In 2019, Israel’s Restaurants Are Getting Eaten Alive

Despite a growing economy, the restaurant industry in Israel has been in a bad state for the last two years

Staff protesting in Tel Aviv, September 21, 2018.
Daniel Sela

The restaurant business has never been for the faint of heart — long hours, changing trends, tax inspectors and frequent staff turnover. But for Israeli restaurateurs, 2019 could prove to be especially bad as they contend with the impact of court rulings that were made over the last year and kick in over the next few.

As it is, the country’s restaurant industry has been in a bad state for the last two years even as the economy overall has been doing well. According to the Israel Restaurants Association, the number of restaurants, cafes, bar and similar businesses operating nationwide declined in 2017 by about 2,000 to 13,750 at the end of the year.

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More restaurants closed than opened. Among the casualties were old, familiar names, including Orna and Ella, which shut its doors after 25 years, and the Red Chinese, which was in business for 40 years.

The ones that did survive the past two years are suffering economically, squeezed by new taxes and rules, higher costs for ingredients and other inputs and diners who resist paying more for a meal out. Banks are wary of the restaurant business even in the best of times and don’t lend money except on stiff collateral terms.

“It’s hard to survive in our industry. About 35% of all restaurants and cafes close in their first year and 80% within their first five years of operations,” says Shai Berman, the association’s CEO. “A lot of people think it’s a glamorous, sexy business but the reality is you have to deal with rules and regulations, a lack of workers, higher costs and profit margins of less than 10%.”

Still, it’s a big industry. Annual turnover is 20 billion shekels ($5.6 billion) and it employs 190,000 people, 100,000 of them waiters. Although the average return on a restaurant is 8%, according to the association, many restaurants are losing money.

The biggest challenge restaurateurs’ face in 2019 is a labor court ruling that starting January 1, 2019 tips are to be regarded as part of servers’ pay, meaning that they will be taxed, used to set pension contributions and to set social benefits like unemployment and National Insurance Institute (social security) allowances.

This marks a sea change for a segment of the business that has long been off the books. Worse still, there are rumors that the Israel Tax Authority will require restaurants to charge the 17% value-added tax on tip income, meaning the value of the tips to the staff will be reduced.

For the record, the authority calls the VAT rumors nothing more than idle speculation. But, adds a spokesman: “Until now we haven’t taken a stand on VAT. When we have formed an expert opinion, we first issue a draft circular to the industry to get its opinions and after we’ve elicited reactions we issue a formal directive.”

The Orna and Ella restaurant.
Tomer Appelbaum

Berman said that with all the deductions restaurant owners will have to make, waiters’ pay from tips will drop by 20% to 30%, which will make the work less attractive.

“We have nothing against waiters getting social benefits, but you have to understand that the safety net the Histadrut [labor federation] has set up for waiters will reduce their take-home pay without the employers being able to do anything to help,” says Berman.

“The current system isn’t perfect but it enables 100,000 people with no skills to make 70 to 120 shekels an hour, which is something you can’t earn anywhere else,” he says.

Others say the court-ordered changes will be for the better because waiters and kitchen staff have lacked formal work conditions.

“There are 100,000 waiters that on paper are salaried workers — they fill out tax forms and the tax authority and NII regard them as part of the workforce, but from the point of view of their employers they aren’t salaried employees but are people who have the right to collect tips for waiting on tables,” says Alon-Lee Green, a social activist who organized Israel’s first waiters union.

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The second challenge has arisen from a court ruling that imposed a 300,000-shekel penalty on Tel Aviv’s Café Noir for trying to block a union from organizing its wait staff. The case originated 18 months ago when Café Noir employees accused management of taking tip money and redistributing it unfairly. Amid noisy protests, they sought to unionize.

At the end of last month, a regional labor court in an unprecedented decision imposed the penalty, prompting the owners to warn that the restaurant couldn’t afford a cost like that, may have to close and are appealing the decision.

Green dismissed Café Noir’s protests. “It’s a strong business that could have spent more on their workers over the years. I don’t think they’re going to close it because they have to pay. They have to take responsibility for what they did,” he says.

For now, the ruling has no broader implications, but it could easily prompt other restaurants’ workers to unionize and win better conditions — at the same time risking the future of the industry where profits are already razor-thin.

Restaurateurs also face the impact of a September 2017 ruling that employers must pay a 20% charge on asylum seekers who have temporary legal residency – the same charge that is charged on other foreign guest workers.

The charge, which restaurant owners must put into a deposit held for the workers, comes on top of a 16% set-side they also have to place in a deposit that the workers can claim when they leave Israel. The idea is both to raise the cost of employing them and encourage them to leave the country.

But the practical effect is to raise costs for restaurants, which have no choice but to hire asylum seekers from Sudan and Eritrea to fill shortages for low-skilled jobs. Estimates are that the restaurant industry employs about 10,000 asylum seekers, mainly in cleaning and dishwashing.

The ruling is coming into effect this year because the tax authority has only now begun issuing assessments. Yaron Gindi, president of the Tax Consultants Association, which represents small and medium businesses, including restaurants, says it has already had a profound impact.

“In my office building alone four restaurants will probably close this year because of the charges,” he says. “Many restaurants have already received assessments, and it’s time to pay, which means that many businesses will collapse.”