Indonesia Employment Laws: A Guide for US Companies Hiring Abroad
With its strong economy and growing tech industry, Indonesia is an ideal place for US companies to hire abroad. We explore the key employment laws you should keep in mind when hiring there.
Published on April 12, 2022
Indonesia's stable economy, growing middle class, and digital expansion offer valuable incentives for US companies hiring abroad, especially groups looking to move overseas operations away from China after 2020. The economy of Indonesia is also the largest in Southeast Asia and its population is the fourth-highest in the world. For US employers seeking talent in Indonesia, it's vital to understand Indonesian labor laws, as well as contract procedures, benefits, worker protections, and termination laws. The following guide offers an overview of important legal considerations to consider as you establish and grow an international team.
Employment laws and regulations ✅Employment law in Indonesia is regulated by the following laws and statues:
- The “Manpower Law” (also called the “Labor Law”), Law #13 from 2003, amended most recently in 2020 with the “Job Creation Law” or “Omnibus Law”
- The Industrial Relations Dispute Settlement Law (“IRDS Law”), Law #2 of 2004
- The Employee/Labor Union Law (“Labor Union Law”) of 2000
Employment contracts ✍🏽Although employment contracts are required in Indonesia to establish an employer-employee relationship, formal procedures vary based on employee status.Required terms and conditions in all employment agreements include:
- employee role
- rights and obligations for employee and employer
- the location where work will be performed
- wages and payment details
- start date and term of employment.
For a permanent employee agreementEmployment agreements for permanent employees may be made in writing or verbally. With a verbal agreement, the employer must provide the employee with a formal appointment letter that specifies employment timeline, expectations, and wage. Beyond this, no official paperwork is required to establish an employment relationship with an indefinite-term worker.
For a fixed-term employment agreementAn employment relationship with fixed-term employees is more strictly regulated. Per the Minister of Manpower and Transmigration Decree of 2004, every employment agreement must be written in Bahasa Indonesia (Indonesian) using the Roman alphabet and registered with the relevant Ministry of Manpower.Additional regulations specify that a written employment agreement for fixed-term workers cannot include a probation period. Further, any fixed-term employment agreement that is not made in writing is automatically considered an indefinite-term employment agreement. It is only possible to extend definite-term or temporary contracts once.
Employee BenefitsThere is no formal distinction under Indonesian employment law between benefits and protections for permanent vs. non-permanent employees—both groups are treated alike. They are entitled to minimum wage, regulated hours for working, paid leave, and representation, as well as protections against discrimination, harassment, data sharing, and termination of employment.
Wage laws and regulations 💲All employees are entitled to minimum wage within their first year of employment. After workers have completed their first year, wages are decided by both the employer and employee.There is no national minimum wage—applicable minimum wage varies based on the type of business and its location. There are 33 provinces in Indonesia and the governor of each province sets a monthly wage rate per recommendation from the Provincial Council on Wages. It is also possible for a regency (an area within a province) to set its own minimum wage, provided this wage is not higher than the one determined by the province. A 2018 regulation (the Minister of Manpower and Transmigration Regulation) officially established a formula for calculating this wage based on inflation and GDP growth in Indonesia.There are also minimum wages determined by sector. These wage rates are set by business groups within a province or regency and cannot be lower than the wage set by the province or regency.In addition to deductions for income tax, employers are required to make two kinds of social security deductions: they must contribute to the badan penyelenggara jaminan sosial (the health security system or BPJS) and to the employment BJPS, which covers work accidents and old age pension.
Working hours 🕰Per the Manpower Law, normal working hours should not exceed seven hours per day, six days per week, and 40 hours per week. With a written agreement, employees can be allowed to work eight hours per day and five days per week, at the same wage rate as team members working six days per week. Female employees under 18 and pregnant women with doctor’s orders cannot be employed between the hours of 11 p.m. and 7 a.m..Employees are eligible for overtime pay after the seventh or eighth hour of work, depending on company policy, up to a maximum of three hours per day and 14 hours per week. Overtime is available at double the hourly wage after an hour is completed—this wage is calculated at 1/173 of an employee's monthly salary. Any employee serving as a "thinker, planner, implementer or controller" is not eligible for overtime pay and their hours cannot be regulated. They are, however, usually entitled to higher pay.At minimum, all employees are entitled to a thirty-minute break after four hours of continuous work. Workers on a five-day week are entitled to take Saturdays and Sundays off; workers on a six-day week may take Sunday off.
Holidays and paid leave 🎉Per the Manpower Law, workers are entitled to take all public holidays off. Public national holidays are determined each year by the Joint Ministerial Decree. In 2022, as an example, Indonesia will observe 16 national holidays. Employers who obligate employees to work on public holidays must pay overtime wages.All employees are entitled to 12 days of paid annual leave, as they accumulate one day of paid leave for every 23 days worked. Workers must use their minimum paid holiday entitlement within six months or they will lose it. Paid leave can be taken at the employees’ discretion with the exception of one six-day consecutive leave per year which is required. Employees who have served the same employer for six years may be entitled to at least two months paid leave in their seventh or either year of work.
