Commissions are part of the salary for the purpose of calculating severance pay, and the court will not grant validity to the employee's waiver of this cogent right.

The Labour Court in Tel Aviv ruled last month on a claim by an employee that the commissions paid to him should be included in the calculation of severance pay paid to him. Conversely, the defendant company claimed that the employee had on two separate occasions signed documents in which he confirmed that he was not entitled to the inclusion of the commissions in determining the salary for the purpose of calculating severance pay[1].

The facts of the case were as follows: The defendant was engaged in advertising and signage. Each month the defendant paid the plaintiff a "basic salary" and a "commission" component for his sales in that month. Approximately ten months after the commencement of his work, the plaintiff signed a "declaration" confirming that the commission component would not be taken into account in calculating his severance pay. Subsequently, after six years of work, the defendant closed the company's advertising department and transferred the plaintiff to its subsidiary company where he was asked to sign a confirmation that he had received all the monies owed to him by the parent company and that he would not have a claim against the parent company. After approximately another four years, the plaintiff was dismissed from his work at the subsidiary company and received severance pay calculated on the basis of the basic salary only.

The Labour Court determined that in accordance with Regulation 9 of the Severance Pay Regulations, the commission paid to the plaintiff is a part that of his salary for the purpose of calculating the severance pay. The court's decision contains the following ratio decendi: First, there was no dispute that the plaintiff worked as a salesperson and that he was paid monthly for the sales he personally performed that month. The payment of the commissions was not contingent upon the fulfillment of any condition (both the fact that the plaintiff needed to make an effort to increase the amount of the commission, and the fact that in the month in which he did not sell anything, he did not receive commissions (which was the first month of employment only), did not indicate that the component was contingent upon the fulfillment of the any condition. Secondly, the fact that the amount of the "commission" component changed from month to month was viewed as the consequence of the volume of sales performed during that month and was not a reflection of the employee's performance. Thirdly, this was not an "incentive" as the company claimed. According to the ruling, an "incentive" is a payment contingent upon the fulfillment of a condition such as: setting a target by the employer to which the employee must reach before receiving any payment. Fourthly, the "commission" component constituted a significant part of his monthly salary, and at a certain stage it was even higher than the basic salary. Fifthly, it was not proven that the basic salary paid to the plaintiff was higher than the market's standard basic salary paid to sales agents. Sixthly, the fact that the monthly salary paid to the plaintiff upon his promotion to a sales manager was slightly higher than the monthly salary, including commissions paid to the plaintiff before this promotion, also demonstrated the fact that the "commission" component was part of the plaintiff's overall salary.

As regards the waiver declaration the employee signed after approximately ten months' employment, the court ruled that the employee could not forego sums whose value was not known at the date of signing the declaration, and which were certainly not specified in the document. In any event, employees should not be bound by a waiver of a cogent right. With regard to the declaration that was signed upon the transfer to the subsidiary company, the court determined that signing the declaration/waiver was presented to the employee as a condition for his continued employment, and therefore was not valid.

The court also determined that even if the employee signed the documents knowing that they were not valid, this should not be regarded as "an act of bad faith" as the company asserted and even if the court would be of the opinion that there had been an act of bad faith on the part of the employee, this would not be sufficient to deprive him of his cogent rights.