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Employment

Labor Law in Indonesia

Table of Contents

1. Introduction....................................................................................................................................1

2. Law No. 13 of 2003 on Labor........................................................................................................1

3. Salary and Allowances...................................................................................................................4

4. Employment of Expatriate Workers ..............................................................................................5

5. Workers’ Social Security (“JAMSOSTEK”).................................................................................6

6. Termination of Employment..........................................................................................................7

7. Termination Payments ...................................................................................................................8

8. Taxation .........................................................................................................................................9

Attachment A........................................................................................................................................11

Attachment B ........................................................................................................................................13


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1. Introduction The sources of labor laws in Indonesia are widely dispersed among a number of national laws and regulations, presidential decrees and ministerial decrees. Some of these sources are relatively recent, while others are quite old, some even issued in the colonial period. In general, these laws and regulations are applicable to all “workers”, regardless of their position (i.e. whether they are managerial or non-managerial workers) or their status (i.e. whether they are indefinite or definite period workers). However, there are some provisions that exempt certain groups of workers from receiving certain benefits, for example: managerial workers are not entitled to overtime

2. Law No. 13 of 2003 on Labor In an effort to synthesize the diverse body of laws and regulations on the protection of workers, the Indonesian Government enacted Law No. 13 of 2003 on 25 March 2003 (“Labor Law ”). The Labor Law contained a significant number of new provisions and also synthesized a major portion of the various labor laws and legislation into a single legal instrument.

2.1 General Principles under the Labor Law

The Labor Law sets out general principles and requirements regarding labor and employment matters, among other things: • employment agreements, Company Regulations and Collective Labor Agreements; • the protection of certain groups of workers, such as disabled workers, child workers, and

female workers; • working hours (including overtime); • health and safety principles; • wages (including the principles on the minimum wage); • paid leave (for example, annual leave, sick leave, religious leave, etc.); • welfare facilities (e.g. worker cooperatives); • principles of the industrial relationship (for example, the obligation to establish a bipartite

forum, Company Regulations and the negotiation of Collective Labor Agreements); • outsourcing; • strikes and lock outs; and • termination of employment.

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2.2 Types of Employment under the Labor Law

The Labor Law refers to 2 basic types of employment relationships: indefinite and definite period employment. The type of employment covered in these 2 main categories is determined based on the type of work, whether it is permanent or temporary in nature or whether the work can be completed within a certain period. The Labor Law does not distinguish between the structure of salary and benefits of workers who are hired under these 2 types of employment. Generally, a definite period worker is entitled to the same benefits as those received by a permanent employee. However, the structure of the termination package applicable to each type of employment is quite different. See section 7 for further details on the requirements for termination of employment in Indonesia and the structure of statutory termination payments. Further differences between the 2 types of employment are explained below.

(a) Indefinite Period Employment

Indefinite period employment is the employment of a worker for an indefinite period. An employer may impose a probationary period of a maximum of 3 months. During this probationary period, an employer may terminate the employment relationship without notice and without the obligation to pay a termination package, provided that the probationary period was imposed earlier in writing. Otherwise, there must be a valid reason for an employer to terminate an indefinite period employment relationship.

(b) Definite Period Employment

Definite period employment is the employment of a worker for a certain period of time. An employment agreement for a definite period can only be made for certain work which as to the type and characteristic or the work activities concerned will be completed within a certain time period, i.e. work that:

• is completed once and for all, or is of a temporary nature; • is completed in a short period of time (3 years at most); • is considered to be of a seasonal nature, or to be repeated (e.g. seasonal harvesting);

and • is related to a new product, new activities, or supplemental products that are still

experimental or in the exploration stage. An employer may not impose a probationary period on a definite period worker. As a general rule, the maximum validity of the initial definite period employment agreement is 2 years. This period can be extended once for up to 1 year. Subsequently, it is possible to renew a definite period employment agreement once for up to 2 years, but only after a break of at least 30 calendar days after the original employment agreement has expired. As further regulated under the Decree of the Minister of Manpower No. Kep-100/Men/VI/2004 regarding the Implementing Regulation on the Definite Period



Employment Agreement (“Decree 100”), the maximum validity of an initial definite period employment agreement and the possibility for its extension and renewal also depends on the type of work. The following table summarizes the types of work and the relevant maximum validity of an initial definite period employment agreement and its extension and renewal.

