Flexibility Meets Protection: Understanding Micro And Small-Sized Enterprises’ Wage Rules Under Indonesian Law

The Indonesian labour framework provides flexibility for micro and small enterprises (“MSEs”) to pay wages below the provincial minimum wage (UMP). This exemption, introduced under the Job Creation Law and elaborated in Government Regulation No. 36 of 2021 as amended by Government Regulation No. 51 of 2023 (“GR on Wages”) on Wages, seeks to balance employee protection with business sustainability. While MSEs benefit from reduced burdens of labour costs, employees remain safeguarded through minimum thresholds and continued entitlement to other mandatory rights.

Introduction

The rules surrounding minimum wages have always been a hotly debated issue in Indonesian labour law. On one hand, the government seeks to ensure employee welfare by setting minimum wage standards each year. On the other hand, many businesses, particularly MSEs and newly established startups, struggle with the burden of paying wages equivalent to those of large corporations. To address this tension, the government has introduced an exemption policy for MSEs, offering a middle ground that allows businesses to remain sustainable without sacrificing basic employee protection.

Legal Basis for the Exemption

The exemption is set out in the Manpower Law (as lastly amended by the Job Creation Law). Article 90B stipulates that the minimum wage obligation does not apply to micro and small enterprises. The provision is further detailed in GR on Wages, particularly Article 36, which allows MSEs to pay wages below the provincial minimum wage (UMP), subject to two conditions:

Wages must be at least 50% of the provincial average per capita consumption; and
Wages must be at least 25% above the provincial poverty line, both calculated using official data from the Statistics Indonesia (BPS).

This ensures that despite the flexibility provided, minimum social protection standards remain in place. Therefore, the exemption operates within clear and quantifiable boundaries.

Exemption Criteria for Micro and Small Enterprises

The right to exemption applies only to enterprises that meet the criteria under Government Regulation No. 7 of 2021 on Ease, Protection and Empowerment of Cooperatives and MSEs:

Micro enterprises
Business capital of up to IDR 1 billion or annual sales of up to IDR 2 billion.
Small enterprises
Business capital of more than IDR 1 billion to IDR 5 billion or annual sales of more than IDR 2 billion to IDR 15 billion.

In other words, the exemption is specifically intended for businesses with limited capacity. Employers must therefore prove their MSE status through official documents such as a Business Identification Number (NIB), financial statements, or annual revenue records. Without proper evidence, claims of eligibility may be disputed, potentially exposing businesses to legal challenges.

Comparison with Neighbouring Countries

Indonesia is not alone in adopting a flexible wage system for small businesses.

For comparison, Singapore does not have a national minimum wage. Instead, it applies the Progressive Wage Model (PWM), which gradually increases minimum wages in certain sectors with a high concentration of low-wage employees, such as cleaning, security, and landscaping. This model gives SMEs room to adjust their wage structure while still encouraging gradual wage increases.

Meanwhile, the Philippines has a system based on regional wage boards, where minimum wages are set according to the economic conditions of each region. For small businesses, these boards can grant exemptions from minimum wage obligations if the companies can prove financial hardship.

Compared to these ad hoc mechanisms, Indonesia’s model provides a more structured framework by tying wage exemptions to objective statistical thresholds.

Other Employees’ Rights Remain Intact

It is also important to note that the exemption from minimum wage does not eliminate other statutory rights. Regulations on working hours, overtime pay, leave entitlements, occupational health and safety (OHS), as well as participation in BPJS Employment and Health programs (social security programs) remain mandatory. Moreover, for employees with more than one year of service, companies are required to establish a wage structure and scale to guide salary increases based on length of service, position, and competency.

Accordingly, even where base wages are below the UMP, other protections continue to apply.

Implications for MSEs and Startups

For MSEs, this regulation provides much-needed breathing space. Many small businesses still grapple with limited capital, unstable market access, and fluctuating cash flow. It allows for formal hiring at sustainable wage levels and supports gradual wage growth as businesses expand. For startups, this regulation helps align workforce costs with early-stage capital and cash flow constraints while maintaining compliance with employment laws.

However, this exemption is not automatic. Employers must ensure they meet the statutory criteria and maintain accurate documentation. Non-compliance can expose businesses to back pay obligations or reputational risks.

Challenges and Risks

Although the flexibility to set wages below the provincial UMP provides much-needed room for micro and small enterprises to manage labour costs, it also brings potential compliance risks that employers should carefully consider.

One of the main concerns is misclassification. Businesses that do not truly meet the criteria for MSEs but implement what is permitted under the exemption policy may face significant legal exposure. In such cases, employers may be required to provide back pay to employees, creating both financial liabilities and reputational risks.

Another challenge is the reliance on outdated statistical data. Wage thresholds are tied to consumption and poverty figures published by Statistics Indonesia (BPS). If employers use old or inaccurate data, the wage floor may not reflect current economic conditions. This increases the likelihood of disputes or challenges from employees and labour inspectors.

There is also the risk of insufficient documentation. When wage arrangements are made verbally and not properly recorded in formal employment contracts, the potential for misunderstandings and conflict increase. Without a properly drafted employment contract, it is difficult to demonstrate compliance or defend against claims.

Closing

The wage exemption framework for micro and small enterprises under Indonesian law reflects the government’s attempt to balance business sustainability with social protection. By tying wage flexibility to objective statistical thresholds and retaining other statutory rights, the regulation offers employers a lawful mechanism to manage labour costs while still respecting minimum protections for employees. For many MSEs and startups, this flexibility can support formal employment, business growth, and gradual wage increases.

Nevertheless, the scheme requires careful implementation. Employers must ensure proper classification as MSEs, use the most recent BPS data and formalize wage agreements in writing to avoid disputes or liabilities. Given the technical requirements and potential risks, businesses are advised to seek professional guidance when implementing these rules to ensure both compliance and long-term stability in workforce management.

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