• 1 NCL 15868-04-18 Kota v. the City of Raanana and el. (2022).

1In April 2021, the Israeli National Labor Court delivered its landmark decision in the KOTA case1. In a 200-page decision the labor court clarified a troubling question in Israel’s labor law - the proper legal mechanism to be utilized in cases of retroactive declaration of employment status. This short note will first briefly examine the necessary legal background of the Kota case decision (I), followed by a summary of the case (II) and a short note on status and contract under Israel’s current labor law (III).

• 2 NCL 3/27-31 The City of Netanya v. Birger (1971).

3The terms « employee » and « employer » are not defined in Israel’s labor legislation. Therefore, since its establishment in 1970, it was the specialized judiciary tribunal in Israel, the labor court, which over the years was entrusted with the difficult task of defining and formulating the proper definition and meaning of these terms. During these years Israel’s labor courts (and the National Labor Court in particular) developed a rich set of combined legal and factual tests which aim to distinguish, to the extent possible, between an employee and an independent contractor in Israel’s labor law. Currently, the main test to be utilized is the integration test. This test evaluates the work performer’s level of integration in the work provider’s enterprise or organizational framework, while also verifying that the work performer does not use his or her own organizational framework or enterprise to supply the disputed work2.

• 3 E. Eshet, « Labor Law », Israeli Legal System, Walter, Medina, Scholz, Wabnitz (eds.), 2018.

5Based on Israel’s common law legal tradition, in its decisions the National Labor Court does not only determine, retroactively, the proper legal relations between the contracting parties of the particular dispute to be adjudicated. It is also entrusted with the task of shaping and determining the proper legal norms which should govern, in the absence of legislation, these legal questions. Setting the proper precedent that will affect the future behavior of the parties serves as an important role in the casuistic legal development of Israel’s labor law3.

• 4 For example, entitlement to severance payment according to Israel’s Severance Pay Law 1963, entitle (...)
• 5 For Israel’s exclusive representation model see E. Eshet, « Coercion and Freedom in Labor Law: Amer (...)

6Under Israel’s adjudicated legal norms prior to the Kota case, if A was declared an employee by the labor court, but originally was considered an independent contractor by the mere wording of the parties’ contract, then A was entitled only to the monetary benefits which he or she had lost, based on his or her false classification as an independent contractor4. Israel’s labor court traditionally emphasized that it cannot « turn back the wheel » by magically turning a falsely classified independent contractor into an employee. For example, the labor court stressed that some non-monetary rights which the false independent contractor had lost, due to his or her false status, could not be compensated by the retroactive nature of the adjudication declaration, such as the opportunity to be promoted by the enterprise over the years, or the opportunity to join the enterprise bargaining unit and to be represented by the exclusive trade union5.

• 6 Although in rare cases, in which the employee acted in extreme bad faith, the National Labor Court (...)

8Furthermore, the labor courts acknowledged the inherent imbalance of the employment relationship, and traditionally were unwilling to accept the employer’s allegations of employee bad faith behavior due to his or her reneging on the original wording of the contract, which classified the relations as a business relationship between an independent contractor and his or her customer6.

• 7 Meaning that the declared employee should restitute the payments he or she received as an independe (...)

10Let’s assume an independent contractor B received remuneration above and beyond his or her salary (and entitlements) as an employee. Should that circumstance be ignored by the labor court? Should the labor court declare B’s claims as breach of his or her good faith requirement? Should the labor court offset B’s remuneration as an independent contractor against B’s entitlements as an employee? Prior to the Kota case the labor courts were divided on these issues. Several judges maintained that B’s remuneration should be offset against his or her entitlements as an employee only in cases where B’s bad faith was proved, and B’s remuneration as an independent contractor outweighed his or her entitlements as an employee. Some ordered not only offsetting but also partial restitution7. Still others set different thresholds for ordering offsetting. Thus, offsetting was the main tool utilized by the labor courts to deter employers from false classification of employees as independent contractors. It was against this legal background that the Kota case was decided.

• 8 The Kota case was decided by a full bench of judges of the National Labor Court and was long antici (...)
• 9 The court also recognized the punitive aspects of non-monetary compensation, see p. 126.

11Seven judges and two lay judges adjudicated the Kota case over 200 pages, deciding on two main questions8. The first question, about which all the bench agreed, pertained to the proper legal mechanism to be utilized in retroactive declarations of employment status. The court decided that there was a need to change the deterrence tool in retroactive classification cases, from the binary offsetting option to a more delicate mechanism – judicial determination of non-monetary compensation9.

