Indonesian Manpower Law: Hiring and terminating employees in Indonesia

The workforce is regulated by the Indonesian Manpower Law, which protects the rights and interests of both workers and employers. The Manpower Labour Law can and does change frequently, and employers must be familiar with current regulations and how they affect hiring practices. 

In 2020, Indonesia introduced Omnibus Law, which includes several revisions to The Manpower Law.

In this article, we will provide updated information on these laws and with special focus on the topics of recruitment, employment contracts, benefit packages and termination.

The process of hiring employees in Indonesia

1# Conduct employee background check

Conducting employee background checks is not a legal requirement in Indonesia and it’s often overlooked.

There are two reasons employee background checks are skipped – either to save time or not to spend money on it. However, our experience shows that the cost of bad hiring is significantly higher than spending a few extra weeks making sure you know who you are hiring, especially for senior positions.

Background check will verify all of the information about the candidate, guaranteeing there were no false claims and, even worse, that there is no criminal history. 

Emerhub’s personal background check services provide an extremely thorough screening for potential candidates, covering the areas of employment history, education, references, criminal records and more. 

#2 Make a formal offer letter

Once you have agreed to hire a candidate, the offer is formalized with an offer letter. While the offer letter is not legally regulated, it sets clear expectations to both parties and is the basis for the employment contract.

The standard elements of an offer letter in Indonesia are the following:

• Position (title, division, direct supervisor)
• Job description
• Performance metrics
• Starting date
• Type of contract
• Salary and other benefits

It’s important to specify whether the offered salary includes taxes (gross salary) or it’s the salary that the employee will take home (net salary). We suggest to always use gross salary – it’s much easier to calculate since the net salary depends on a lot of factors such as their previous income during the calendar year.

3# Sign an employment contract

When hiring an employee in Indonesia, you must specify what type of employment contract you are offering. Employment contracts are legally binding and must adhere to the Indonesian Manpower Law. 

We will introduce the types of employment contracts in Indonesia later in this article.

4# Introduce company regulations (Peraturan Perusahaan (PP))

In addition to employment contracts, companies must also have Peraturan Perusahaan (PP) This is the internal regulations of a company, understood and legally binding to both the company and its employees. Company Regulations must always comply with the Indonesian Manpower Law.  

Clauses within the PP are typically referred to when settling industrial disputes – disagreements between management and employees that fall outside their terms of employment. Examples include labor strikes and lock-outs. 

Types of employment contracts in Indonesia

Temporary i.e. fixed-term contract (PKWT)

Fixed-term contracts are signed for a specific amount of time. Here are the requirements for the fixed-term contract (PKWT):

• Maximum duration of five years.
• No probationary period is allowed.
• Contract must be signed in the Indonesian language. Bilingual contracts are common for foreign employees. If the employment contract is in English, it’s automatically considered as an indefinite contract (more on that below).
• Contract must be registered with the Indonesian Ministry of Manpower within three days after signing.

Terminating fixed-term contract (PKWT)

There are a few key aspects to remember when working with fixed-term contracts:

• You are not allowed to include a probationary period that would allow you to easily terminate the contract in the first months of the employment
• Indonesian employees are entitled to compensation in case the contract gets terminated or extended.
• The size of the compensation is one month’s salary. If the employment lasted for less than 12 months, then the compensation is prorated (e.g. 50% for six months).
• Foreign employees are not entitled to the compensation.

 Permanent, or indefinite term contract (PKWTT)

Permanent contracts are the most common types of employment contracts in Indonesia. As the name suggests, they don’t specify an end date for the employment.

A permanent employment contract can include an up to three month probationary period. Once the probationary period is over, the employer must issue a letter to the employee that they are now a permanent employee.

Probationary period conditions are outlined in the employment contract. They usually allow both parties to terminate the contract in one to four week notice, without the employee having the right for a severance pay.

A common mistake is to not to track the end date of the probationary period. It’s important to set up internal practices where the direct supervisors must make a decision of whether to keep the employee or not after the probationary period.

Freelance or daily work contracts

Freelance, or daily work, contracts are considered as temporary employment contracts (PKWT). The key difference is that the employee cannot work for more than 21 days per calendar month.

The common use case for freelance contracts is hiring temporary staff for seasonal or temporary assignments. However, it’s important that the HR department tracks the number of days the freelancer works for your company – if they exceed the 21 days per month, they automatically become permanent employees.

All contracts must be written in Indonesian.  They can be written with both Indonesian and an English translation, but contracts must have an Indonesian version to be legally binding. 

