NewsEmployment Termination During the Outbreak

The Covid-19 outbreak is forcing many companies to adjust their employment policies, from implementing a work from home policy, cutting out certain benefits, and to the most extreme, terminating non-essential employees.

Up to this date, the government has yet to issue regulations with regard to termination of employment specifically during the Covid-19 pandemic. Companies should, therefore, follow the regulations as stipulated under Law Number 13 of 2003 Concerning Manpower.

 

A. Employment Termination Under Indonesian Law

Pursuant to Law Number 13 of 2003 Concerning Manpower (“Law 13/2003”), employment termination is a termination of the employment relationship due to certain conditions resulting in the end of rights and obligations of both the employer and the employee.

In terms of employment termination, the employer is obligated to pay (i) severance pay and/or (ii) employment reward, and (iii) compensation pay to the dismissed employee. Pursuant to Article 156 of Law 13/2003, the calculation is as follows:

 

 1. Severance Pay (Article 156 Paragraph (2) of Law 13/2003)

No.Years of EmploymentAmount of Severance Pay
1.Less than 1 year1-month wages
2.1 year < 2 years2-months wages
3.2 years < 3 years3-months wages
4.3 years < 4 years4-months wages
5.4 years < 5 years5-month wages
6.5 years < 6 years6-month wages
7.6 years < 7 years7-month wages
8.7 years < 8 years8-month wages
9.8 years or more9-month wages

 

2. Reward Pay (Article 156 Paragraph (3) of Law 13/2003)

No.Years of EmploymentAmount of Reward
1.3 years < 6 years2-months wages
2.6 years < 9 years3-months wages
3.9 years < 12 years4-months wages
4.12 years < 15 years5-months wages
5.15 years < 18 years6-month wages
6.18 years < 21 years7-month wages
7.21 years < 24 years8-month wages
8.24 years or more10-month wages

 

3. Compensation Pay (Article 156 Paragraph (4) of Law 13/2003)

The compensation shall include:

  1. Entitlements of employee’s annual leaves that have not expired and have not been taken by the said employee;
  2. Costs or transport expenses of the employee and his/her family to return to the place where the employee was accepted to work;
  3. Compensation for housing allowance, medical and health care allowance, which is determined at 15% of the severance pay and/or reward for years of service for those who are eligible to receive such compensation; and
  4. Other compensations that are stipulated under individual work agreements, employer’s rules and regulations, or collective work agreement.

 

B. Reasons for Employment Termination

1. Termination Due to Efficiency

In the situation of the Covid-19 outbreak, businesses can use efficiency as a reason to terminate their employees. This termination is carried out as a result of the company cost-cutting measures, diversification exercise and other necessary measures that have not improved the company’s financial position or performance. Based on this reason, the company may make its employees redundant due to the company’s efficiency as regulated under Article 164 Paragraph (3) of Law 13/2003. Below is the quoted provision:

 

Article 164 Paragraph (3)

“The employer may terminate the employment of his or her employees because the company has to be closed down and the closing down of the company is caused neither by continual losses for 2 (two) years consecutively nor force majeure but because of efficiency. If this happens, the employee shall be entitled to severance pay twice the amount of severance pay stipulated under Article 156 Paragraph (2), reward for the period of employment pay amounting to 1 (one) time the amount stipulated under subsection (3) of Article 156 and compensation pay for entitlements that have not been used according to what is stipulated under Article 156 Paragraph (4).”

 

Please note that this provision under Article 164 Paragraph (3) has been judicially reviewed by Constitutional Court, whereas the judges of the Court ruled that the clause ‘closed down for efficiency’ must be interpreted that ‘the company is permanently closed, or not for temporary’. However, in practice, employment termination due to the company’s efficiency is commonly exercised in Indonesia. Several decisions of the Supreme Court have allowed companies to do this action as long as the company fulfills all of the entitlements of the terminated employee.

If the company uses efficiency as a reason to terminate its employees, the company is obligated to pay the employees with the following: (i) severance pay twice the amount of severance pay as stipulated under Article 156 paragraph (2) of Law 13/2003, (ii) reward for one period of employment pay, one- time amount as stipulated under Article 156 paragraph (3) of Law 13/2003 and (iii) compensation pay for entitlements as stipulated under Article 156 Paragraph (4) of Law 13/2003.

Please also bear in mind that employee termination due to efficiency has consequences that the calculation of severance pay is bigger than employee termination due to continual losses or force majeure as will be elaborated below.

 

2. Termination Due to Company is Suffering Losses

Under Law 13/2003, an employer can terminate an employee if the company suffers continual losses for two years consecutively. To prove continual losses, the employer must provide financial reports over the last two years that have been audited by public accountants.

If the company uses this reason, the company is obligated to pay the employees with the following: (i) severance pay one time the amount of severance pay as stipulated under Article 156 paragraph (2) of Law 13/2003; (ii) reward for one period of employment pay, one-time amount as stipulated under Article 156 paragraph (3)  of Law 13/2003 and (iii) compensation pay for entitlements as stipulated under Article 156 Paragraph (4) of Law 13/2003.

 

3. Termination Due to Force Majeure

Although Law 13/2003 sets force majeure as one of the reasons for termination of employment, it does not explicitly define the meaning of a force majeure event. Therefore, the employer can refer to Article 1244 and 1245 of the Indonesian Civil Code.

In the context of termination of employment, the definition of force majeure pursuant to Article 1244 and 1245 of the Civil Code becomes a reference for Industrial Relations Court or Supreme Courts in defining elements of force majeure.

If the company uses this reason, the company is obligated to pay the employees with the following: (i) severance pay one time the amount of severance pay as stipulated under Article 156 paragraph (2) of Law 13/2003; (ii) reward for one period of employment pay, one-time amount as stipulated under Article 156 paragraph (3)  of Law 13/2003 and (iii) compensation pay for entitlements as stipulated under Article 156 Paragraph (4) of Law 13/2003.

Please note that based on our review of several Supreme Court decisions, we have yet to find a specific and universal decision that can be used as a single reference to determine types of conditions that would be considered as force majeure events.

As such, if the employer is unable to prove the force majeure event to the court, in practice the judge will order the employer to pay the highest termination formula as if the termination were due to efficiency reasons.

 

C. Conclusion

From the above explanation, it can be concluded that in the situation of this Covid-19 outbreak, the employer can terminate its employee by using three alternative reasons namely termination due to efficiency, termination due to continual losses and termination due to force majeure. Each reason has its own requirements and consequences.

 


ADCO Law earns the trust to represent clients from multinational companies to emerging entities across a wide range of industries to achieve their business objectives in Indonesia.

By combining commercial sensibilities and legal expertise, ADCO is Law Firm Jakarta who assists the clients to structure, organize and implement their business ventures and investments, including structuring, financing and securing investments as well as establishing new foreign companies in Indonesia. Should you have more queries regarding this matter, please do not hesitate to contact us.

Dendi Adisuryo
dendi.adisuryo@adcolaw.com

@2020 ADCO Law. All rights reserved.
This publication has been prepared by Andi Kristian for general informational purposes only to provide clients with information on recent legal developments and is not intended as legal advice or opinion.

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