Comprehensive Guide to Employment Law in Indonesia

If you’re looking to hire in Indonesia, it’s essential to understand the local employment laws. These laws ensure fair practices throughout hiring, managing, and terminating employees. The main regulation to be aware of is the Manpower Law, which sets the fundamental rights and responsibilities for most workers in the country.

Country Guide

Employer of Record (EOR)

Professional Employer Organization (PEO)

Employment Law

Payroll & Tax

Compensation & Benefits

Table of Contents

Employment Law in Indonesia

Termination of Employment

Conclusion

Employment Law in Indonesia

Indonesia’s employment laws are mainly governed by Law No. 13 of 2003 on Manpower, often called the Manpower Law. This law outlines the key principles for managing employment relationships and safeguarding workers' rights.

Other essential guidelines are:

Legislation No. 11 Tahun 2020 (Omnibus Law on Job Creation) This comprehensive law aims to simplify various regulatory frameworks, including labor law. It introduces changes to manpower law, including employment contracts, outsourcing, working hours, and severance pay
Government Regulation No. 35 Tahun 2021 This regulation implements provisions of the Omnibus Law related to employment contracts, working hours, rest periods, and the termination process
Government Regulation No. 36 of 2021 on Wages) This regulation provides detailed provisions on wages, including minimum wage, payment structure, and wage components

In Indonesia, labor law ensures that all employees are entitled to essential rights that employers must meet. These include:

Receiving a minimum wage, which varies by sector and province
Being enrolled in social security programs that cover pensions, healthcare, life, accident insurance, and old-age benefits
Receiving a religious holiday allowance (typically one month’s salary, depending on the length of employment)
Earning paid time off for statutory absences or getting compensated for unused annual leave
Receiving overtime pay for any extra hours worked=

Fixed Term Contracts

In Indonesia, there are three types of fixed-term contracts (FTC) that the government recognizes:

FTCs based on completing specific work
FTCs based on a set period
FTCs for non-permanent work

These contracts are designed for temporary roles that can be completed within a certain timeframe. Any extensions to these contracts can’t exceed a total of five years. If these rules aren’t followed, the employee may automatically be considered a permanent staff member.

FTC based on
completion of work

Type of work

Temporary work; or

One-time work

Contract period

There is no specific maximum period. However, the employment agreement must include provisions on the expected period for work completion.

FTC based
on period

Type of work

Work that can be completed in a short time;

Seasonal work; or

Work related to new products that are in trial or experimentation.

Contract period

Maximum five years (including extension).

FTC related to

non-permanent

work

Type of work

Work that is based on attendance; or

Work that changes based on volume or time.

Contract period

Maximum 20 days per month.

If the employee works for 21 days per month or more for three consecutive months, then they will be considered permanent workers.

Indonesia’s New Fixed-Term Contract System

FTC based on completion of work

FTC based on period

FTC related to non-permanent work

Type of work

Temporary work; or

One-time work

Work that can be completed in a short time;

Seasonal work; or

Work related to new products that are in trial or experimentation.

Work that is based on attendance; or

Work that changes based on volume or time.

Contract period

There is no specific maximum period. However, the employment agreement must include provisions on the expected period for work completion.

Maximum five years (including extension).

Maximum 20 days per month.

If the employee works for 21 days per month or more for three consecutive months, then they will be considered permanent workers.

Compensation for FTC workers

Employers are required to pay compensation to employees, even if the employee ends a fixed-term contract (FTC) early.

Compensation must be provided in the following situations:

When the FTC ends
If the FTC is extended
If the contract is terminated early, no matter who ends it

How is it calculated?

Compensation is calculated using the following formula:

Contract period

Compensation amount

More than one month but less than 12 months

(work period in months/12) x one month’s salary

More than 12 months

(work period in months/12) x one month’s salary

12 consecutive months

One month’s salary

When a fixed-term contract (FTC) expires and is then extended, employers must pay compensation for the initial contract at the time of expiry.

Minimum Wages

The monthly minimum wage is calculated by the provincial or district wage council, with the local government setting the final figure. They consider factors like the state of the economy and employment rates. Key factors include:

Purchasing power in the region
Job availability and absorption rates
Median wages, which reflect the middle point between the highest and lowest salaries for similar roles

Working Hours

In Indonesia, the standard working hours are 40 hours per week, which can either be split into eight hours a day for five days or seven hours a day for six days.

However, some companies can offer shorter workweeks if they:

Have work that can be completed in less than 35 hours per week
Can provide flexible working hours
Allow work to be done outside a fixed location

Overtime

The regulation extends overtime to a maximum of four hours per day and 18 hours per week, excluding public holidays.