Employment benefits packages in Indonesia

Salary

Salary negotiations often refer to the offer of a net or gross amount for monthly salary. With a net payment, the employer pays the employee’s Income Tax (PPH 21), social and health insurance (BPJS) contribution.

The majority of the Indonesian job candidates, especially the junior employees, state their expected salaries as a “take-home-pay” or a net salary.

Overtime Pay

When including overtime as part of employee working schedules, companies must pay employees adequately for the extra hours. Overtime hours must be agreed upon in writing with the employee. 

Many employees enjoy the opportunity to work overtime, especially in busy seasons or holidays, with additional pay added to their salary. However, companies are not allowed to replace incentives and bonuses with overtime pay. 

Hours worked beyond the following are considered overtime in Indonesia:

• 7 hours per day and 40 hours in a week; for 6 days per week; or
• 8 hours per day and 40 hours in a week; for 5 days per week

The maximum hours of overtime that employees can work are 3 hours per day, and 14 hours per week.  In addition to paying the overtime fee, companies must provide enough rest time, and adequate food and drinks (minimum 1,400 calories for 3 hours of overtime).

It should be noted that employees who are in higher positions – while typically working longer hours – are not entitled to overtime pay since they generally have higher salaries.

Overtime pay calculation during a normal working week: 

• First, calculate the hourly rate = 1/173 x 1 monthly salary
• The first hour of overtime =  1.5 x (hourly rate)
• The second hour of overtime =  2 x (hourly rate)

Overtime fee calculation during the holidays: 

• First, the same calculation for hourly rate: 1/173 x 1 monthly salary
• The first 5 hours of overtime = 2 x (hourly rate) for each hour
• The 6th hour = 3 x (hourly rate) for that hour
• The 7th – 8th hour = 4 x (hourly rate) for that hour 

Paid Annual Leave

Manpower Law entitles employees to 12 days of annual leave per year. During these days, employees have time off but maintain their normal salary. 

Employees are eligible for annual leave after they have worked for 12 months consecutively with a company. If the employee does not take the full 12 days within a year, the remaining days do not carry over to the next year. 

Companies do have the right, however, to postpone employees’ annual leave, but the reason must be obvious (example: peak season, or mandatory attendance days). These stipulations can be explained in the PP/Company Regulations. 

Festive Holiday Leave (THR)

It can be surprising to non-Indonesians when they realize how many holidays there are throughout the year. Indonesians celebrate a substantial number of holidays, national, religious, international and commemorative. The tanggal merah or “red dates” are public holidays when banks, schools, government offices and most businesses are closed. 

Companies need to prepare for festive days, knowing that they will either be closed, or if they are open, they will pay their employees extra for holiday time. 

Indonesian Manpower Law also requires the religious holiday allowance equal to a one month salary, known as Tunjangan Hari Raya (THR). This essentially means that the employees receive 13 salaries per year.

Read more:  Understanding the Religious Holiday Allowance THR in Indonesia.

Healthcare and social security program (BPJS)

As an employer, you must also provide basic health care and social security to all full-time employees.  Badan Penyelenggara Jaminan Sosial (BPJS) is a public program, providing medical and old age coverage to all Indonesians. 

There are two parts to the program – BPJS Kesehatan (health insurance) and BPJS Ketenagakerjaan (Social Security). Employers are required to make sure employees are registered for both.

BPJS Kesehatan Contribution of monthly salary

	Borne by employer	Borne by employee	Maximum gross salary for BPJS
Health Insurance	4%	1%	12,000,000

BPJS Kesehatan covers a maximum of five family members (employee, spouse, and three children). Additional members can be added with a contribution of one percent per person, per month.  

BPJS Ketenagakerjaan contribution of monthly salary

	Borne by employer	Borne by employee
Pension Plan (JP)	2%	1%
Retirement savings (JHT)	3.7%	2%
Work-related injury insurance (JKK)	0.24% – 1.74%*	0%
Non-work related accidental death insurance (JMT)	3%	0%

*JKK contribution will depend on the industry and risks of working in that field.

More information on coverage for Social Security can be found here: Compliance in Indonesia. 

Non-mandatory employee compensation benefits

As the workforce becomes more competitive with highly skilled workers, companies are finding ways to ‘sweeten the deal’ for hiring or rewarding their loyal employees. These benefits are not required by Manpower Law, but they go a long way for employee morale and job satisfaction.

• Bonus structures for employees* 
• Additional days for annual leave
• Expanded Inpatient and Outpatient health insurance to cover family members
• Permission to work remotely 
• Mobile phone credit allowance 
• Meal allowance or stipend 

*Bonuses (other than THR) are not regulated nor required by the Indonesian Manpower Law, but companies can set up a structure for their Company Regulations, based on performance. 

