hiring a small number of employees, EOR is almost always cheaper than the alternative.
How NETO helps you
NETO offers a digital system that centralizes the entire employment process. You can view employee status, payments, and reports at any moment. Everything is transparent and accessible.
Our local team knows Israeli labor and tax laws inside out. This means you don’t have to be an expert. Have a question about vacation? Bonus? Termination? Someone is there to answer. Support is provided throughout the employee lifecycle, from onboarding to offboarding.
The system also supports complex payments like bonuses, commissions, and expense reimbursements. Everything is documented, reported, and compliant. No need to worry about things “falling through the cracks.”
FAQ
Is the EOR the day-to-day manager of the employee?
No. The EOR is the legal employer only. Your company manages the employee in practice, sets tasks, monitors performance, and conducts professional reviews. The EOR handles only the formal side of employment.
Can senior executives be hired via EOR?
Yes. The EOR model fits all employee levels, from junior developers to VPs. There is no limit on role type or salary level.
What happens if the employee wants to leave?
The process is identical to standard resignation. The employee submits notice, and the EOR handles the final settlement and fund release. If severance is due by law, it is paid as required.
Do EOR employees receive all rights?
Absolutely. Employees receive full social rights: vacation, sick leave, convalescence, pension, severance, and everything mandated by law. For the employee, there is no difference between EOR employment and direct employment.
How long does it take to start?
In most cases, an employee can be onboarded within a few days. If documents are ready and terms are clear, the process can even end within minutes, but we commit to 24-48 hours.
What happens if something changes mid-way?
Changes in employment terms, salary raises, bonuses, or scope of position are handled by the EOR. You just need to update us, and the system adjusts the calculations and reports accordingly.
About the Author
Yizhar Cohen is a CEO with rich business, entrepreneurial, and managerial experience. Holding a BA in Business Administration and an MA in Logistics, Izhar combines deep academic knowledge with broad practical vision in the business world.
Looking for a simple and legal way to hire employees in Israel without setting up a local company? Want to focus on the work itself and not the bureaucracy? Contact the NETO team, and we will build a solution that fits your needs exactly.
