Indonesia, also known as the "Land of a Thousand Islands" and the "Tropical Treasure Island", has become one of the most popular business expanding destinations for Chinese investors due to its important geographical location, continuously positive economic development prospects, unique comparative advantage etc. Investing and building entities overseas often involves the employment of employees. Understanding Indonesia's labor and employment laws and regulations can help companies avoid potential legal risks and unnecessary financial losses.
1. Country Profile of Indonesia
Indonesia is located in southeastern Asia and is rich in natural resources, especially agricultural and forestry products, and mineral resources. As the largest economy in ASEAN and an important member of the G20, Indonesia attracts a large number of foreign investments with its stable political situation, active opening policy, abundant natural resources, cheap labor cost, favorable geographical location, and huge market potential. Indonesia is also an important economic and trade partner of China, attracting a large number of Chinese companies to Indonesia for trade and investment cooperation. According to the World Bank's Doing Business 2020 report, Indonesia is ranked 73 among 190 economies in the ease of doing business.[1] The World Economic Forum's Global Competitiveness Report 2022 shows that Indonesia is ranked 44th among the most competitive countries and regions in the world.[2] In addition to knowing the local investment regulations and policies in Indonesia, it is also important for Chinese companies to understand the labor and employment laws and regulations in Indonesia.
2. Indonesia's Labour Legal Framework
Indonesia is heavily influenced by the civil law system, particularly Dutch law. Combined with the large number of ethnic groups on the island, the law is characterized by diversity. Indonesia's legal sources include Dutch colonial laws, customary law, Islamic law and laws and regulations enacted after independence. Indonesia has a separation of powers, with the People's Consultative Assembly, the Supreme People's Court and the Government exercising their respective powers independently and as a check on each other. The People's Consultative Assembly, the Indonesian Parliament, is the national legislature of Indonesia.
At present, the main labour and employment legislation in Indonesia is the Manpower Law（Law No. 13 of 2003 on Manpower ）. This law regulates labour, employment contracts, industrial relations, government functions, termination of labour relations, trade unions, wages and so on，as well as Law No. 11 of 2020 on Job Creation(hereinafter referred to as The Law on Job Creation), and Government Regulation No. 35 of 2021 on Fixed-Term Employment, Outsourcing, Working Hours and Rest Times and Employment Termination, etc.
Indonesia's employment policy generally tends to protect the priority employment rights of national workers and address domestic employment issues. Indonesia allows foreign professionals to enter the country and obtain work permits on the condition that companies give priority to local professionals. Foreign professionals who are employed can apply for a residence permit and a work visa. For foreign workers, regulations such as Regulation No. 16 and Regulation No. 35 of 2015 issued by the Ministry of Manpower and Immigration in 2015, and Presidential Regulation No. 72 of 2014 on Foreign Worker Utilization and Implementation of Education and Training of Indonesian Workers as Associates for Foreign Workers provide guidance for businesses to employ foreign workers.
3. Characteristics of Indonesian labour legislation
3.1 "Employer" and "Worker"
Unlike Chinese labour laws, which mainly regulate "employers" and "workers", the Indonesian Manpower Law regulates a wider range of subjects, including employers, workers, and foreigners working in Indonesia. The term 'employer' refers not only to enterprises but also to natural persons, and employment relationships between natural persons, such as the employment of a domestic helper for cooking and cleaning, are also regulated by the labour law.
Indonesia allows the employment of child labourers over the age of 14 in easy manual jobs, with a maximum of three working hours per day. However, the employment of workers under the age of 18 requires the signature of their legal representative.
3.2 Employment contracts and probationary periods
a.About the employment contract
Indonesia requires that the text of the employment contract be in Indonesian or in a bilingual form of "Indonesian + foreign language", with Indonesian prevailing in case of discrepancies between the two languages. There are fixed-term and non-fixed-term employment contracts in Indonesia, and the Manpower Law and the Law on Job Creation also stipulate that certain types of jobs must be covered by a fixed-term employment contract:
a)Non-fixed-term employment contract (PERJANJIAN KERJA WAKTU TIDAK TERTENTU, PKWTT in Indonesian)
This type of contract is applicable to regular workers in written or oral form. However, to avoid disputes over the terms of the contract, it is recommended that companies sign a written employment contract with their employees. Under a non-fixed-term employment contract, one party must give at least 14 working days' written notice to the other party to terminate the employment contract; for the probationary period, 7 working days' notice is required.
