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Indonesia

April 01, 2022

By Nafis Adwani and Jaime Angelique

Back to International Employment Law

Indonesia

KEY DEVELOPMENTS FOR 2022


 

Overhaul of local employment laws, including changes to termination procedures and severance package components

On 2 November 2020, the Indonesian Government issued Law No. 11 of 2020 on Job Creation (“JCL”).  The JCL was issued to partly amend the provisions of 79 existing laws, including Law No. 13 of 2003 on Employment (“Employment Law No. 13”). 

The JCL has amended 31, added 13 and removed 29 articles of Employment Law No. 13. Provisions in the Employment Law No. 13 not amended by the JCL remain applicable and effective, to be read in association with the relevant provisions in the JCL. In 2021, the Government issued several implementing regulations of the JCL, including those related to fixed-term employment agreements, outsourcing, work and rest time, termination of employment relationships, wages, social security, and expatriates.

As a result of the issuance of the JCL implementing regulations, companies must amend their Company Regulations, company policies, and Collective Labor Agreement (if the company has a labor union) to conform with the new laws as soon as possible.  Companies are also required to re-negotiate with employees or any applicable union to comply with these new arrangements. 

Important items to be adjusted include:

  1. provision of compensation payable to employees recruited under a fixed-term employment agreement at the end of their contract period;

  2. termination procedure, to eliminate the requirement to negotiate with the union or the employee to terminate employment;

  3. adjustments to severance package components and the multiplication factor for each cause of termination;

  4. maximum period of a fixed-term  employment agreement, which  now can be extended more than once (previously, once only) and up to 5 years (previously, the maximum duration of a fixed-term contract was 3 years with a one-time extension/renewal for another 2 years); and

  5. extension of possibilities to assign work to third parties or to demand manpower supply from third parties to work on a company’s activities, as outsourcing is now open to any type of work, including core business activities of a company.

 

KEY DEVELOPMENTS FOR 2021


 

Law No. 11 of 2020 on Job Creation enacted

Law No. 11 of 2020 on Job Creation ("JCL" or the "Omnibus Law," in common parlance), enacted on 2 November 2020, was issued to partly amend the provisions of 79 existing laws, including Law No. 13 of 2003 on Employment ("Employment Law No. 13").

JCL has amended 31, added 13 and removed 29 articles of Employment Law No. 13. Unamended provisions remain applicable and effective, to be read in association with the relevant JCL provisions.

In this update, the remaining provisions in Employment Law No. 13 will be combined with those in the JCL and presented as a single entity, referred to as the "New Employment Law," ("NEL").

The four most prominent changes since the NEL are related to: 1) the impact of termination of non-permanent employees, 2) the impact of termination on permanent employee, 3) adjustments to the formula for severance package calculation, and 4) outsourcing.


 

Impact of termination of employment on non-permanent employees

The NEL introduces a new financial obligation upon companies as employers, which requires companies to pay compensation following the expiry of an employment contract (Article 61A of JCL—Manpower-related Section) for fixed-term employees. Prior to the NEL, an employer was not obliged to pay compensation in any form to a fixed-term employee once the term expired. The Government has changed its stance on this matter: Within three months of 2 November 2020, the Government was expected to issue an implementing regulation to stipulate further the amount in compensation or the formula to calculate the amount in compensation.


 

Impact of termination of employment on permanent employees

Under the Indonesian employment law (Employment Law No. 13 and the NEL), termination of employment must be followed by payment of a severance package which is made up of severance pay, service appreciation pay, and compensation pay.

Further, the components of compensation pay have changed following the issuance of the NEL. The table below shows a comparison of the "before" and "after" situation:

Pre NEL Post-NEL
i. severance pay i. severance pay
ii. service appreciation pay ii. service appreciation pay
iii. compensation of rights:
  1. payment of any unused annual leave
  2. cost of relocation (if different than the place of recruitment)
  3. medical & housing allowance in an amount equal to 15% of the severance pay + service appreciation pay
  4. any other rights as provided under the employment agreement, company regulations and /or the collective labour agreement
iii. compensation of rights:
  1. payment of any unused annual leave
  2. cost of relocation (if different than the place of recruitment)
  3. any other rights as provided under the employment agreement, company regulations and/or the collective labour agreement

In summary, in accordance with the NEL, the amount in severance pay is one month's wages for up to one year of service and an additional one month's wages for each year of service thereafter, up to a maximum of nine months' wages. The amount in service appreciation pay will depend on the length of service of the employee, with minimum service of three years before the employee is entitled to the benefit. Service appreciation pay starts at two months' to 10 months' wages. Compensation pay includes several elements:

  • payment of unused annual leave;
  • relocation cost (if different to the place of recruitment); and
  • any other rights as provided under the employment agreement, company regulations and/or the collective labour agreement.

