Indonesia Employment Law and Regulations [Updated 2024]

Indonesia Employment Law system is crucial not only for businesses but also for shaping the development and activities of employees. Understanding labor Laws helps mitigate legal risks, enhance transparency, and foster healthy labor relations. Let's explore the fundamental aspects of Indonesia Employment Law and its significance.

About Indonesia Employment Law

Role of labor laws in HR management

Indonesia Employment Laws play a crucial role in HR management by providing a framework for employers to navigate their responsibilities and obligations toward employees. Here's how they are significant:

Legal compliance: Labor Laws set clear guidelines and standards for employers to ensure legal compliance in areas such as wages, working hours, leave entitlements, and workplace safety. Adhering to these Laws helps organizations avoid legal penalties and disputes.

Employee protection: Labor Laws are designed to safeguard the rights and interests of employees, ensuring they are treated fairly and respectfully in the workplace. This includes protections against discrimination, harassment, unfair dismissal, and unsafe working conditions.

Dispute resolution: Labor Laws provide mechanisms for resolving disputes between employers and employees. By outlining procedures for grievances, arbitration, and collective bargaining, these Laws help mediate conflicts and maintain harmonious employer-employee relations.

Establishing standards: Labor Laws establish minimum standards for employment practices, such as minimum wages, overtime pay, and workplace health and safety regulations. These standards help create a level playing field and promote equity in the labor market.

Employee empowerment: Labor Laws empower employees by granting them certain rights and entitlements, such as the right to organize, collectively bargain, and seek grievances. This helps balance the power dynamic between employers and employees, fostering a more equitable work environment.

Overall, Indonesia Employment Law plays a vital role in shaping HR management practices, promoting fairness, equity, and compliance in the workplace, and ensuring the well-being and rights of employees are upheld.

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Indonesia Employment Law is important in HR management practices

Main Indonesia Employment Law

Understanding Indonesia Employment Law is crucial for businesses operating in the country. Here's an overview of the main Laws and their significance.

Manpower Law

The Manpower Law serves as the cornerstone of employment regulations in Indonesia. It covers a wide range of topics including working hours, leave entitlements, minimum wage requirements, and procedures for termination of employment. This Law is instrumental in safeguarding the rights and well-being of employees, ensuring fair treatment and compliance with global HR standards.

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Trade Union Law

The Trade Union Law protects the rights of employees to form and join trade unions. These unions are pivotal in advocating for better working conditions and fostering communication between employees and employers. This Law becomes particularly significant in the context of distributed teams, where effective employee representation is essential for decision-making processes.

Minimum wage

Indonesia's minimum wage law sets minimum pay across various sectors and regions. Employers are legally obligated to pay wages at or above the prescribed minimum wage. For example, the minimum wage in Jakarta is fixed at 4,400,000 IDR, which requires all employers to pay their workers. This is made possible through Indonesia Employment Laws, ensuring fairness in compensating laborers.

Social Security Law (SJSN)

Under the Social Security Law, employers are required to register their employees for Social Security benefits, including health and workplace accident insurance. This mandate promotes inclusivity in the workplace by ensuring that all employees, including international contractors, have access to essential benefits and protections.

Law against discrimination

Under Indonesia Employment Law, discrimination based on race, gender, and religion, among other characteristics covered by the law, is strictly prohibited in the case of employees or job applicants. Employers are not allowed to show bias in any recruitment activities, including hiring, promotions, and salary decisions.

Law against violence and sexual harassment

Indonesia takes a firm stance against sexual violence in the workplace through this legislation. The Law on Elimination of Sexual Violence in Employment defines and prohibits sexual violence in the workplace, outlining legal procedures and penalties for offenders. Compliance with this law is essential for businesses to create safe and respectful work environments for all employees.

Indonesia Employment Laws mandate employee registration for the benefit

Types of employment contracts in Indonesia

In Indonesia, employment contracts are categorized into two main types: Definite Term Employment Contract (PKWT) and Indefinite Term Employment Contract (PKWTT).

Definite term employment contract (PKWT)

• PKWT is designed for employment relationships with a specified duration.
• It is commonly utilized for jobs with predictable completion times.
• The agreement must be documented in writing and registered with the manpower office.
• PKWT can last up to five years or until the designated tasks are accomplished.
• If the work extends beyond the contract period, it can be renewed for up to another five years.
• Employers are obligated to provide compensation to employees upon contract expiration.

