Israel's High Court Signals It Won’t Rule Against Pay Cap for Bankers

But justices express concern about provisions that retroactively strike at pension and severance agreements.

Finance Minister Moshe Kahlon, March 30, 2016.
Ofer Vaknin

The High Court of Justice on Wednesday signaled it will not disallow Israel’s controversial pay cap on executives in the financial services industry, but it expressed strong misgivings about the law’s retroactively imposing a ceiling on severance pay.

“We don’t think there is room to intervene in the essence of the pay-ceiling law for senior financial executives,” Justice Miriam Naor said, responding to petitions by industry groups representing Israeli banks and insurance companies.

Naor’s opinion took the petitioners by surprise. “I’m speechless. I regret your position,” muttered David Tadmor, who is representing the Israel Insurance Association.

The lawsuits were filed after the Knesset earlier this year imposed a pay cap on financial-service executives – a rule that will mainly affect top bankers – and limits their pay to 35 times the salary of the lowest-paid employee of the same institution.

The pay ceiling is the toughest ever imposed by a Western country, but the main problem critics have said is that it retroactively imposes the caps on pensions and severance agreements whose terms were reached before the law went into effect, in many cases years before.

On Wednesday Israel Leshem, the attorney representing the Israel Banks Association, warned that a wave of top bankers will quit before the law is due to go into force next month. Echoing that prediction, Bank of Israel Banks Supervisor Hedva Ber expressed concern about the loss of talent and experience to the industry.

“We have reviewed the law itself and see no legal problem requiring a solution – there are limits to judicial intervention. The main thing is we are all uncomfortable transition provisions of the law. I am looking for a practical way to get around it,” Naor said.

The problem of the transitional instructions, which deal with the impact of the law on employee rights and agreements made before it goes into force, is that the essence of the legislation changed at the last minute. The original bill denied tax benefit on salaries exceeding the pay cap, but Finance Minister Moshe Kahlon amended it before the Knesset approved the law, turning it into an absolute ceiling.

Deputy Attorney General Avi Licht had sought to surmount the problem by proposing in a legal opinion he prepared for the Bank of Israel that bankers affected by the law could turn to the Labor Court on a case-by-case basis, knowing that the state would not try to defend the law’s retroactive elements.

But on Wednesday the justices looked askance at Licht’s solution. “The idea should be to reduce the transitional instructions so that there won’t be constant litigation over the years in the Labor Court,” said Supreme Court Vice President Elyakim Rubinstein.

The court also used the opportunity of the high-profile case to criticize the haste with which the pay cap and other legislation was approved by the Knesset and put into effect.

“I want to make a protest,” said Naor. “The government and the Knesset must take into account in instances like these the very likely probability that a law will be subject to a legal challenge. There’s no reason in the world to set a timetable for the law to go into effect that forces the court to abandon other business and read hundreds of pages [of legislation] just because the legislator doesn’t give enough time. We’ve seen this happen in a number of cases recently.”