Further, the cause of termination must be lawful and be based on the lawful reasons for termination set out in the NEL. For each cause of termination, a multiplication factor for severance package may apply. For example, in Employment Law No. 13, severance package for termination due to insolvency is less than that for termination due to company efficiency, as a different multiplication factor is used.

We understand that there will be an adjustment to the multiplication factor but will not know the precise details until the implementing regulation has been issued.


 

Changes to the outsourcing of work activities

Before the issuance of the New Employment Law, outsourcing was highly regulated, subject to many restrictions and applicable only to non-core work activity. Employment Law No. 13 compelled employers to employ outsourced workers directly if the company (as client/employer) violated the outsourcing rules. The New Employment Law removes most of the provisions on outsourcing and focuses on the employment relationship between the outsourcing company and outsourced workers. Consequently, there is no longer an explicit obligation between workers and a company (as client/employer) that assigns the tasks.

In Employment Law No. 13, the outsourcing of work activities to a third party can be done in two ways: 1) assignment of work to a third party or 2) a labour supplier. The NEL no longer differentiates between the types of outsourced work activities, and refocuses on only one definition, outsourcing. Further, limitation of work activities (both for assignment of work and labour supply) available to be outsourced to an outsourcing company are also removed in the NEL, leaving open the potential for interpretation that all types of work activity may be outsourced to third parties.

With thanks to Nafis Adwani and Jaime Angelique of ABNR Counsellors at Law for their invaluable collaboration on this update.

 

KEY DEVELOPMENTS FOR 2020


 

Overhaul of existing laws under the Bill on Job Creation

The key issue in 2020 is the progress of the Bill on Job Creation (the "Bill") through the National Legislative Assembly (DPR). The Bill proposes to amend a total of 79 existing statutes which, taken together, cover virtually all major economic sectors and activities, as well as many important facets of the country's Governmental, regulatory and planning systems.

In the employment arena, the Bill proposes significant changes to the prevailing Manpower Law 2003. Some of the key changes envisaged by the Bill are the following:

  • relaxation of Indonesia's strict rules on termination of employment;
  • reduced benefits for dismissed employees;
  • changes to the formula for the calculation of minimum wage to strip out the inflation component―as a result, the minimum wage will no longer be linked to the consumer price index;
  • abolition of most restrictions on outsourcing―previously, outsourcing was only permitted for ancillary activities and prohibited for core production operations;
  • establishment of a national, insurance-based unemployment benefit scheme; and
  • to help dampen down opposition from organised labour, the Bill proposes the payment by employers of a one-off, length-of-service bonus to employees ranging from one months' pay (for employees with less than three years’ service) to up to five months' pay (for employees with 12 years' of service or more). Following a storm of protests from employers, the Minister of Finance recently stated that the bonus would only be payable to employees on less than IDR 20 million (approx. USD 1,400) per month. However, as this proviso is not actually stated in the Bill, there is no guarantee that this will actually be the case.

In general, making progress with the Bill is still a top priority of the current Government and legislature. However, since the end of March 2020, the country's attention quickly refocused on health issues caused by the COVID-19 pandemic. Prior to the COVID-19 emergency (which started around mid-March 2020), the legislature and Government (including the President and ministries) considered postponing the discussion on employment matters under the Bill. There has since been no further clarification on the schedule for discussing employment matters under the Bill, nor have the legislature and Government confirmed whether the employment related provisions in the Bill will be left out altogether.

Since the COVID-19 emergency hit Indonesia, the Government and legislators have turned their attention to laws and regulations related to health protocols, as well as laws and regulations that ultimately will protect and help businesses and citizens to re-energise the economy. Amongst others, the Government has issued regulations on tax incentives for industry, relaxation of loan obligations and adjustments to the education system.

 

KEY DEVELOPMENTS FOR 2019


 

Employment administration streamlined for expatriates

The administration process for expatriate employment has been significantly streamlined by (i) Presidential Regulation No. 20 of 2018 (“PR 20/2018”) and (ii) Regulation of the Ministry of Manpower No. 10 of 2018 (“MoM 10/2018”) (“New Regulations”), which have respectively revoked (i) Presidential Regulation No. 72 of 2014 (“Old Presidential Regulation”) and (ii) Regulations of the Ministry of Manpower No. 16 of 2015 and No. 35 of 2015 (“Old MoM Regulations”).


