The former housekeeper, Meni Naftali, said the 170,000 shekel ($44,000, 39,000 euro) payment covering distress and court costs was a "small victory" but not the end of his campaign to improve working practices at the Netanyahu's official Jerusalem residence.
"I advise any person who has been abused, no matter who he is or where he is employed, to stand up for his rights and claim what is due to him," he told Israeli public radio.
"I'm writing a book (and) I don't intend to stop here," he added.
Naftali, who said he is now working as a night security guard, filed the suit in the Jerusalem District Labour Court in March 2015.
He accused the Netanyahus of failing to pay him overtime for long and arduous working hours as well as verbal abuse, including a 3:00 am dressing-down by the premier's wife Sara for buying the wrong brand of milk.
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The Netanyahus had dismissed the claims as an attempt to sully their image.
Before Netanyahu's re-election campaign last spring, media reported that Sara had pocketed at least $1,000 worth of public cash by collecting the deposits on empty bottles returned from the residence.
Naftali was quoted in media last year as talking of "uncontrolled tongue-lashings" from Sara Netanyahu.
"The court had before it many testimonies indicating that the conditions of employment in the residence were harmful due to the behaviour of Mrs. Netanyahu and her attitude to the employees," judge Dita Pruginin said on Wednesday, quoted by Haaretz newspaper.
"Those included exaggerated demands, insults, humiliation and outburst of anger."
The damages are to be paid by the state, as Naftali was employed by the prime minister's office rather than by the Netanyahus personally.