b)Fixed-term employment contract (PERJANJIAN KERJA WAKTU TERTENTU, PKWT in Indonesian)
This type of contract is applicable to contract workers and has a maximum legal duration of 5 years. The contract must be in writing and can be renewed several times. However, the law restricts the types of work to which this contract applies as follows:
i.Work that is expected to be completed within a period of five years.
ii.Work of a seasonal nature.
iii.Work related to new products, products that are still in the testing phase.
iv.Work of a one-time nature.
v.Work of a temporary nature.
b.About the probationary period
There are significant differences between the provisions on the duration of the probationary period in China and Indonesia. According to Indonesian law, generally a probationary period is not permitted in fixed-term employment contracts, and if a probationary period is agreed in the contract, such probationary period is counted towards the duration of the contract. A probationary period may be agreed in writing in a non-fixed-term employment contract and the duration of which may not exceed three months.
The salary of the employee during the probationary period shall not be less than the local minimum wage, and either party shall give at least 7 working days' written notice to the other party to terminate the employment contract during the probationary period.
3.3 Minimum Wage
Under Indonesian law, workers may not be paid less than the "provincial minimum wage" for their location, but micro and small businesses are not subject to this rule.
3.4 Overtime Wages
The Law on Job Creation stipulates the following requirements for overtime work: a. The worker's consent must be obtained. b. Overtime work must not exceed 4 hours per day and 18 hours per week in total. c. Overtime pay must be paid.
The criteria for the payment of overtime in Indonesia are more detailed than in China:
a)1.5 times the hourly rate for the first hour of overtime worked on working day.
b)2 times the hourly rate for each hour of overtime worked thereafter.
c)In the case of overtime work on a rest day or legal holiday, the above overtime pay is calculated differently as follows:
i. For the calculation of overtime pay for the first hour to the eighth hour, two times the hourly rate is paid.
ii. For the ninth hourly wage, three times the hourly rate is paid.
iii. Four times the hourly rate for the tenth to twelfth hours of overtime work.
In addition, the Indonesian Regulation No. 35 of 2021 on Fixed-Term Employment Contracts, Outsourcing, Working Hours and Rest Time and Employment Termination additionally grants companies the right not to pay overtime to certain personnel--management personnel, due to their free working hours and generous salaries. The scope of the above-mentioned positions can be specified in the employment contract, collective agreement and by-laws.
3.5 Annual leave and religious holiday allowances
a.Annual leave
Employees who have worked for the employer for 12 months in Indonesia are entitled to 12 days of annual leave with pay. Among other things, Muslim employees are entitled to additional leave for the purpose of performing their religious duties (e.g. pilgrimage to Mecca).
b.Religious Holiday Allowance
Religious Holiday Allowance (Tunjangan Hari Raya, THR in Indonesian) is a special statutory allowance in Indonesia. In Indonesia, employees who have worked continuously for more than 1 year are entitled to a religious holiday allowance equivalent to 1 month's salary. Employees who have worked for 1 month or less than 1 year are paid on a pro-rata basis. The allowance must be paid to the employee within 7 days prior to the holiday, otherwise there is a risk of a fine.
4. Notes for Employment of Chinese Enterprises in Indonesia
4.1 Compliance points for hiring foreign employees
Indonesia has a policy of giving priority to the employment of its own nationals. Chinese companies wishing to recruit foreign employees, such as Chinese, should note that in addition to applying for relevant official approvements for their employees in accordance with the law, they must also comply with the special provisions of Indonesian law regarding the employment of foreign employees.
a. The following prerequisites must be met in order for a company to employ foreign workers in Indonesia:
a)The position cannot be filled by Indonesian staff.
b)The position is legal.
c)For every foreign employee employed, the company must also employ an Indonesian employee.
At the same time, the company is obliged to assign the foreign employee to teach the accompanying Indonesian employee technical and professional knowledge until the Indonesian employee is qualified for the foreign employee's position.
b.Indonesian prohibits foreign employees from working in the following sectors:
a) Law
b) Supply chain management
c) Human resources
d) Quality inspection and control
e) Environmental affairs
f) Health and safety
However, if a company employs a foreign employee as a member of the board of directors, and the foreign employee is a shareholder of the company. The company is not required to obtain a work visa for him or her and is not subject to the above restrictions.
