False economy? Paying temps a pittance has saved Israel Post hundreds of millions over the years.
Israel Post: Will the government let it go bankrupt? Photo by Moran Maayan
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The Israeli postal service is hoping to avoid a huge lawsuit by subcontracted workers it employed for years, under conditions that were inferior to those of direct postal employees, TheMarker has learned. The cost of such claims, if made, could reach hundreds of millions of shekels.

Thousands of subcontracted workers that were employed through personnel agencies did not receive payments for mandated supplementary benefits that colleagues who were directly employed by the government company did get. The postal service stopped the discriminatory treatment four-and-a-half years ago.

Israel Post, a government corporation under the supervision of the Communications Ministry, also failed to maintain reserves in the event that the subcontracted workers make claim to the payments, despite the severe implications on its liquidity.

These facts have been obscured for years in the postal service's financials. Sections were blackened out and censored to keep formerly contracted employees from discovering that there was money owed to them.

Denying the workers the payments has saved the post office hundreds of millions of shekels in expenses over the years. But fearing the workers would sue, and on the advice of legal counsel that it would likely lose such a case, the Israel Post recorded a NIS 400 million to NIS 500 million accounting provision in its books in 2001, without specifying the reason in its statements.

Most of the exploited workers are at the lowest socioeconomic strata, unaware of their legal rights, and few have made claims about the money. It is not believed that the postal service has attempted to locate or pay these workers their due, even though management has long been aware it lacks any viable defense against a potential lawsuit. Meanwhile the statute of limitations is ebbing away and the post office cancels part of the provision each year, recording this under "other income." Its write-downs totaled NIS 47 million, NIS 68 million, and NIS 64 million in 2009, 2010, and 2011 respectively.

The statute of limitations hasn't yet expired for the last 2.5 year period, however, and Israel Post is still exposed to the tune of NIS 150 million. But despite the remaining contingency on its books, it does not actually have the means to pay that kind of money, if a large-scale claim is to be made. If that should happen, the service would have difficulties paying off its other creditors, including NIS 400 million in bonds raised just two years ago.

Denial of payment results in postal profit

Credit rating agency Midroog ranks the bonds relatively high at A2, but its report makes no mention of the service's legal exposure to employee claims.

Israel Post told TheMarker, "Every company is entitled under law to manage its risks. Provisions in the financial statements are carried out in concert with the company's accountants and according to legal opinions."

Israel Post's financial reports show it moved from a NIS 34 million net loss in 2010 to NIS 14.7 million in net profit last year, but this includes NIS 64 million in "other income," attributable to unclaimed worker entitlements. Had the company paid what it owed, it would have recorded a NIS 48 million loss.

Cash flow from operating activities totaled NIS 116 million, bringing the balance of cash and equivalents to NIS 199 million. The peculiarity of the last calendar day of last year falling on Saturday postponed NIS 40 million in payments to January 1, 2012, according to CEO Haim Elmoznino, thereby artificially inflating the positive cash flow.

The company's financial position as reflected in its statements is far from what Elmoznino and chairman Sasi Shilo described in a letter to the Finance and Communications ministers just two months ago. "The financial foundation on which Israel Post rests is continually deteriorating," they wrote. "Each passing day that nothing is done brings the company closer to the brink and raises the cost of stabilizing its financial robustness."

The post office's struggles aren't yet over. It expects to receive between NIS 320 million and NIS 370 million in assistance from the treasury, to fund the early retirement of 500 employees, with an estimated four to five year payback period on the investment. It anticipates this move will allow it to hire cheaper labor and improve service.