Fully compliant. Fully managed. No bureaucracy.
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.
Why US Companies Are Turning to EOR in Israel
Israel has become one of the most sought-after talent markets for US tech companies, startups, and global enterprises. The country produces world-class engineers, cybersecurity experts, R&D professionals, and business development talent — many of whom prefer staying in Israel rather than relocating.
For US-based companies, hiring directly in Israel creates an immediate compliance problem: you need a registered legal entity to employ someone there. Setting up an Israeli subsidiary takes months, costs tens of thousands of dollars in legal and accounting fees, and requires ongoing operational overhead — even if you’re hiring just one or two people.
That’s exactly where an Employer of Record (EOR) fits. With an EOR like NETO, a US company can:
- Hire Israeli employees within days — not months
- Stay fully compliant with Israeli labor law, tax law, and social security requirements
- Pay one consolidated monthly invoice in USD, covering salary, employer contributions, and the management fee
- Manage the employee's day-to-day work directly, while the EOR handles all HR and compliance operations
- Exit the arrangement cleanly, without the complexity of entity restructuring
Whether you’re a Series A startup adding your first Israeli engineer, a Fortune 500 company building an R&D team, or a PE-backed firm managing a portfolio company with Israeli staff — the EOR model gives you speed, compliance, and flexibility without the overhead of a local entity.
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.
Compliance & Risk Reduction: What US Companies Need to Know
Israeli labor law is comprehensive, employee-friendly, and strictly enforced. For US companies unfamiliar with the local framework, the compliance exposure can be significant. Here are the key risks when hiring in Israel without proper structure:
- Contractor Misclassification Risk — Many US companies pay Israeli workers as "freelancers." Under Israeli law, if a worker operates under employer-like conditions, courts will reclassify them as employees retroactively — triggering back-payment of severance, vacation, pension, national insurance, and penalties. The EOR model eliminates this risk from Day 1.
- Permanent Establishment (PE) Exposure — If your Israeli employee has authority to sign contracts on behalf of your company, regularly negotiates deals, or operates as a de facto representative, Israel's Tax Authority may treat your US entity as having a taxable "permanent establishment" in Israel. A proper EOR structure, where NETO is the employer of record, helps mitigate this risk significantly.
- Pension & Benefits Non-Compliance — Israeli law mandates pension fund contributions from both employee and employer, starting from the employee's very first month. Missing these contributions — even accidentally — results in penalties and personal liability. NETO handles all mandatory contributions automatically.
- Termination Process Violations — Terminating an employee in Israel without following the mandatory hearing process ("Shimua"), proper notice period, and documented severance calculation can expose your company to significant legal liability. NETO manages the full termination process in compliance with Israeli law.
The EOR model isn’t just about convenience — it’s a structural compliance solution that transfers legal employer liability from your US entity to NETO, a licensed Israeli Manpower Contractor (License #1565) with full accountability under Israeli law.
US Tax Considerations When Hiring Through an EOR in Israel
Hiring internationally always has tax implications for US companies. Here’s a plain-language overview of the key US tax angles when you use an EOR to hire employees in Israel. This is not tax advice — consult your CPA or international tax counsel for your specific situation.
- EOR Costs Are Generally Deductible — The monthly invoice you pay to NETO — covering the employee's salary, Israeli employer contributions, and the management fee — is typically treated as a deductible business expense for your US entity, similar to any other professional services fee.
- No US Payroll Tax Obligations for Israeli Employees — Because NETO is the legal employer in Israel, your US company does not run Israeli workers through US payroll. You are not subject to FICA, FUTA, or state payroll tax withholding for these employees.
- FBAR / Form 8938 May Apply — If your company makes payments to foreign entities or maintains any foreign accounts related to the EOR arrangement, your tax counsel should review FBAR and FATCA reporting obligations.
- Transfer Pricing Considerations — If the Israeli employees perform work that creates significant intellectual property, R&D output, or other value for your US entity, there may be transfer pricing considerations — meaning the IRS could scrutinize whether the intercompany arrangement is priced at arm's length. This is typically more relevant for larger-stage hires.
- US-Israel Tax Treaty — The US and Israel have a tax treaty that governs how income, dividends, and other payments between the two countries are taxed for US entities. For US companies using an EOR, the most relevant treaty provisions typically relate to PE determination and withholding taxes.
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.”
Watch: How NETO’s EOR Model Works
In this short video, you can see how the employment process through NETO works from the first moment to ongoing management:
FAQ: Hiring in Israel from the US — What International Companies Ask
These are the questions we hear most from US and global companies exploring EOR in Israel for the first time.
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.
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