Indefinite term employment contract (PKWTT)

PKWTT establishes a permanent employment arrangement without a specified end date.

It applies to various types of employment.

• While written documentation is preferred, PKWTT can also be agreed upon verbally.
• If agreed upon verbally, the employer must issue a written letter of appointment to the employee.
• Unlike PKWT, registration with the manpower office is not mandatory for PKWTT.

Proper classification of employment contracts is crucial for legal compliance, avoiding legal risks, and managing labor conflicts. Misclassification can lead to loss of credibility, conflicts, and increased costs for businesses.

There are two types of employment contracts in Indonesia Employment Law

Employee rights

Indonesia Employment Law upholds the rights of various categories of workers, ensuring fairness and equality in the workplace. Let's delve into the specific rights afforded to different types of employees.

Rights of full-time employees

Full-time employees in Indonesia enjoy comprehensive benefits and protections. These rights typically include:

• Access to standard working hours per week.
• Entitlement to annual leave for rest and rejuvenation.
• Provision of sick leave for health-related absences.
• Eligibility for social security benefits, ensuring financial protection.
• Compensation for overtime work, ensuring fair remuneration for additional hours.

Full-time employees are crucial contributors to businesses, and Indonesia Employment Law recognizes and safeguards their rights to maintain a healthy and productive workforce.

Rźghts of temporary employees

Temporary workers, despite the nature of their employment, are also entitled to certain rights and protections. These include:

• Access to benefits such as sick leave, and ensuring health-related support during their tenure.
• Entitlement to overtime pay, ensuring fair compensation for additional hours worked.
• Protection against misclassification, ensuring they receive appropriate remuneration and benefits as per their employment terms.
• Safe working conditions, regardless of the temporary nature of their employment.

While their tenure may be limited, Indonesia Employment Law ensures that temporary workers are treated fairly and provided with essential protections during their employment.

Rights of foreign employees

Foreign workers, or expatriates, employed in Indonesia are also safeguarded by employment laws. Their rights typically include:

• Fair wages and equal treatment in the workplace, irrespective of nationality.
• Protection against discrimination or exploitation based on their foreign status.
• Access to benefits such as social security and health insurance, ensuring their well-being during their employment.
• Compliance with visa and work permit regulations to avoid legal issues.

Indonesia Employment Law emphasizes fairness and equality, extending protections to foreign workers to ensure a harmonious and legally compliant work environment.

Foreign employees in Indonesia have protection from discrimination

Key provisions in Indonesia Employment Law

The provisions in the Indonesia Employment Law create equal opportunities for all workers and safeguard employee rights in the workplace. These key aspects encompass:

Working hours and overtime

In Indonesia Employment Law, the standard workweek is 40 hours, spanning seven hours a day over six days or eight hours a day over five days. Hourly wages are calculated using the following formula: 1/173 * monthly salary.

Overtime pay applies if work surpasses these daily limits, notably on weekends and holidays, with overtime hours capped at four per day or 18 per week. Two methods exist for calculating overtime pay:

• Overtime on regular weekdays: 1.5 times the hourly wage for the first hour and double the hourly wage for subsequent hours.
• Overtime on weekends or holidays:
  • For companies with five working days: Double the hourly wage for the first eight hours, triple the hourly wage for the ninth hour, and quadruple the hourly wage for subsequent hours.
  • For companies with six working days: Double the hourly wage for the first seven hours, triple the hourly wage for the eighth hour, and quadruple the hourly wage for subsequent hours.

Leave policy

Employees in Indonesia have the following leave entitlements:

• Annual leave: Employees receive paid annual leave based on length of service. For 1-12 months, it is per company policy. After 12 months, additional leave is granted, a minimum of 12 days.
• Sick leave: Paid sick leave with a medical certificate.
• Maternity leave: Female employees get 3 months of paid leave, extendable to 6 months in special cases.
• Paternity leave: 2 days paid leave for new fathers.
• Other leave types: Includes public holidays, marriage leave (up to 3 days), and bereavement leave (up to 3 days).

Indonesia Employment Law stipulates working hours and leave policies for employees

Probation period

Newly hired employees in Indonesia typically undergo a probation period of up to three months, during which their salary must not fall below the minimum wage.

