JERUSALEM — The Israel Aerospace Industries workers’ union has announced a labor dispute and is threatening to disrupt the company’s supply to its customers.

The dispute, announced Monday, follows the Israeli Finance Ministry’s demand that it regulate so-called salary anomalies found within the state-owned defense company. The government is seeking the return of hundreds of millions of shekels that IAI employees received over multiple years without governmental approval, contrary to what is customary in state-owned firms.

But the union describes the anomalies as incentives, claiming they are primarily meant to help with employee retention. The union wants the salary deviations to be incorporated into the company’s budget.

The union added that if the Finance Ministry does not meet its demands, the supply of the Arrow 3 air defense system to Germany, which is the largest defense deal in the history of Israel and the company, will be among the disrupted programs.

“Our goal is not to harm the company or its customers,” Yair Katz, chairman of the union, told Defense News. “Rather, exactly the opposite: to preserve it by preserv[ing] our employees.”

“Since our demands were not met by the Ministry of Finance, we declared a labor dispute, and we now demand the intervention of the prime minister,” Katz added.

Katz said IAI workers will not carry out their threat of disruption until after they have exhausted discussion procedures with all the relevant parties, including Prime Minister Benjamin Netanyahu and the minister responsible for the authority of government companies, David Amsalem.

A meeting held with Amsalem on Tuesday — which also involved IAI management, the union committee and the salary commissioner with Israel’s treasury — ended without an agreement.

“The employees don’t want foreign customers to think twice about doing business with the IAI, but if our issue will not be addressed, it is possible that the prime minister will receive complaints from foreign leaders about delivery delays of systems, and then he will understand the magnitude of the crisis and intervene to solve it,” Katz said.

The treasury has said it is ready to meet with the company’s management and union representatives to discuss a new collective agreement that will respond to the changing labor market.

However, the union said the proposals from the latest meetings did not address the issue to their satisfaction.

Defense News has learned that during Tuesday’s meeting with Amsalem, the parties decided to try drawing up an interim agreement within a week that would last for three months, during which they would discuss a permanent agreement to resolve the issue. An interim agreement is yet to be signed.

On Thursday, the Israeli Defense Ministry announced that officials representing the government and the German Defence Ministry met to discuss the production of the Arrow 3. The contract was signed in November 2023 after approval from the U.S. government in August that year. Germany is set to receive its first Arrow 3 battery as early as the end of 2025. Germany has already transferred $600 million of the $3.5 billion deal, and IAI is supposed to complete the delivery of the remaining batteries up through the end of 2030.

An Israeli delegation meets with their German counterparts amid negotiations over selling the Arrow 3 air defense system. (Israeli Defense Ministry)

IAI has experienced so-called salary irregularities for several years, with the treasury bringing them up annually. Until the recent dispute, the Israeli government had conceded to one-off salary increases for IAI employees, while also agreeing to discuss with the union a way to settle so-called salary anomalies and set up a new employment agreement. But these discussions never ended in a resolution.

The workers’ union and the company itself are united in the union’s demand to incorporate the alleged salary anomalies into the company’s budget.

IAI is fully owned by the Israeli government and as such is subject to supervision by the Finance Ministry, which outlines the salary framework for the company’s managers and employees.

“IAI employees have been working 24/7 since Oct. 7, and the decision of the salary commissioner at the Ministry of Finance comes in the most wrong timing,” Boaz Levy, the chief executive of IAI, told Defense News, referring to the day Hamas attacked Israel, which led to the ongoing war in Gaza.

“Wage irregularities are nothing new, and the issue can wait until the war subsides,” Levy added. “The company’s management and its employees should not be distracted from their work due to this issue. And the company’s board of directors, its management and its workers’ union stand together in opposition to it. The company is ready for a new collective agreement, but this is not the time.”

The executive expressed confidence that the prime minister’s intervention would help, noting that any resolution would be ”a temporary solution until the end of the war,” after which there would need to be “a comprehensive solution.”

The Prime Minister’s Office did not respond to Defense News’ request for comment.

The Finance Ministry declined to discuss whether it will impose sanctions on the company, its management or its employees — or whether a solution has been found.

However, the ministry did tell Defense News that its commissioner in charge of payments “is not opposed to salary promotions for IAI employees, provided that these promotions do not lead to a deepening of the existing salary anomalies.”

Amid the dispute, Levy said, the company will “continue to work fully, both with our clients abroad and in Israel.”

“But I cannot declare that there will be no disruption, since I do not know what the day will bring,” he added.

Tzally Greenberg is the Israel correspondent for Defense News. He has experience reporting on economic affairs as well as defense and cyber companies.

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