Employment Termination in Indonesia

When terminating a contract, both employer and employee should clearly understand the action and consequences. In addition, both parties have rights and obligations, and proper procedures to follow.  

1. Negotiations, you must first try to negotiate with the employee or their Labor Union. 
2. Follow the steps stipulated in the Company Regulations
3. Three consecutive warning letters must be given to the employee from the employer prior to termination. 
4. After termination, calculate the remaining compensation owed, and pay to the employee. 

Severance payment for permanent employees

In situations except for a serious offense, employees are entitled to a severance pay, with the amount depending on how long they were with the company. 

Years of service	Amount
Less than 1 year	1X salary
1 – 2	2X salary
2 – 3	3X salary
3 – 4	4X salary
4 – 5	5X salary
5 – 6	6X salary
6 – 7	7X salary
7 – 8	8X salary
More than 8	9X salary

Appreciation payment 

UPMK is a reward for long-time service or tenure with a company. 

Years of service	Amount
3 – 6	2 times salary
6 – 9	3 times salary

Reimbursement of rights

This is owed based on what was promised in the employment contract. 

An example of this is the payout for annual leave not taken is included in the contract. Other examples could include travel expenses back home, if the employee relocated for the position, as well as coverage for housing.

Separation payments

This is a voluntary payment from the employer to the employee, and it is the only payment that is not regulated in the Manpower Law.  To avoid disputes which could end up in the Industrial Court, employers should be very clear about separation payments either in the employment contract or in  the company regulations (PP).

Here is an example of a typical separation pay agreement:

Period of Service / Reason for termination	Employee resigns	Employee is absent for five working days or longer	Employee conducts a serious offence
< 3 years	No payment	No payment	No payment
> 3 years	1 month salary	No payment	No payment

Voluntary Resignation by Employee

When an employee resigns voluntarily, possibly for personal reasons, re-location, or moving to another company, the process for termination of their contract is simple.

It is standard that the employee gives a 30-days notice prior to their last day with the company. Some companies may choose to end the employee’s employment before that date. 

Resigning employees are not eligible for severance pay.  Depending on the circumstance of their resignation, they could still receive uang penggantian hak (rights replacement), uang penghargaan masa kerja (long tenure reward), and separation fee (uang pisah).

Use the table below to understand the types of payments and which employees are eligible after termination. 

Overview of payments the employer is required to pay to the terminated employee 

The following table gives a comprehensive overview of the common reasons a contract is terminated and the types of payments the employee is entitled to.

Most Common Reasons	Severance	Rewards of Service	Reimbursement on Rights	Separation Pay
Merger of a company	Y	Y	Y	X
Acquisition of company and termination is being initiated by the company	Y	Y	Y	X
Acquisition of company and workers are not willing to continue working	Y, 0.5x	Y	Y	X
Efficiency due to financial loss	Y, 0.5x	Y	Y	X
Efficiency to avoid financial loss	Y	Y	Y	X
Dissolution due to 2 years loss	Y, 0.5x	Y	Y	X
Dissolution not because of loss	Y	Y	Y	X
Dissolution due to force majeur	Y, 0.5x	Y	Y	X
Force Majeure	Y, 0.75x	Y	Y	X
Employee resigned	X	X	Y	Y
Employee not showing up for five days in a row	X	X	Y	Y
Employee breached agreement/ PP, and has been issued warning letters 1, 2 and 3	Y, 0.5x	Y	Y	X
Employee passed away	Y, 2x	Y	Y	X

Indonesian Manpower law regulations for hiring foreign workers

The hiring of foreign workers is also tightly regulated, but restrictions have been slowly loosening, allowing for more international workers to legally work in Indonesia.  Foreign workers are recruited because they possess an acute set of skills and international knowledge. 

Work and stay permits

Employers must provide both work (IMTA) and stay (KITAS) permits for the employee. Not all companies are permitted to hire foreign workers, so be sure to ask the Emerhub Talent Solutions team for the latest hiring laws.

Employment contracts

Foreign employees can only be hired on a temporary contract, PKWT. These contracts are for 6 to 12 months, and the 12 month contract can be extended every year.  If there is any termination of the work agreement, the employee is not entitled to any severance payments.

Compensation regulations

Because the employee is on a temporary contract, he/ she is not eligible to receive the full-time benefits that are granted to local workers. This includes overtime, THR (festive holiday payment) or severance. If it was included in the contracts, the employee can still receive the Reimbursement of Rights payments.