 

Expatriate Manpower Employment Plan/Expatriate Manpower Employment License

The most important change is a prospective employer will no longer be required to apply for a separate Expatriate Manpower Employment License (“IMTA”) from the Minister of Manpower in order to employ an expatriate. Instead, the employer will need to submit an Expatriate Manpower Employment Plan (“RPTKA”) to the minister for approval. Article 9 of the New Regulation expressly states that an approved RPTKA will simultaneously constitute the license to employ the expatriate.

Once the RPTKA is approved, the following steps need to be completed:

  • notify the Director General of Manpower Placement Development and Expansion of Job Opportunity (“Notification”);
  • pay the compensation fund in the amount of US$100 per month per expatriate (“Compensation Fund Payment”); and
  • evidence of the Notification and Compensation Fund Payment must then be submitted online to the Director General of Immigration as the basis for issuance of a Limited-Stay Visa.

 

Concurrent Employment now Permitted

Article 6 of PR 20/2018 allows expatriates in particular sectors to work concurrently for more than one employer. Previously, only a director/commissioner could be employed by more than one company. This new provision reflects a greater awareness of the need for flexibility in sectors suffering from shortages of skilled labor.


 

Centralization of authority with Minister of Manpower

Under the Old Presidential Regulation and Old MoM Regulations, provincial governments in certain circumstances had a role to play in RPTKA and IMTA extension or renewal. In contrast, the New Regulations afford no such role to provincial governments, although the Minister of Manpower or an authorized official is required to forward data on expatriate employees to the relevant provincial, county, or municipal manpower agencies within whose jurisdiction the expatriates are employed. Thus, the entire expatriate manpower licensing process from start to finish has now been centralized with the Ministry of Manpower, which should help avoid confusion and overlapping, provided, of course, that this change is reflected in implementing regulations subsequently issued by the minister.


 

Jakarta minimum wage for 2019

On 26 October 2018, the Governor of DKI Jakarta determined the minimum wage for the capital in 2019 through the issuance of Regulation of DKI Jakarta Governor No. 114 of 2018. The new minimum wage for 2019 will be Rp3,940,973, an 8.03% increase on the Rp3,648,035 for 2018. The province with the second-highest minimum wage is Papua (Rp3,240,900), followed by North Sulawesi (Rp3,051,076.)

 

KEY DEVELOPMENTS FOR 2018


 

Revisions to the Labor Law

The Government has indicated that it will revise the Labor Law by including it in the working agenda of the Tripartite Cooperation Body. The new Labor Law is expected to remove employers’ obligation to pay severance on termination in certain conditions, as well as to lower the amount paid.


 

Impact of Digitalization on Labor

The Government is paying particular attention to the impact of digitalization on labor sectors. The Ministry of Manpower plans to invigorate vocation training to match industry needs focusing on labor intensive services, manufacture, and agriculture.

The Ministry of Manpower is also planning to formulate a comprehensive employment policy (regulation) responding to the digitalization trend. The policy will synchronize related existing policy/regulation issued by other government institutions such as the Ministry of Trade, Ministry of Communication and Information Technology, Ministry of Transportation, etc.


 

New Procedure for Manpower Reporting

The Ministry of Manpower is introducing a new online procedure for mandatory manpower reporting. It requires companies to submit manpower reports via the Ministry’s website (a) On establishment, recommencement, or relocation or (b) prior to their relocation, suspension, or dissolution. In addition, companies are required to submit annual manpower reports in the month of December.


 

Wage Structure and Wage Scale

Employers are obliged to prepare a wage structure and scale, and communicate this to employees. In preparing the wage structure and scale, consideration must be given to classification, position/title, years of service, education and competency. There are administrative sanctions for non-compliance, and the document must be presented on application for (a) ratification or renewal of a company’s company regulations/manual, and (b) in the application for registration, extension or renewal of a company’s collective labor agreement. 

With thanks to Nafis Adwani and Indra Setiawan of Ali Budiardjo, Nugroho, Reksodiputro for their invaluable collaboration on this update.

For More Information

Image: Suzanne Horne
Suzanne Horne
Partner, Employment Law Department
Image: Kirsty Devine
Kirsty Devine
Associate, Employment Law Department
Image: Aashna Parekh
Aashna Parekh
Associate, Employment Law Department

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