Sick leaveWorkers are entitled to sick leave with medical documentation, at the following pay rates:
- Full pay for the first four months of sick leave;
- Three-quarters pay for the next four months;
- Half pay for the following four months; and
- One-quarter pay until the employer terminates employment
Maternity leave and family leavePregnant employees are entitled to three-months of paid maternity leave at their full hourly wage rate. Although the Manpower Act proposes this leave be taken in two parts (one-and-a-half months before delivery and one-and-a-half months after), in practice, many employers allow pregnant employees to take their three months consecutively after childbirth. Women may take one-and-a-half months of leave after a miscarriage.Employers must allow mothers to breastfeed or pump breast milk after maternity leave, including during work.Paternity leave in Indonesia is two days, for the birth of a child. Fathers are also entitled to two days’ paid leave in the case of a wife’s miscarriage.For family leave, employees are entitled to the following:
- The employee’s own wedding (three days’ leave)
- Baptism of the employee’s children (two days’ leave)
- Circumcision of the employee’s children (two days’ leave)
- Marriage of a son or daughter (two days’ leave)
- Death of a spouse, parent, parent-in-law or child (two days’ leave)
- Death of a family member living in the same house (one day of leave)
Employee representation and trade unions 👷🏽♀️A trade union established by a group of ten or more employees in any industry will be recognized under Indonesian law (by name, as a trade union, labor union, or employee union). For trade union recognition, the employees must formally register their union's establishment in writing with the local Manpower Agency, and then notify the employer in writing, providing the union registration number.Trade unions are governed by the Labor Unions Law. Only a duly registered trade union can participate in collective bargaining with company management to establish a Collective Labor Agreement (or CLA). This bargaining takes place mostly at the company (as opposed to industry) level. If established, a CLA will specify the rights and obligations of the employer, trade union, and employees. Employers with ten or more employees who have never had a registered labor union must establish a Company Regulation (or CR).Under a 1998 presidential decree, no government or employer may intervene in the creation of a labor union. Labor unions have the right to negotiate CLAs, represent employees in industrial relations disputes and ministry of manpower institutions, work to improve employee welfare, establish a labor union federation, and cooperate with international labor unions.Under Indonesian laws and regulations, employees and labor unions can also participate in industrial action (or a strike) in response to an unsuccessful industrial relations dispute settlement.
Discrimination and data protection ✋🏽Workers in Indonesia are protected against discrimination in applying for, obtaining, and advancing their skills at jobs by Article 5 of the Manpower Law. Employees cannot be discriminated against based on any of the following:
- political affiliation
- HIV/AIDS status
Termination of employmentTermination of employment is discouraged by labor law in Indonesia, which recommends employers work to prevent termination. Suggestions for the latter include offering flexible hours, providing extra guidance, and improving work conditions. Bottom line: employers cannot terminate employment without reason and all terminations must be approved by the Industrial Relations Court.Still, terminations may be deemed necessary, either in situations deemed the employee’s fault or otherwise. Employers may terminate employees for misconduct including unauthorized absences, absences due to legal proceedings, an employee's arrival at retirement age (57), or for violating company regulations, their respective employment agreement, or other official policies.Employers may also pursue termination due to circumstances the employee is not held responsible for including (1) a merger, consolidation, or acquisition; (2) downsizing, (3) debt, bankruptcy, or a closure. In a case where the company is insolvent, the employee's salary is considered part of the company's debt. There is no specific legal policy for mass employment termination.Employers must provide 14 days of written notice before termination of employment unless the employee is in a probationary period, in which case 7 days are required. If an employee rejects termination, the employer and employee must attempt to settle amicably and gain employee consent through a bipartite meeting within 30 days. Employees are eligible for severance pay and service appreciation pay in cases of termination—the amount depends on the length of their employment relationship.When terminating any labor union member, employers must notify the union. An employer may ask employees to remain home during the termination process, taking a so-called “garden leave,” wherein the employee continues to be paid but does not work.An employee may request termination in response to employer misconduct including abuse, illegal activity, non-payment of wages, non-compliance with employment agreement, and employee endangerment. This employment termination may be granted either by dispute settlement in an Industrial Relations Court or in the case that the employee has provided 30 days’ written notice and has fulfilled their commitments to the company.Employees are officially terminated if they do not reject termination, if the final court decision is made, or if they sign a mutual employment termination agreement.
The information contained in this site is provided for informational purposes only, and should not be construed as legal advice on any subject matter.
Finding a partner to help you succeed abroad 🤝Ensuring your company's compliance with global labor laws can be complicated, especially considering Indonesia's recent (and contested) amendments to labor policies. Pilot can help. We specialize in remote payroll, benefits, and legal and tax compliance for US-based companies hiring abroad. We can help ensure that you're staying up-to-date and compliant with regulations in Indonesia. Pilot's team of HR and legal experts is here to help you navigate questions as you build your international team.
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