Extension Renewal

Type of Work Initial

Contract Period

Permitted

Yes/No

Max. Period

Permitted

Yes/No

Max. Period

Completed once and for all or temporary nature

3 years or earlier based

on completion of the work specified in

the agreement

No. - Yes, but only once and after a break of 30

calendar days

2 years

Seasonal Depends on the weather or season or order/target.

Not specified

- No -

Related to a new product, new activities, or supplemental products that are still experimental or in the exploration stage.

2 years Yes 1 year No -

Daily Workers A daily worker is also categorized as a definite period worker. Under Decree 100, the employment of a daily worker is defined as the employment of a worker to perform a certain job, the volume of which and the period within which the job is to be performed can be changed from time to time. A daily worker receives his/her wage based on daily presence at the job site. The work must be completed in a relatively short period of time (3 months at the most) with a maximum of 20 working days per month. A daily worker is not bound by the general working hours applicable at an employer.


3. Salary and Allowances

3.1 Definition of Salary

The Labor Law defines “salary” as compensation in the form of money received by an employee from an employer, determined and paid in accordance with the employment contract or applicable laws and regulations. Salary may also include allowances for the employee and his/her family for certain work and/or services that have been or will be performed.

3.2 Components of Salary

The Labor Law does not specifically set out the components of salary; it merely states that allowances are considered a component of salary. Based on the previous regulations, salary consists of the following components: • Basic Salary: is defined as the basic compensation paid to an employee, based on pay grade. • Fixed Allowance: is a fixed payment made to an employee and family in relation to the job

and is paid with the basic salary. The Labor Law defines a fixed allowance as a regular payment unrelated to the employee’s attendance or performance.

• Non-fixed Allowance: is an irregular payment made to the employee and family that need not

be directly related to the job, nor paid along with the basic salary.

Employers are not obliged to pay allowances under the Labor Law. Depending on the type of payment concerned, the determination of the components of salary might differ for different types of calculations e.g. the salary components used to calculate a termination package are different from those used to calculate overtime pay.

3.3 Salary Structure and Grade

The Labor Law requires employers to determine the salary structure and grade of individual employees based on their position within the employer, their years of service, education and competency. However, the Labor Law does not state whether or not the details of the salary structure and pay scale of a given employer must be made available to all employees.

3.4 Minimum Wage

Each provincial level government annually issues a minimum wage that is applicable in the province. In some provinces, there may also be a sectoral minimum wage, (i.e. the minimum wage applicable in certain industry sectors) and city minimum wage (i.e. the minimum wage applicable in certain cities within the province). Neither the sectoral minimum wage nor the city minimum wage should be lower than the applicable provincial minimum wage.

3.5 Religious Festivity Allowance (“THR”)

The THR is a mandatory payment which must be made by an employer to an employee in relation to the major religious holiday celebrated by the employee. As regulated under Minister of Manpower Regulation No. Per-04/Men/1994, the THR must be paid no later than 7 days before the relevant



religious holiday. Typically, for Moslem employees, the THR is paid no later than 7 days before Idul Fitri (the end of the fasting month of Ramadhan). For Christian employees, the THR is paid no later than 7 days before Christmas. The amount of the THR for an employee who has worked for 12 consecutive months is equal to 1 month’s salary (in this case, "salary" means basic salary plus fixed allowances). For an employee with a service period of less than 12 months but more than 3 months, the amount of the THR is pro-rated according to the employee's actual months of service with the employer. Employees with less than 3 months service with an employer are not entitled to the THR.

3.6 Salary Deductions

Under Government Regulation No. 8 of 1981 on Wage Protection, salary deductions by an employer for third parties are only allowed if there is a specific power of attorney from the employee authorizing such deductions. This rule is not applicable to salary deductions in relation to payments that employees must make to the State e.g. contributions to Jamsostek (worker’s social security program) and salary deductions for the purpose of income tax.

3.7 Salary During Absence Due to Illness

The Labor Law provides that an employee who is ill is not obliged to work. The employee’s salary during absence due to illness is calculated as follows: • first 4 months of illness : 100% • second 4 months of illness : 75% • third 4 months of illness : 50% • each subsequent month of illness : 25%

(until termination of employment)

3.8 Salary During Detention

An employer is not required to pay salary if a worker is arrested for allegedly committing a criminal act. However, instead of the salary, the employer is required to provide assistance to the employee’s dependants. The amount of the assistance depends on the number of dependant(s) and ranges from 25% to 50% of the employee’s monthly salary.

