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Types of Employment Contracts

Employment Contract

What is an Employment Contract?

Government Regulation No. 35 of 2021 concerning Work Agreements for Specific Time, Outsourcing, Working Time and Rest Time, and Termination of Employment Relations (“GR 35/2021”) defines an employment contract or work agreement as an agreement between employees and employers which contains work conditions, rights and obligations of the parties. Law No. 13 of 2003 concerning Manpower (“Law 13/2003”) also states that the employment relations between employers and employees must be made in an employment contract. Referring to GR 35/2021, there are 2 types of employment contracts based on the type of work i.e., the Fixed-Term Employment Agreement (“PKWT”) and the Indefinite Time Employment Agreement (“PKWTT”). An employment contract provides clarity regarding the rights of employees and employers, and legal protection, especially in the event of termination of employment. 

Besides having to comply with the provisions of Article 1320 of the Criminal Code, the making of an employment contract must also comply with the provisions contained in Law 13/2003:

  1. Agreement from both parties;
  2. Ability or capacity to perform legal actions;
  3. An agreed work;
  4. The agreed work does not conflict with public order, decency and applicable laws.

Employment Contract

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Types of Employment Contracts in Indonesia

The following are the types of employment contracts in Indonesia:

  1. Fixed-Term Employment Agreement (PKWT)
    A Specified Time Work Agreement (“PKWT”) is an agreement between employees and employers who wish to enter into an employment relationship only for a certain time, which is usually used for certain jobs for which the expiration time can be estimated. PKWT is made in writing and registered with the manpower office, and can only be valid for a maximum period of five years or until the work is completed. If the work in question has not been completed, but the employment contract has expired, then the employment contract can be extended in accordance with the agreement between the employer and the employee for a period of not more than five years, this as stipulated in GR 35/2021. In addition, at the end of the working period, the employer is obligated to provide compensation money to employees, where this provision has also been regulated in GR 35/2021. 
  2. Indefinite Time Employment Agreement (PKWTT)
    An unspecified Time Work Agreement (“PKWTT”) is a work agreement between employees and employers who wish to establish a permanent employment relationship, which can be applied to all types of work. In contrast to PKWT, in addition to being made in writing, PKWTT can be made verbally and it is not mandatory to be registered with the manpower office. If the PKWTT is made orally, the employer is obligated to make a letter of appointment for the employee concerned.

The Difference between each Type of Contract

It should be noted that there are differences between PKWT and PKWTT that are noteworthy after the 2020 Job Creation Law has been enacted. Quoting from GR 35/2021, the following is a table of differences between PKWT and PKWTT.

Difference PKWT PKWTT
Type of work It is limited, namely only for certain jobs that are not permanent. It is not limited, namely to jobs that are both permanent and non-permanent
Working Period Limited, based on:

  • The maximum term of 5 years (can be extended for a maximum of 5 (five) years) or;
  • Completion of a certain work (until the work in question is finished)
Work Agreement Form Must be written
  • Written
  • Oral (must be accompanied by a letter of appointment)
Registration at the Ministry of Manpower Mandatory, namely no later than 3 (three) days from the signing of the PKWT. Not mandatory.
Termination of Employment Relations The employment relationship ends by law when the work period is completed or when the work in question has been completed.

One of the parties, both the employee and the employer, can end the employment relationship before the employment contract ends. In this case, the employer is required to provide compensation money, the amount of which is calculated based on the PKWT period that has been passed by employees.

Certain reasons as stated in Article 36 of GR 35/2021
Probationary period Not allowed Allowed, maximum 3 months
Compensation for Termination of Employment Relations
  • There is PKWT compensation money
  • Compensation as stipulated in Article 62 of Law 13/2003 (in the event that the employment relationship ends because one of the parties terminates the PKWT before the expiration of the PKWT period).
  • Severance pay
  • Service reward money
  • Money for compensation of rights and or
  • Severance pay

Things Should be Added to the Employment Contract

Based on GR 35/2021, PKWT must contain at least:

  1. Company name, address and type of business;
  2. Name, gender, age and address of Employees;
  3. Position or type of work;
  4. Place of work;
  5. The amount and method of payment of Wages;
  6. The rights and obligations of Employers and Employees in accordance with the provisions of laws and regulations and/or working conditions set forth in Company Regulations or Collective Bargaining Agreements;
  7. Start and period of validity of the PKWT;
  8. Place and date PKWT made; and
  9. The signatures of the parties in the PKWT.

Meanwhile, based on Law 13/2003 PKWTT must contain at least:

  1. Name, company address, and type of business;
  2. Name, gender, age and address of the Employees;
  3. Position or type of work;
  4. Place of work;
  5. The amount of wages and the method of payment;
  6. Working conditions that contain the rights and obligations of employers and employees;
  7. The place and date the work agreement was made; And
  8. The signatures of the parties in the employment agreement.


Employment Contract

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The Importance of a Written Employment Contract

An employment contract has an important role as a document that contains the rights and obligations of both parties and provides legal certainty for both employees and employers. After the contract was signed, it becomes a reference regarding the rights and obligations of both parties and becomes a basic guideline when one of the parties violates the contents of the employment contract.

Following are some of the reasons for the employment contract for both parties:

  1. Provide clarity regarding the rights and obligations of both parties individually
  2. Provide legal certainty for both parties
  3. Mitigate disputes between the two parties
  4. Becomes a basic guideline so that both parties do not take actions outside of the provisions contained in the contract

Those are some points of explanation related to the importance of employment contracts. Therefore, it is important for an employee candidate to understand an employment contract clearly and precisely before signing it and starting work because an employment contract will provide legal protection for both employees and employers.


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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.