Israel's High Court Calls for Tips to Be Taxed, but Takes No Action

At the request of the attorney general and National Insurance Institute, the court considered changing the system under which tips in Israel go largely untaxed, but ultimately deferred the issue to lawmakers.

The High Court of Justice has called on lawmakers to change the status quo whereby the majority of the tips given to waiters in Israel go unreported to the tax authorities.

An estimated one billion shekels in tips are given in Israel every year, and tax is very rarely paid on them. The High Court decided not to take direct action on the issue, despite the unambiguous and unusual request from the attorney general and the National Insurance Institute to do so.

The panel of seven judges reiterated their previous ruling that tips are considered the income of the waiters who receive them rather than of the restaurants they work for.

In explaining his conservative response, Supreme Court President Asher Grunis said intervening would be undesirable "judicial legislation." Justices Salim Joubran, Hanan Melcer and Edna Arbel agreed, while court Vice President Miriam Naor and justices Esther Hayut and Elyakim Rubinstein disagreed.

In a previous ruling, the National Insurance Institute was made to pay a dependent's allowance to the family of a waiter who drowned in 1996. According to the ruling, the allowance was calculated according to a wage that included income from tips.

In the current case, the court, at the request of the National Insurance Institute, considered whether to deviate from previous laws and recognize the tips given to waiters as if they were paid to restaurants. The attorney general weighed in, asking the High Court to clarify the income tax directive so that tips would be considered part of restaurants' incomes and transferred to waiters.

"The existing legal situation is especially convenient for  restaurateurs, as it allows the unacceptable practice whereby waiters' salaries in many restaurants are calculated on the basis of tips, are not properly registered and do not have tax or national insurance contributions deducted from them," he said.

The attorney general and the National Insurance Institute said a situation has been created whereby the institute is sometimes required to pay out benefits for which it has not received contributions. The attorney general argued that tips should be recorded along with restaurants' earnings. When they are transferred from restaurants to waiters, they can be recorded as an outlay. In this way employers will be forced to make the necessary insurance and tax deductions.

But Grunis ruled it would be inappropriate for the judiciary to create a new, comprehensive plan to reform the status of the tips. "I believe that from an institutional point of view, such questions should be resolved by the legislature rather than by means of a judicial inquiry and a 'judicial legislation' decision," he said.

David Bachar