4. Employment of Expatriate Workers

4.1 Requirement to Obtain a Work Permit

Every employer employing an expatriate worker must have a written permit to employ expatriates from the Minister of Manpower & Transmigration.


4.2 Requirement to Obtain the Expatriate Manpower U tilization Plan (“RPTKA”)

An employer who intends to employ expatriates must first obtain an RPTKA. An RPTKA is essentially an employer’s plan in relation to the utilization of expatriate workers for certain positions in the employer. The plan should include the number of expatriate workers, the period of work and the plan to replace the expatriate workers with Indonesian employees. The RPTKA application must be submitted to the relevant Manpower Office for approval. The reason for requiring employers to obtain a RPTKA is that an expatriate worker may be employed only for certain positions and for a certain period of time.

4.3 Appointing a Counterpart

As a general rule, for technology transfer purposes an employer of expatriate workers (except for expatriates who hold the position of Director or Commissioner) must appoint 1 Indonesian worker as a counterpart to the expatriate. For some employer’s the ratio is higher e.g. 3:1 for foreign trade representative offices.

5. Workers’ Social Security (“JAMSOSTEK”)

5.1 Enrollment Requirements

Under Law No. 3 of 1992 on Workers’ Social Security (“Jamsostek Law”) and its implementing regulation, an employer that has 10 employees or more, or pays a total amount of salary of Rp1,000,000 is obliged to enroll its employees in Jamsostek.

5.2 Jamsostek Programs

Jamsostek consists of four programs: • Occupational Accident Security Program (Jaminan Kecelakaan Kerja or “JKK”); • Death Security Program (Jaminan Kematian or “JK”); • Old Age Security Program (Jaminan Hari Tua or “JHT”); and • Health Care Security Program (Jaminan Pemeliharaan Kesehatan or “JPK”) The JKK, JK and JHT are mandatory. However, if the employer does not participate in Jamsostek’s JPK program, the employer is obliged to provide a health care benefit which is better than that provided in the JPK. As provided under Jamsostek Law and its implementing regulation, the JPK covers an employee and his/her family (spouse and up to 3 children).

5.3 Jamsostek Contributions

Jamsostek contributions are calculated based on a certain percentage of the employee’s salary as follows:



(i) JKK

The percentage depends on the industry of the employer, but ranges from 0.24% to 1.74%. This contribution is fully paid by the employer.

(ii) JK

The contribution is 0.3% of the employee’s monthly salary and is paid by the employer.

(iii) JHT

The contribution is 5.7% of the employee’s monthly salary. 3.7% of this contribution is paid by the employer and 2% is paid by the employee (deducted from employee’s salary but paid by the employer to PT Jamsostek (Persero));

(iv) JPK (if the company does not provide health care benefits).

For married employees, the contribution is 6% of the employee’s monthly salary and for single employees it is 3% of the employee’s monthly salary.

An employee should be covered by Jamsostek from the first day he/she joins the employer.

5.4 Possible Exemption from Enrolling Employees in the JPK Program

An employer may choose not to enroll its employees in the JPK program of Jamsostek. However, the employer is still obliged to provide a health care benefit which is better than the JPK. Typically, employers provide health care and medical benefits that are better than the JPK program under Jamsostek. JPK covers both in-patient (hospitalization) and outpatient (doctor’s visit, prescription drugs, etc) treatment, but the level of coverage is sometimes viewed by employers (and employees) to be minimal. Therefore, employers typically provide health care and medical benefits that cover both in-patient and out-patient care but are of a much better quality than that provided under JPK.

6. Termination of Employment Termination of employment in Indonesia is governed by the Labor Law and Law No. 2 of 2004 on the Settlement of Industrial Relations Disputes. As the first principle under the Labor Law, employers, workers, labor unions and the Government are obliged to make every effort to avoid termination of employment. Efforts in this regard include positive actions aimed at avoiding termination of employment, such as scheduling working hours, taking cost-efficiency measures, altering working methods and providing developmental programs to workers. In order to terminate employment relationships, the general rule is that employers must first obtain a favorable decision on the termination of employment from the industrial relations dispute settlement agency (at present, the Industrial Relations Court (“ IRC ”) and Supreme Court, if the decision of the IRC is appealed by one or both parties).


