Ensuring Compliance with Indonesia’s 2025 Minimum Wage Regulation: Legal Perspective for Businesses

The Ministry of Manpower’s Regulation Number 16 of 2024 concerning the Determination of the 2025 Minimum Wage mandates a 6.5% increase in Indonesia’s 2025 minimum wage, impacting businesses significantly. While promoting fair compensation, this poses challenges, particularly for labor-intensive sectors. Compliance is crucial, as paying below the minimum wage may lead to severe penalties under Law Number 13 of 2003 on Employment as lastly amended by Law Number 6 of 2023 on Determination of Government Regulation in Lieu of Law Number 2 of 2022 on Job Creation Law to Become a Law (“Indonesian Employment Law“), including imprisonment and hefty fines. Micro and small businesses (“UMK”) have flexibility in wage-setting, provided legal minimums are met. To navigate these changes, businesses are advised to consider strategic restructuring, optimize resources, and realign operations.
On 4 December 2024, the Ministry of Manpower issued Regulation Number 16 of 2024 concerning the Determination of the 2025 Minimum Wage. This regulation introduces a significant change: a 6.5% increase in the minimum wage for 2025 compared to the previous year. This adjustment is applied uniformly at the provincial and regency/city levels.
While the wage increase reflects the government’s commitment to promoting fair compensation for employees, it also presents challenges for businesses. The wage increase will inevitably lead to higher production costs, particularly for sectors that are labor-intensive and depend on manual labor. Businesses must adapt quickly, as failure to do so could mean falling behind in the competitive market.
Adhering to minimum wage regulation is not merely a matter of compliance for businesses operating in Indonesia; it is a critical factor in preserving their reputation, boosting employee morale, and ensuring operational stability.
According to Article 88E paragraph (2) of Indonesian Employment Law, businesses are unequivocally prohibited from paying wages below the established minimum wage. Non-compliance with this provision can result in severe penalties, making it imperative for businesses to grasp both the legal and practical implications of this regulation. In essence, failure to comply is not just a violation of the law—it could also harm the company’s reputationin the long run.
Read More: Employment Insight 2024
Flexibility for Micro and Small Businesses
For UMK, the Indonesian Employment Law offers a degree of flexibility in wage determination. Businesses in this category may set wages through mutual agreement with their employees, as long as the agreed wages meet the minimum requirements.
Under Government Regulation Number 36 of 2021 on Wage as lastly amended by Government Regulation Number 51 of 2023, wage must be at least 50% of the average consumption of the community at the provincial level and no less than 25% above the provincial poverty line. This approach strikes a balance, recognizing the financial constraints often faced by UMK while ensuring fundamental protections for employees.
Strategic Organizational Restructuring
For businesses that anticipate difficulties in meeting the new minimum wage regulation, organizational restructuring may be a necessary course of action. Restructuring enables businesses to optimize resources, increase efficiency, and align their financial capabilities with regulatory obligations.
One approach involves re-evaluating hiring practices to minimize redundancies. By adopting more cautious hiring strategies, businesses can ensure that each new hire aligns with critical business needs, thereby preventing excess employees from further burdening financial resources. Additionally, a thorough review of employment agreements, company regulations, and collective labor agreements can uncover opportunities for employee reallocation. Strategic employee transfers or rotations—within the prevailing legal and regulatory framework—can help address shifting operational demands without having to resort to layoffs. For example, employees in underutilized roles might be reassigned to positions or divisions experiencing higher demand, thereby optimizing existing human resources.
Moreover, businesses could explore the establishment of new divisions tailored to emerging opportunities or operational priorities. This proactive measure not only aligns with compliance needs but also positions the business for growth amidst the changing economic and regulatory landscapes. By the approach to restructuring with a combination of prudence, adaptability, and innovation, businesses can not only comply with the minimum wage regulation but also enhance their competitiveness in the market.
Read More: Constitutional Court Decision No. 168/PUU-XXI/2023: A Game Changer in Employment Law
Legal Consequences
The consequences of failing to comply with Article 88E paragraph (2) of the Indonesian Employment Law are severe. Businesses found guilty of underpaying their employees may face criminal penalties, including imprisonment for a minimum of one year and up to four years, and/or a fine ranging from IDR 100 million to IDR 400 million, as regulated under Article 185 paragraph (1) of the Indonesian Employment Law.
Since these penalties are not merely administrative but also classified as criminal offenses, non-compliance can significantly tarnish a company’s reputation and severely disrupt its operations. Beyond the legal ramifications, non-compliance can also damage employee trust and lead to employment disputes, further emphasizing the importance of adhering to this minimum wage regulation.
For comprehensive insights and expert guidance on employment law in Indonesia, please do not hesitate to contact our firm. ADCO Law is prepared to provide the necessary assistance. Stay informed and compliant to support both equitable treatment and the continued success of your business in Indonesia.
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ADCO Law is a law firm that offers clients a wide range of integrated legal services, including commercial transactions and corporate disputes in a variety of industry sectors. Over the course of more than a decade, we have grown to understand our clients’ industries and businesses as well as the regulatory aspects. In dealing with business dynamics, we provide comprehensive, solid legal advice and solutions to minimize legal and business risks.
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Contact our Business Development team for further information:
Alvin Mediadi, Business Development Manager, Indonesia