Overtime pay should be clearly stated in collective labor agreements, company regulations, or employment contracts. If it isn’t mentioned, employees are automatically entitled to overtime pay.

However, some employees are exempt from overtime pay, including:

Those in roles like planners, decision-makers, or key executors
Employees in managerial positions where working hours are not fixed
Workers receiving high salaries

Termination of Employment

Employers are required to give employees a written notice at least 14 business days before termination, explaining the reasons for termination along with details of any payments and entitlements.

If the employee accepts the termination, the employer can then inform the Ministry of Manpower. However, if the employee disagrees, they must provide their reasons in writing within seven business days of receiving the notice.

Grounds for terminating an employee in Indonesia

In Indonesia, employers can terminate an employee based on several grounds, including:

Violating the employment agreement (after receiving three written warnings)
Being absent due to illness for more than 12 months
Missing work for more than five days without a valid reason
Misconduct, such as harassment or damaging company property
Reaching retirement age
Conviction of a crime

Terminations can also occur due to company-related circumstances, like:

Business insolvency
Mergers or acquisitions
Downsizing due to ongoing financial losses
Bankruptcy

Unfair grounds for termination

In Indonesia, employers are not allowed to dismiss an employee under certain conditions, including:

The employee is sick for less than 12 months, based on a doctor's diagnosis
The employee gets married
The employee practices religious rites
The employee is related to another worker at the company, unless the employment contract says otherwise
The employee is unable to work because they’re performing State duties
The employee reports the employer for a criminal act
Any form of discrimination
The employee becomes permanently disabled due to a work-related accident
A female employee is pregnant, miscarrying, giving birth, or nursing
The employee joins a labor union

Termination payments

Terminated employees in Indonesia are entitled to termination payments, which vary based on how long they’ve been with the company.

Indefinite term agreement (PKWTT)

These payments include four main components:

Severance pay: Calculated based on employee's tenure as Indefinite-term (PKWTT)
Long service pay: Calculated based on employee's tenure as Indefinite-term (PKWTT), minimum 3 years of service
Separation Pay: Amounts refer to Glints company regulations and minimum 3 years of service
Compensation of rights: covers any untaken annual leave and other costs like relocation.

Employees whose employment is terminated may receive severance pay, long service pay or long service pay, depending on their length of service and eligibility.

Severance Payment in Indonesia

Completed years of service

Severance payment

Less than 1 year

1 month wage

1 year or more, but less than 2 years

2 months wage

2 years or more but less than 3 years

3 months wage

3 years or more but less than 4 years

4 months wage

4 years or more but less than 5 years

5个月工资

5 years or more but less than 6 years

6 months wage

6 years or more but less than 7 years

7 months wage

7 years or more but less than 8 years

8 months wage

More than 8 years

9 months wage

Long Service Payment in Indonesia

Completed years of service

Severance payment

More than 3 years but less than 6

2 months wage

More than 6 years but less than 9

3 months wage

More than 9 years but less than 12

4 months wage

More than 12 years but less than 15

5 months wage

More than 15 years but less than 18

6 months wage

More than 18 years but less than 21

7 months wage

More than 21 years but less than 24

8 months wage

More than 24 years

10 months wage

Definite term agreement (PKWT)

These payments include three main components:

Indemnity: Calculated based on the remaining contract prior to the agreed employment period as stated in the definite-term employment agreement
Compensation: Calculated based on employee's tenure as definite-term (PKWT)
Compensation of rights: covers any untaken annual leave and other costs like relocation

Termination payment calculation

Reason for Contract Termination

Severance payment

Just Causes (e.g., misconduct, fraud, criminal activity, neglect of duty)

Long-term
Illness
(12 months)

2nd

Employee death

3rd

Retirement

1.75x

4th

Merger,

Acquisition, or

Separation

5th

Force Majeure

(No Closure)

0.75x

4th

Acquisition/

Bankruptcy/

Employer's Loss

0.5x

5th

- Court Decision/

Employee

Voluntary Exit

- Absence

Without Notice

(5 Days)

4th

Detention

(6 months, with

Losses)

Detention

(6 months,

No Losses)

Reason for Contract Termination

Long service payment

Just Causes (e.g., misconduct, fraud, criminal activity, neglect of duty)

Long-term
Illness
(12 months)

2nd

Employee death

3rd

Retirement

4th

Merger,

Acquisition, or

Separation

5th

Force Majeure

(No Closure)

4th

Acquisition/

Bankruptcy/

Employer's Loss

5th

- Court Decision/

Employee

Voluntary Exit

- Absence

Without Notice

(5 Days)

4th

Detention

(6 months, with

Losses)

Detention

(6 months,

No Losses)

