Employment in Indonesia: Maneuvering Essentials Laws for Business Success

ADCO Law

The employment relationship in Indonesia is primarily governed by contractual agreements covering work, instructions, and wages. Indonesian employment laws offer flexibility within these agreements while ensuring fairness for both employers and employees by establishing standard values or minimum standards. For example, although specific wage scales aren’t mandated, minimum wage provisions exist to safeguard employees’ rights.

Similarly, as remote work or working-from-home arrangements become more prevalent, Indonesian regulations do not offer detailed guidelines on implementation. However, they do set limits on weekly working hours and stipulate rest time requirements, ensuring a balance between work and personal well-being for employees.

In Indonesia, the key elements that employers should include in employment contracts are primarily regulated in Article 54 (1) of Law Number 13 of 2003 on Manpower, as last amended by Law No. 6 of 2023 on Stipulation of Government Regulation in lieu of Law Number 2 of 2022 on Job Creation into Law (referred to as “Indonesian Employment Law“). These provisions stipulate that an employment contract must include:

1. Name, address, and type of business;
2. Name, gender, age, and address of the employee;
3. Title or type of work;
4. Location of work;
5. Amount of wages and the method of payment;
6. Working conditions outlining the rights and obligations of both employer and employee;
7. Start and validity period of the employment contract;
8. Place and date of the drafting of the employment contract; and
9. Signature of the parties.

While these elements need not to be explicitly stated for validity, it’s advisable to include them to mitigate potential misinterpretations during implementation. Customization of contracts is allowed, but adherence to prevailing laws is compulsory. Indonesian Employment Law requires contracts to meet minimum standards for legal validity and mutual protection.

Employment laws and regulations in Indonesia outline at least 15 valid reasons for termination, each with its own severance package calculation based on factors like length of service and compensation entitlements. However, employers and employees can opt for mutual agreement as an alternative dispute resolution method for termination. This approach fosters an amicable resolution, addressing concerns like severance package and compensation calculation. It’s crucial to recognize that each termination reason carries inherent risks for employers, including litigation, compliance, reputational and commercial risks. Hence, careful consideration of laws, regulations, and practical approaches is vital before formal termination.

Severance packages in Indonesia typically include severance pay, tenure awards, and compensation for unclaimed rights such as unused annual leave.

The calculation formula is meticulously outlined in Indonesian regulations, particularly Government Regulation Number 35 of 2021. However, the prevailing regulations only set a minimum standard, and that allows for more generous calculations outlined in employment agreements, internal company regulations, or collective labor agreements to take precedence.

While there are numerous unique aspects regarding employment in Indonesia, the following are some of the most concerning aspects that employers must pay attention to when dealing with employment issues in Indonesia:

Employee Termination

Indonesian employment laws and regulations impose strict regulations on termination of employment, including requirements to provide written notice for certain termination reasons and to pay severance packages consisting of several components, and many more. Employers must adhere to these regulations to avoid potential legal disputes and penalties.

Wage and Non-Wage Income

Components of wage and non-wage income are regulated by Indonesian employment laws and regulations, with which employers must comply. Based on Indonesian Employment Law, wage arrangements consist of (i) wages without allowances; (ii) basic wages and fixed allowances; (iii) basic wages, fixed allowances, and variable allowances; or (iv) basic wages and variable allowances. Furthermore, the laws have also stipulated that if the wage component consists of a basic wage and fixed allowances (and variable allowances, if any), then the amount of the basic wage shall be at least 75% (seventy-five percent) of the sum of the basic wage and fixed allowances.

Expatriates Can Only Hold a Certain Position within a Certain Period

While Indonesia welcomes foreign workers, regulations limit their tenure and positions. Expatriates can only hold specific positions for a certain period, as stated in Article 42(4) of Indonesian Employment Law and Article 4(1) of Government Regulation Number 34 of 2021 on the Recruitment of Expatriates. Adherence to administrative rules is essential to mitigate risks.

Penalties or sanctions resulting from non-compliance with employment laws and regulations in Indonesia vary from administrative to criminal sanctions.

Staying up to date and Reviewing the Latest Employment Regulations

In Indonesia’s dynamic regulatory landscape, keeping current with the latest employment regulations is essential for businesses to mitigate legal risks and maintain smooth operations. Non-compliance with new regulations can lead to severe consequences such as penalties, lawsuits, and reputational harm. Proactively researching and reviewing the latest regulations allows employers to adjust policies and practices accordingly, fostering compliance and sustainability while minimizing risks.

Reviewing Existing Employment Documentation

Following a thorough review of the latest laws and regulations, employers should evaluate existing employment documentation for alignment. Any inconsistencies should prompt consideration of immediate amendments or validation until expiration. Regular reviews and updates are essential to maintain alignment with evolving laws and regulations.

Seeking Guidance

Given the intricate nature of Indonesian employment law, seeking professional legal guidance is imperative. Understanding obligations and ensuring compliance can avert costly legal issues. Therefore, employers are advised to engage legal experts to navigate the legal landscape effectively and uphold adherence to employment laws and regulations in Indonesia.