Employment in Indonesia: Differences worth labouring

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13 February 2014 | By Jared Heath (Partner)

Indonesia’s employment laws are quite different to Australia’s. Engaging expatriates, employee entitlements, termination and outsourcing are all arguably more complex. This has implications for Australian businesses working, hiring and firing there.

FOREIGN WORKERS

A foreigner travelling on a business visa to Indonesia may only undertake limited business activities, such as attending business discussions, participating in seminars and exhibitions and inspecting branch offices.  Activities beyond these risk violating the Immigration Law.

In order for Indonesian companies to employ foreigners – including under a joint venture, secondment or sponsorship arrangement with a foreign company – the company must obtain approval for its foreign worker recruitment plan and secure a foreign worker recruitment permit.

Any foreigner employed in Indonesia must have appropriate educational qualifications, relevant competency or work experience, declare their willingness to transfer knowledge and skills to Indonesian co-workers and be able to communicate in Bahasa Indonesia. 

The foreigner will be required to train at least one Indonesian co-worker, with a view to the co-worker assuming the foreigner’s role.

The Ministry of Manpower and Transmigration will consider the proposed position and whether foreigners are required for it.  Relevantly, foreigners cannot be employed as Office Managers or in 18 other human resource related positions.  Foreigners also cannot be employed by more than one company.

Foreigners can be appointed as directors (including the President Director, the Indonesian equivalent to CEO) or commissioners of a foreign investment limited liability company (PMA Company).[1]  The employment requirements outlined above do not apply to these positions.

While the Employment Law applies to a PMA Company and its Indonesian employees, not all of its provisions apply to foreign workers.

Employment agreements

Indonesian employees have substantial rights under the Employment Law.

Employment agreements must contain minimum statutory information and agreements with Indonesian citizens must be in Bahasa Indonesia or at least bilingual versions.[2]  In contrast to general contracts, the Employment Law provides that in the event of any inconsistency in bilingual versions of employment agreements, the Bahasa Indonesia version prevails.

Fixed term employment agreements are available for only limited types of work and with a maximum duration of 2 years (subject to statutory extension or renewal periods).

Permanent employment agreements may include a probationary period of up to three months, during which both the employer and employee may unilaterally terminate the employment (without any severance package).

Standard working hours are up to 40 hours per week.  Employees, other than those in senior positions, are entitled to overtime. 

Provincial governments set minimum pay rates for different regions and industries.  An employer with 10 or more employees, or collective monthly salaries of at least 1,000,000 Rupiah (A$90), must make contributions to the Employee Social Security Program (Jamsostek) for each employee, which encompasses accident, death, retirement and health security elements.

Permanent employees are entitled to 12 days annual leave and a variety of other leave, including unlimited sick leave and Hajj leave for Muslim employees.

In 2013, the Constitutional Court held that the 1945 Constitution precludes statutory timelimits on employee claims for unpaid salary and other amounts accrued during employment (including severance packages upon termination).

Termination

Employers and employees may agree on termination of employment.  While employees may unilaterally resign with 30 days notice, employers cannot unilaterally terminate employees (even on performance grounds).  Instead, employers must provide employees with three written warnings each valid for 6 months.  Alternatively, employment agreements, Company Regulations or Collective Labour Agreements may specify certain violations which entitle the employer to serve a first and final warning.

After the requisite warnings, the employer must obtain an order from the Industrial Relations Court before proceeding to termination.  This can be a lengthy process of at least 6 months.

In 2012, the Constitutional Court held that the Employment Law provision contemplating employer initiated termination due to rationalisation must involve permanent closure of the employer.  Previously, employers had used the rationalisation provision as a basis for downsizing or efficiency redundancies (without any closure).

Upon termination, permanent employees are entitled to receive a severance package, service pay and compensation calculated under the Employment Law.  The package may amount to the equivalent of over 32 months salary for long-term employees.

A change in the status of the employer, whether by way of acquisition, merger or other change in ownership of the employer, entitles employees to terminate their employment and receive a severance package.  This complicates corporate transactions.  The only alternatives are for the employees to “voluntarily” resign or agree to be terminated and re-employed for an agreed consideration, although the amount to which they would be entitled under a termination severance package will inevitably inform any such consideration.

Outsourcing

Indonesian companies are permitted to outsource supporting, non-core work.  The non-core work constitutes those activities without which the company would still be able to undertake its “production process”.  This is determined by reviewing an “activities flow chart” of the relevant business company association for the relevant industry.

A company may also outsource for external personnel to provide certain limited services, such as cleaning, security and catering or transport services for employees.

In both cases, any outsourcing company offering to provide such services through a labour hire arrangement requires an operational business licence and can only outsource Indonesian employees, not foreigners (given they can only be employed by one company).

Outsourcing, other than in accordance with these requirements, may create direct, permanent employment between the company procuring the services and the outsourced employees.


Jared Heath is a Senior Associate currently seconded to one of Indonesia’s leading law firms, Soemadipradja & Taher (S&T) as Foreign Counsel.  More information on S&T is available from its website.

Corrs is not licenced to practice law in Indonesia and this should not be construed as providing Indonesian legal advice.  If you would like further advice, please contact S&T.


  [1] For more information on PMA Companies and their directors and commissioners, refer to the article available here.

  [2] For more information on these language requirements, refer to the article available here.




The content of this publication is for reference purposes only. It is current at the date of publication. This content does not constitute legal advice and should not be relied upon as such. Legal advice about your specific circumstances should always be obtained before taking any action based on this publication.


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Jared Heath

Partner. Melbourne
+61 3 9672 3545

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