Reason for Contract Termination

Compensation of rights

Just Causes (e.g., misconduct, fraud, criminal activity, neglect of duty)

Long-term
Illness
(12 months)

2nd

Employee death

3rd

Retirement

4th

Merger,

Acquisition, or

Separation

5th

Force Majeure

(No Closure)

4th

Acquisition/

Bankruptcy/

Employer's Loss

5th

- Court Decision/

Employee

Voluntary Exit

- Absence

Without Notice

(5 Days)

Yes

4th

Detention

(6 months, with

Losses)

Yes

Detention

(6 months,

No Losses)

Yes

Reason for Contract Termination

Separation pay

Just Causes (e.g., misconduct, fraud, criminal activity, neglect of duty)

Long-term
Illness
(12 months)

2nd

Employee death

3rd

Retirement

4th

Merger,

Acquisition, or

Separation

5th

Force Majeure

(No Closure)

4th

Acquisition/

Bankruptcy/

Employer's Loss

5th

- Court Decision/

Employee

Voluntary Exit

- Absence

Without Notice

(5 Days)

Yes

4th

Detention

(6 months, with

Losses)

Detention

(6 months,

No Losses)

Reason for termination

Severance payment

Long service payment

Compensation of rights

Separation pay

Long-term Illness (12 months)

Employee death

Retirement

1.75x

Merger, Acquisition, or Separation

Force Majeure (No Closure)

0.75x

Acquisition/Bankruptcy/
Employer's Loss

0.5x

- Court Decision/Employee Voluntary Exit

- Absence Without Notice (5 Days)

Yes

Detention (6 months, with Losses)

Yes

Detention (6 months, No Losses)

Yes

Severance payment for fixed term contract workers

In Indonesia, there are three types of fixed-term contracts (FTC) recognized by the government:

FTC based on completing a specific project
FTC for a set period of time
FTC for non-permanent work

These contracts are meant for temporary roles that can be finished within a certain timeframe. Any extensions cannot go beyond a total of five years. If the rules aren’t followed, the employee may automatically be considered a permanent employee.

Indonesia’s New Fixed-Term Contract System

FTC based on completion of work

Just Causes (e.g., misconduct, fraud, criminal activity, neglect of duty)

Type of work

Temporary work; or

One-time work

2nd

Contract period

There is no specific

maximum period,

however, the

employment

agreement must

include provisions

on the expected

period for work

completion.

FTC base on period

Just Causes (e.g., misconduct, fraud, criminal activity, neglect of duty)

Type of work

Work that can be

completed in short

time;

Seasonal work; or

Work related to

new products that

are in in trial or

experimentation.

2nd

Contract period

Maximum five

years (including

extension).

FTC related to non-permanent work

Just Causes (e.g., misconduct, fraud, criminal activity, neglect of duty)

Type of work

Work that is based

on attendance; or

Work that changes

based on volume

or time.

2nd

Contract period

Maximum 20 days

per month.

If the employee

works for 21 days

per month or more for three consecutive months,

then they will be

considered

permanent workers.

FTC based on completion of work

FTC base on period

FTC related to non-permanent work

Type of work

Temporary work; or One-time work

Work that can be completed in short time; Seasonal work; or Work related to new products that are in in trial or experimentation.

Work that is based on attendance; or Work that changes based on volume or time.

Contract period

There is no specific maximum period, however, the employment agreement must include provisions on the expected period for work completion.

Maximum five years (including extension).

Maximum 20 days per month. If the employee works for 21 days per month or more for three consecutive months, then they will be considered permanent workers.

Employers are required to pay compensation to employees, even if the employee ends the fixed-term contract (FTC) early.

Compensation must be provided in these situations:

When the FTC expires
Each time the FTC is extended
If the contract is terminated early, no matter who initiates it

The compensation amount is calculated based on a specific formula:

Contract period

Compensation amount

More than one month but less than 12 months

(work period in months/12) x one month’s salary

More than 12 months

(work period in months/12) x one month’s salary

12 consecutive months

One month’s salary

When an FTC expires and is then extended, the compensation for the initial contract must be paid when the FTC expires.

Conclusion

Hiring an HR manager is a great way to ensure your company policies are set up right and kept up-to-date. It’s crucial to have standard contracts like offer letters or employment agreements in place to protect both your business and your employees. Plus, regularly reviewing these contracts helps make sure everything stays compliant with Indonesia’s employment laws.

But why not make it even easier for yourself? With Glints, the leading expert in Southeast Asia, you can take the stress out of managing HR and compliance across the region. Our on-the-ground expertise means we understand the local regulations and nuances of each SEA market, ensuring that every aspect of your HR operations runs smoothly.

Book a schedule with our team to start!

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