4.2 Additional reporting obligations when enterprises conclude and terminate labour contracts
Indonesian labour law shows a tendency to protect workers. Indonesia's fixed-term employment contracts apply to seasonal, one-time, and temporary jobs. For protecting workers, the government has imposed a mandatory reporting obligation on companies conclude or terminate fixed-term employment contracts with their employees. Once a fixed term employment contract has been signed the company must register with the local labour office within a set period:
a. Online registration via the internet within 3 days after the date of signing the contract.
b.Manual registration at the local labour office is 7 days after the date of signing of the contract.
With regard to the termination of the employment relationship by the enterprise, Regulation No. 35 of 2021 additionally establishes the obligation and procedure for the enterprise to submit a report of termination of employment to the relevant authorities. If the employee does not object to the termination of employment, the enterprise must submit a termination report to the local labour office, which must include the preliminaries and procedures for the termination of employment by the enterprise, as well as the compensation and other benefits paid to the employee. The report must also include a copy of the notice of termination of employment and the employee's acknowledgement of receipt to prove that the employee has not objected to the termination.
4.3 Financial compensation for termination of employment in Indonesia
There are four types of financial compensation for termination of employment in Indonesian law: severance payment, long service pay, compensation and separation pay. These four types of financial compensation are not all applicable when an enterprise terminates its employment relationship with an employee but are applicable to different circumstances of termination in accordance with the law.
a.Severance payment
In general, one month's salary is paid for each year of service in the enterprise as severance payment, with the total amount of severance payment not exceeding a maximum of nine months' salary. If the period of employment is less than one year, it is calculated on the basis of one year.
An exception to the severance payment rate exists if the employment relationship is terminated for the following reasons:
a) If the employee is chronically ill or has a disability that prevents him from working for 12 months, or if the employee dies, the severance payment is 200%.
b) If the employee retires, the severance pay is 175%.
c) If the company suffers force majeure but does not close down, the severance pay is 75%.
d) If the company is acquired; if the company suffers losses and needs to streamline its staff; if the company closes down due to force majeure; if the company goes bankrupt; if the employee violates the employment contract (the company has issued a warning letter); if the company is in debt repayment proceedings due to its losses, the severance pay is 50%.
e) Severance pay is not payable if the court rules that the employee's charges against the enterprise are not established; the employee is voluntarily discharged; the employee is absent from work for five consecutive working days without permission; the employee commits a crime and causes damage to the enterprise; the employee is unable to work for six consecutive months due to detention.
b. Long service pay
In general, the long service pay is paid at the rate of two months' salary for the first three years of employment and one additional month for each subsequent three years of employment. If the employee has worked for 24 years or more, a maximum of 10 months' salary will be paid. If the period of service is less than three years, it is calculated on the basis of three years.
Length of service bonus = (N/3 + 1) month's salary (N is rounded up to the nearest whole number, 3≦N<24, and the length of service bonus is capped at 10 months' salary)
However, the enterprise is not required to pay the long service pay if the employment relationship is terminated for the following reasons：
a)Where the court rules that the employee's allegations against the enterprise are unsubstantiated.
b)The employee's voluntary termination.
c)The employee's unauthorised absence from work for five consecutive working days.
d)Where the employee has committed a crime which has caused damage to the enterprise.
e)If the employee is unable to work for 6 consecutive months due to detention.
c.Compensation
Statutory compensation includes the commutation of untaken annual leave and the payment of relocation costs to return the employee and his/her family to the new workplace.
d.Separation pay
The separation pay is not compulsory but is payable if the company and the employee have agreed on a severance pay clause in the employment contract. The company is not required to pay the employee separation pay due to the following statutory circumstances:
a)The court decides that the employee's allegations against the enterprise are not substantiated.
b)The employee is voluntarily discharged.
c)The employee is absent from work for five consecutive working days without permission; the employee commits a crime and causes damage to the company.
d)The employee is unable to work for 6 consecutive months due to detention.
Labour and employment laws in Indonesia are updated quickly and the government issues various regulations to amend them every year. There are many differences in the labour law provisions between China and Indonesia. Chinese companies should keep abreast of the latest local legal trends and seek professional legal advice to avoid unnecessary legal risks when recruiting staff in Indonesia.
[1]Doing Business 2020，https://www.worldbank.org/en/programs/business-enabling-environment/doing-business-legacy.
[2]IMD world competitiveness booklet 2022. https://imd.cld.bz/IMD-World-Competitiveness-Booklet-2022.