The requirement to obtain a prior decision for termination is not applicable if the termination of employment occurs: • during the probation period of the worker (as long as the probation period is in writing); • due to the worker’s voluntary resignation, with no indication of any pressure/intimidation

from the employer; • due to the expiry of the worker’s employment agreement for a definite period; • due to the worker reaching the retirement age as stipulated under the employment agreement,

Company Regulation or Collective Labor Agreement, or other laws and regulations; • due to the worker’s death; or • due to criminal proceedings resulting in the worker being unable to work for 6 consecutive

months.

7. Termination Payments

7.1 Structure of Termination Payments

The termination payment depends on whether an employee is employed under a definite period employment agreement or an indefinite period employment agreement.

(a) Indefinite Period Employees

The termination payment paid to terminated indefinite period employees consists of 3 elements: • severance pay • long service pay and • compensation of rights. Attachment A provides details of these 3 components of termination payment. In addition to the 3 elements of a termination package, the Labor Law introduced a new element, i.e. the “separation payment” (uang pisah). This separation payment applies to termination of employment due to the resignation of an employee and termination due to an employee’s absence without leave for 5consecutive working days or more. The Labor Law stipulates that the amount of the “separation payment” is as stipulated under the employment agreement, the applicable Company Regulations or Collective Labor Agreement. Under the Labor Law, “separation pay” is only to be granted to a worker whose duties and functions do not “directly represent” the employer’s interests. The law is not clear on who would be included in this category of employees. However, it is generally assumed that a worker whose duties and functions directly represent the employer’s interests refers, at a minimum, to the members of the Board of Directors of a company. Some officials of the Ministry of Manpower & Transmigration have interpreted this provision to mean “managerial level employees” as well (e.g., HR managers, finance managers etc).



(b) Definite Period Employees

An employee employed under a definite period employment agreement and terminated before the contract period expires is not entitled to a termination payment that consists of severance pay, long service pay and compensation of rights. Instead, a party that terminates a definite period employment agreement before its expiry (i.e. employer and employee) is obliged to pay to the other party compensation in the amount of the employee’s salary until the end of the period of the definite period employment agreement.

7.2 Termination Payment Formula (For Indefinite Per iod Employees)

Whether an employee is entitled to severance pay, long service pay, compensation of rights and separation payment depends on the reason for the termination of employment. Attachment B sets is a summary of the various reasons for termination (and the relevant termination payment entitlements) under the Labor Law.

8. Taxation Under the Indonesian Income Tax Law, an employer is obliged to withhold a certain amount of an employee’s taxable income for the purpose of payment of the employee’s income tax to the State. In Indonesia income tax is calculated based on the following progressive tax rates:

Taxable Income Tax Rate

Up to Rp. 50,000,000 5%

Rp. 50,000,000 – Rp. 250,000,000 15%

Rp. 250,000,000 – Rp. 500,000,000 25%

Above Rp. 500,000,000 30%

A different tax rate applies for payments made to employees upon termination of employment. The applicable tax rates for termination payments are:

Taxable Income Tax Rate

Up to Rp. 50,000,000 Exempted

Rp. 50,000,000 – Rp. 100,000,000 5%

Rp. 100,000,000 – Rp. 500,000,000 15%

Above Rp. 500,000,000 25%


For further information, please contact: Susie Beaumont : Tel: +62 21 515 4894 E-mail: [email protected] Alvira M. Wahjosoedibjo Tel: +62 21 515 5290 E-mail: [email protected]



Attachment A Components of Termination Payment Under Law No. 13 of 2003 on Labor

1. Severance Pay (Article 156.2 of Law No. 13 of 2003)

• 1 month salary for a service period of less than 1 year; • 2 months salary for a service period of 1 year but less than 2 years;

• 3 months salary for a service period of 2 years but less than 3 years;






• 9 months salary for a service period of 8 years or more.

• one month’s salary for a service period of less than one year;

2. Long Service Pay (Article 156.3 of the Labor Law)

• 2 months salary for a service period of 3 years or more, but less than 6 years; • 3 months salary for a service period of 6 years but less than 9 years;






• 10 months’ salary for a service period of 24 years or more.

