Calculating Severance Pay
The Complete Formula — 2026
By Adv. Liron Yitzhak Elmaliach | Updated: 2026 | Reading time: approx. 8 minutes
Severance pay (Pitzuei Pitourim) is one of the most important rights in Israeli labour law — and one of the most commonly disputed. Employers often pay less than they owe, or claim exceptions that do not apply. This guide explains the formula, what enters the calculation, and what to do if your employer refuses to pay.
The Basic Formula
Severance Pay = Last Monthly Salary × Years of Service
(one monthly salary for each full year of employment)
For example: an employee who earned ₪10,000 per month and worked for 8 years is entitled to ₪80,000 in severance pay.
Partial years are calculated proportionally. An employee who worked 8 years and 4 months is entitled to 8 + 4/12 = 8.33 monthly salaries.
What Enters the Base Salary Calculation
"Last monthly salary" is not always simply the last payslip amount. Courts have established what must be included:
Section 14 — Pension Fund as Severance Pay
Section 14 of the Severance Pay Law allows an employer and employee to agree that employer contributions to the employee's pension fund will serve as severance pay — rather than the employer paying severance separately at the end of employment.
Under Section 14 arrangements (which are now standard in most employment agreements signed after 2008):
- The employer contributes at least 6% of salary to the pension fund as the severance component
- At the end of employment (for any reason), the employee keeps the pension fund — no separate severance payment is made
- The employer cannot demand the money back even if the employee resigned voluntarily
Not all Section 14 arrangements are done correctly. If the employer did not properly implement the Section 14 arrangement — for example, contributing at a lower rate — they may still owe additional severance pay. This should be checked carefully, especially for long-term employees.
Who Is Entitled to Severance Pay
- Employees dismissed by the employer (any reason other than cause)
- Employees who resigned due to constructive dismissal (deteriorated conditions — see our article on constructive dismissal)
- Employees who resigned due to serious illness
- Female employees who resigned due to pregnancy, childbirth, or parental leave
- Employees who die in service (paid to their estate)
- Employees who resigned voluntarily without qualifying circumstances
- Employees dismissed for cause (subject to court review — courts scrutinise this)
- Employees with less than one year of continuous service
If the Employer Refuses to Pay
An employer who fails to pay severance pay is subject to significant penalties under the Severance Pay Law:
Late payment penalty (Section 20):
20% of the unpaid amount per year, compounded annually. For a ₪100,000 debt unpaid for 3 years — the penalty reaches approximately ₪72,800 on top of the principal. This is a powerful tool for employees.
A claim can be filed with the Regional Labour Court. With the 20% annual penalty, the longer an employer delays, the more expensive it becomes for them. Most cases are settled before reaching a full trial.
Believe you are owed severance pay?
Free initial consultation — we will calculate what you are owed and advise on the best course of action.