• 10 See G. Davidov, « Contractual Stipulation Concerning ’Employee’ Status and its Implications », Mish (...)

12This change was also justified by academic writing which elaborated on the flaws in using the dichotomic offsetting option and recommended adopting a more sensitive and just legal mechanism aimed at deterring future employers from false classification of employees10.

• 11 According to the decision, the employer bears the burden to prove the theoretical salary of the emp (...)
• 12 See Kota case, p. 57. The court also invalidated the employer’s claim for restitution of payments f (...)

13The court’s decision articulates the proper method of dealing with entitlements stemming from reclassification of an independent contractor as an employee. According to the court, the first step is to award monetary compensation to the employee, based on the monetary damage the employee suffered from their false classification. The calculation is based on balancing the theoretical employee’s compensation (salary and other monetary benefits) as an employee with the actual remuneration they received as an independent contractor11. In cases where the independent contractor’s remuneration exceeded that of the theoretical employee’s compensation, mandatory offset will be utilized12. In other cases, the employee should be awarded the monetary compensation.

• 13 See Kota case, p. 58, 59. The court suggests a variety of considerations in deciding to award non-m (...)

14The second step is to determine the non-monetary compensation and its extent. The court decided that compensation should be awarded in all cases which involve false classification unless the employer convinces the court to refrain from its award. The court explains that some employment-based rights (tenure, promotion) cannot be monetarily determined, and therefore cannot be compensated through the first step. Another important justification for awarding non-monetary compensation is the need to properly deter employers from false classification13.

• 14 For example, if the evidence shows that the individual deemed to be the employee specifically deman (...)
• 15 See Kota, p. 30.
• 16 The Chief Justice’s opinion was supported by the opinions of Judge Poliak, Judge Soffer and Lay jud (...)

15The second question, on which the court was divided, dealt with the possibility of rescinding the employment status due to the employee’s bad faith14. According to the lead minority opinion, written by the Chief Justice of the court, Justice Virt-Livne, due to changes in technology and in the modern workplace (remote work, outsourcing), and due to the need to recognize the mutual need for flexibility in determining the work relationship, it is justified, in proper cases, to provide a contractual leeway to the contracting parties15. This required leeway led justice Virt-Livne to recognize a possibility in which employee bad faith could prevail over the « status » of employment, at the initial phase, thus, removing the need to calculate the employee’s entitlements as such.16

• 17 An idiomatic phrase coined by Prof. Aaron Barak (former Chief Justice of the Israeli Supreme Court)
• 18 See p. 108 - 116 (juge Davidov-Motola); p. 154-158 (juge Itach & juge Gliksman); p. 171-172 (juge O (...)

16The majority opinion emphasized the principle of jus-cogens on which Israeli labor law was built, and was reluctant to recognize recent labor market changes as requiring adaptation of this fundamental principle. According to the majority opinion, since employment relations are close to employment « status », the proper « geometric-normative point »17 in taking into consideration good or bad faith behavior is during the second phase. It is in this phase that entitlements are determined, not during the first phase in which legal classification of the work relationship is determined18.

• 19 Sir Henry James Sumner Maine, Ancient Law, Its Connection to the History of Early Society, 1861, p. (...)
• 20 O. Kahn-Freund, A Note on Status and Contract in British Labor Law, The Modern Law Review, vol. 30, (...)
• 21 Sir H. J. S. Maine, Ancient Law, Its Connection to the History of Early Society, op. cit., p. 99: « (...)

18The tension between status and contract in labor law is neither new nor local. Nevertheless, it is quite odd that in 2022 Israeli labor law, as reflected in the Kota case, is still deliberating this issue. Maine’s Ancient Law, formulated in 1861, never meant to describe modern employment relations. On the contrary, according to Maine, when referring to labor relations - « the status of the Slave has disappeared - it has been superseded by the contractual relation of the servant to his master »19. It was Prof. Kahn Freund who correctly distinguished between two separate legal techniques, between Maine’s concept of legal «status» and England’s labor law which can be conceptualized as placing limitations on the traditional freedom of contract20. Hence, labor relations are not considered legal « status », at least not through Maine’s ancient lens, or Kahn Freund’s modern lens21.