3. Compensation of Rights (Article 156.4 of the Labor Law)

• compensation for annual leave to which the employee is entitled, but which is not taken by the employee;

• compensation for travel expenses or costs for the employee and his/her family to

return to the original location of hire;


• compensation for housing and medical costs, which is 15% of the total amount of severance and service payment; and

• other compensation as stipulated under the employment agreement, Company

Regulation or Collective Labor Agreement. Components of Salary The components of salary that are used to calculate the termination package under the Labor Law consist of: • current base salary; and • fixed allowances (i.e. payments to the employee made regularly and not related to the

employee’s attendance, or achievements within a certain job).



Attachment B Calculation for Termination Payment Under The Labor Law

(Applicable only to termination of indefinite period (permanent) employees)

No. Reason for Termination of Employment

Severance Payment

Long Service Payment

Compensation of Rights

Separation Payment (“ Uang Pisah”)

1. Change of employer’s status, merger or consolidation of the employer, and the employer does not wish to continue the employment relationship (Article 163, Paragraph 2)

2x 1x 1x None

2. Closure of the employer for efficiency measures, not for financial reasons or force majeure (Article 164, Paragraph 2)

2x 1x 1x None

3. Employee’s death (Article 166)

2x 1x 1x None

4. Employee reaching pension age, if the employer has not enrolled the employee in a pension plan (Article 167, Paragraph 5)

2x 1x 1x None

5. Employee termination where the employee makes allegations against the employer which are proven (Article 169, Paragraphs 1 and 2)

2x 1x 1x None

6. Employee’s violation of employment agreement, Company Regulations or Collective Labor Agreement (after 3 consecutive warning letters) (Article 161, Paragraphs 1 and 3)

1x 1x 1x None

7. Change of employer’s status, ownership and merger or consolidation of the employer, and the employee does not wish to continue the employment relationship (Article 163, Paragraph 1)

1x 1x 1x None



Severance Payment




8. Closure of the employer for financial reasons or force majeure (Article 164, Paragraph 1)

1x 1x 1x None

9. Bankruptcy of the employer (Article 165)

1x 1x 1x None

10. Employee’s inability to work for 6 consecutive months due to detention by the authorities (Article 160 Paragraphs 3 and 6)

None 1x 1x None

11. Employee found guilty by a court within 6 months of detention by the authorities (Article 160 Paragraphs 5 and 6)

None 1x 1x None

12. Employee resignation (Article 162, Paragraph 2)

None None 1x Yes, if the employee’s duties and functions do not directly represent the employer’s interests. The amount and implementation depends on the provisions under the employment agreement, Company Regulations or Collective Labor Agreement.




Severance Payment




13. Employee’s absence without leave (Article 168, Paragraph 3)

None None 1x Yes, if the employee’s duties and functions do not directly represent the employer’s interests. The amount and implementation depends on the provisions under the employment agreement, Company Regulations or Collective Labor Agreement.

14. Employee reaching pension age - if the employer enrolls the employee in a pension plan (Article 167, Paragraph 1)

None None 1x None

15. Employee termination where the employee makes allegations against the employer that are not proven (Article 169, Paragraphs 1 and 3)

None None 1x None

16. Employee termination due to his/her continuing illness after a period of 12 months (Article 172)

2x 2x 1x None

The components of salary used as the basis for the calculation of the termination payments consist of the basic salary and fixed allowance, including the value of rations, if provided by the employer.


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DISCLAIMER It should be noted that the material in this book is designated to provide general information only. It is not offered as advice on any particular matter, whether it be legal, procedural or other, and should not be taken as such. The authors expressly disclaim all liability to any person in respect of the consequences of anything done or omitted to be done wholly or partly in reliance upon the whole or any part of the contents of this book. No reader should act or refrain from acting on the basis of any matter contained in it without seeking specific professional advice on the particular facts and circumstances at issue. ©2011 Hadiputranto, Hadinoto & Partners. All rights reserved. Hadiputranto, Hadinoto & Partners is a member firm of Baker & McKenzie International, a Swiss Verein with member law firms around the world. In accordance with the common terminology used in professional service organizations, reference to a “partner” means a person who is a partner, or equivalent, in such a law firm. Similarly, reference to an “office” means an office of any such law firm. This may qualify as “Attorney Advertising” requiring notice in some jurisdictions. Prior results don’t guarantee a similar outcome.

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