Termination

Indonesia Employment Law specifies that when terminating a contract, businesses must present justifiable reasons, and this process must be carried out fairly and transparently. Cases and policies regarding contract termination include:

Cases where employees can terminate the contract

In general, there are two main types of reasons that lead to the termination of employment, which may be initiated by either the employee or the employer.

From the employee's perspective:

• Voluntary resignation.
• Absence for 5 consecutive working days.
• Prolonged illness or disability from a work-related incident incapacitating the employee for over 12 months.
• Employee approaching retirement.
• Breach of employment contract/company rules.
• An acquisition where acquired employees opt not to continue.
• Merger, consolidation, or split leading to employee disinterest.
• Employee requests contract termination without proving company misconduct.
• Inability to work due to temporary detention exceeding 6 months from damaging company.
• Inability to work due to incarceration exceeding 6 months.
• An employee convicted of a crime within 6 months.
• An employee convicted of a crime causing company harm within 6 months.

From the employer's perspective:

• Company acquisition.
• Merger, consolidation, or split with no intent for further hiring.
• Closure due to 2 consecutive or non-consecutive years of losses.
• Closure due to force majeure.
• Unavoidable situation not directly causing closure.
• Closure unrelated to financial losses.
• Efficient operations to avert losses.
• Bankruptcy declaration.
• Employee request for contract termination due to clear company misconduct.
• Temporary payment suspension, potentially due to losses or other causes.

Besides the listed causes, termination of an employment contract can also be justified by urgent reasons (alasan mendesak). Employers have the authority to define any situation as urgent, provided it complies with the Minister of Manpower's guidelines on such circumstances. If an employer dismisses an employee without valid reasons, it may be deemed unlawful termination, risking legal action from the employee.

Employers must have valid reasons to terminate employment contracts

Compensation policy upon contract termination

Under Indonesia Employment Laws, policies regarding compensation fees and severance benefits are based on an employee's length of service. The compensation levels include:

About severance compensation:

• Less than one year: One month
• One to two years: Two months
• Two to three years: Three months
• Three to four years: Four months
• Four to five years: Five months
• Five to six years: Six months
• Six to seven years: Seven months
• Seven to eight years: Eight months
• More than eight years: Nine months

About service pay:

• Three to six years: Two months
• Six to nine years: Three months
• Nine to 12 years: Four months
• 12 to 15 years: Five months
• 15 – 18 years: Six months
• 18 – 21 years: Seven months
• 21 – 24 years: Eight months
• More than 24 years: Ten months

Additionally, employees are entitled to receive compensation for accrued but unused leave days and reimbursement for travel expenses where applicable.

Impact of non-compliance with Indonesia Employment Law

Non-compliance with Indonesia Employment Law can result in severe consequences for businesses. It can lead to legal penalties, damage to reputation, loss of productivity, employee discontent, and even business disruption. To mitigate these risks, preventive measures such as thorough legal compliance reviews, robust training programs, prioritizing employee well-being, and proactive engagement with regulatory authorities are essential. By prioritizing compliance and taking proactive measures, businesses can avoid potential legal troubles and foster a positive and productive work environment.

New update: Indonesia's new tax regulation

Indonesia has implemented a new tax regulation, Government Regulation 58 of 2023 (GR 58/2023), focusing on income tax deductions for individual taxpayers. Effective January 1, 2024, this regulation aims to streamline the process of monthly withholding tax calculations and provides clear guidelines for taxpayers. Under GR 58/2023, the monthly withholding tax calculation from January to November is now based on an 'effective tax rate' (ETR), while the annual calculation in December still follows the progressive income tax rate under Article 17(a) of the Income Tax Law.

Taxpayers are categorized into three groups: Category A, Category B, and Category C, each with different deduction rates based on their monthly gross income. Additionally, non-permanent employees paid on a daily or weekly basis have specific daily ETRs applied to their income. The implementation of GR 58/2023 represents a significant step towards simplifying tax compliance procedures and ensuring transparency in Indonesia's tax system.

Indonesia's new tax regulation simplifies monthly withholding tax calculations

In this article, we have discussed the importance of Indonesia Employment Law and its significant role for businesses and employees. Understanding labor Laws helps companies avoid legal risks and create a fair and safe working environment for employees. Aniday provides information and legal advice, as well as supports in finding and recruiting experienced employees, helping businesses operate confidently in Indonesia.

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