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Ensuring Fair Compensation: Wage Regulations in Indonesia

Wage Regulations

Wage Policy in Indonesia:

Pursuant to Article 1 Number 30 of Law Number 13 of 2003 concerning Employment, as partially amended by the Government Regulation in Lieu of Law Number 2 of 2022 and subsequently ratified through Law Number 6 of 2023 (“Employment Law”), wages are recognized as an employee’s entitlement that manifests in monetary terms as remuneration from the employer to the employee. This remuneration principally is stipulated and disbursed in accordance with the terms outlined in an employment agreement or relevant laws and regulations.

Moreover, in accordance with Article 7 (1) of Government Regulation Number 36 of 2021 concerning Wages, as partially amended by Government Regulation Number 51 of 2023 (“GR on Wages“), the components comprising wages are expressly articulated and may be subject to variation through mutual agreement between the employer and the employee. Primarily, the agreements can take the form of: (i) wages excluding allowances; (ii) basic wages plus fixed allowances; (iii) basic wages plus fixed allowances and non-fixed allowances; or (iv) basic wages plus non-fixed allowances.

Notably, the GR on Wages has outlined a framework for calculating the comprehensive composition of total take-home pay, as elucidated in the chart below:

Form of Wages Composition Limitation
Wages excluding allowances.
Basic wages plus fixed allowances. The minimum basic wages must be 75% of the total sum of basic wages and fixed allowances.
Basic wages plus fixed allowances and non-fixed allowances. The minimum basic wages must be 75% of the total sum of basic wages and fixed allowances.
Basic wages plus non-fixed allowances.

 

It is crucial for employers to be aware that, in practice, additional complexities beyond the outlined parameters may occur. For instance, the percentage allocation of basic wages within the wage structure, as delineated in the aforementioned chart, may be subject to particular provisions based on certain positions or roles. These provisions can be established through agreements within employment agreements, organizational policies, company regulations, or collective employment agreements. It is noteworthy that any such adjustments should comply with the condition that the amount of wages remains at least equal to the highest wage limit for calculating pension security contributions.

It is also essential to underscore that certain conditions must be met when employers intend to offer a “minimum wage” to their employees. In accordance with the provisions outlined in the GR on Wages, especially in cases where minimum wages comprise basic wages and fixed allowances, the basic wage components, under such circumstances, are mandated to be, at a minimum, equivalent to the minimum wage set by governmental regulations. Additionally, Article 24(1) of the GR on Wages explicitly states that the “minimum wage” is to be applied to employees who have served the company for less than one year. Therefore, adhering to these provisions ensures compliance with the regulatory framework governing minimum wage standards and duration of employment.

Wage Regulations

Read more: Employment Agreements for Foreign Workers

Time and Output-Based Wages:

In addition to the wage determination mechanisms elucidated above, Indonesian laws and regulations duly recognize the incorporation of time and/or output-based compensation structures.

As delineated in Articles 14 to 17 of GR 36/2021, time-based wages are to be established on an hourly, daily, or monthly basis. Notably, hourly wages are expressly designated for part-time employees. Conversely, according to Articles 18 and 19 of GR 36/2021, output-based wages are contingent upon the agreed work results, the determination of which is aligned with the outcomes specified within the mutually agreed work arrangement.

The regulatory framework regarding time and/or output-based compensation as mentioned above principally provides a structured approach to compensating employees based on the time invested or the tangible outcomes achieved. These nuanced mechanisms not only reflect legal precision but also ensure a fair and transparent remuneration system that aligns with the complexities of contemporary employment relationships.

Wage Regulations

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Non-Wage Income

In addition to the provisions regarding wages described in the sections above, there are other types of remuneration recognized in the employment law framework in Indonesia, commonly referred to as Non-Wage Income, as detailed in the following table:

Components of Non-Wage Income Provision
Religious holiday allowances. Mandatory.1
Incentives. Depending on position, job, and/or company policy.2
Bonuses. Based on company’s profit. 3
Work facilities When necessary. 4
Service fees in certain businesses. Depending on the nature of businesses. 5

 

Despite the understanding that employment relationships are considered ‘civil relationships’—which are essentially agreements between employers and employees—it is crucial to acknowledge the presence of general provisions that must be adhered to based on prevailing laws and regulations.  We all must understand that any agreement crafted in violation of laws and regulations carries legal risks.

For comprehensive insight and expert guidance in navigating the intricate landscape of wage regulations, ADCO Law is prepared to provide the assistance you require. Stay informed and stay compliant to ensure fair compensation for your employees in Indonesia.

For further information about wage regulations in Indonesia, please do not hesitate to contact our firm

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About ADCO Law:

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As a law firm, we also believe in regeneration. To stay abreast of business changes and stay relevant, our formation of lawyers is comprised of the top graduates from Indonesian and international law schools.

Should you have more queries regarding this matter, please do not hesitate to contact us

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Disclaimer: This article has been prepared for scientific reading and marketing purposes only from ADCO Law. Accordingly, all the writings contained herein do not constitute the formal legal opinion of ADCO Law. Therefore, ADCO Law should be held harmless of and/or cannot be held responsible for anything performed by entities who use this writing outside the purposes of ADCO Law.