Employment in Indonesia: Employees take priority

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21 November 2014 | By Jared Heath (Partner)

Decisions by Indonesia’s Constitutional Court demonstrate that Indonesian law seeks to protect employees.

Article 28D(1) of the 1945 Constitution states “every person has the right to recognition, guarantees, protection, certainty and equal treatment before the law”. Additionally, Article 28D(2) provides that “every person has the right to work and to receive fair and proper remuneration and treatment in employment”.

The Constitutional Court has adopted a broad interpretation of these provisions in a variety of cases, with outcomes that would be surprising in other jurisdictions.

Employees take priority over secured creditors

On 11 September 2014, the Constitutional Court decided that employee wages take priority during an employer’s bankruptcy or liquidation, even over secured creditors.

Different Indonesian laws recognise the following basic hierarchy of rights in relation to a bankruptcy or liquidation:

  • Preferred rights: Creditors given preference by law over other creditors (eg, under the Bankruptcy Law), for example a liquidator’s fees arising from the management of, or court charges resulting from the disposal of assets during, bankruptcy or liquidation processes.
  • State’s rights: Under the Taxation Law, the government has a right to recover unpaid taxes ahead of all other creditors (other than preferred rights).
  • Secured creditors: Creditors holding security rights over collateral, principally mortgages, fiduciary security and pledges. In bankruptcy or liquidation, a secured creditor may execute their rights to auction the collateral to discharge the debt.
  • Privileged creditors: Creditors given preference by law over other creditors (apart from secured creditors), for example an auction house’s costs in auctioning the debtor’s assets, an insurance policy holder’s claim during an insurance company’s bankruptcy or liquidation.
  • Unsecured: Creditors without any security or other special rights. In bankruptcy or liquidation, they are entitled to any residual proceeds from the sale of the debtor’s assets.

Article 95(4) of the Employment Law provided that employee wages and other rights are prioritised over other payables during an employer’s bankruptcy or liquidation, but did not specify what constitutes “other payables”.

The Court held that based on Article 28D(1) and (2) of the Constitution, unpaid wages take priority over all other rights (including preferred and state’s rights, as well as secured and privileged creditors), while other employee rights do not take priority over secured creditors (but do take priority over state’s rights and privileged creditors).

It is unclear how the decision will operate in practice, including whether a liquidator may sell secured collateral to meet any employee unpaid wages claims, potentially without consultation with, or recovery by, the secured creditor.

The scope of other employee rights also remains unclear, but probably includes severance packages upon termination and other non-wage allowances.

The government is yet to substantively respond to the decision.

No timelimits on certain employee claims

In 2013, the Constitutional Court held that the Constitution precludes statutory timelimits on certain employee claims.

Article 96 of the Employment Law provided that any employee claim for unpaid salary and other amounts accrued during employment (including severance packages upon termination) expires two years after the right to make such claim arises.

The Court held that Article 96 was inconsistent with Article 28D(2) of the Constitution (amongst others) and hence was invalid.

As such, there are no statutory timelimits on employee claims for unpaid salary and other accrued amounts.

Termination only for permanent closure

Termination of employment is complicated. In the absence of written agreement between employer and employee, an Industrial Relations Court order is required.

In 2012, the Constitutional Court held that where an employer closes due to rationalisation, it may only terminate employees if such closure is permanent.

Article 164(3) of the Employment Law recognized grounds for termination where an employer closes due to two consecutive years of financial losses, force majeure or due to rationalisation. Termination benefits apply in all these circumstances, but are highest for closure due to rationalisation.

Previously, employers relied on this provision as a basis for terminations due to temporary closure or downsizing or efficiency redundancies. No other Employment Law provision specifically contemplates or facilitates downsizing.

The Court determined that rationalisation was not of itself a legal basis for terminations. Instead, an employer should consider reducing wages and benefits of directors and managers, reducing shifts, days, hours and overtime of employees, granting employees temporary leave, not extending expired contracts and granting early retirement.


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.




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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