A new Ministry of Employment regulation may discourage companies from hiring foreign workers and their shareholders from appointing non-resident foreign directors and commissioners.
In April, the Ministry of Employment (MoE) instructed its bureaucrats to more thoroughly and frequently investigate companies employing foreigners. This resulted in a marked increase in MoE raids (often occasions of great stress for employers and employees).
In late June, MoE issued Regulation 16 of 2015 (Regulation). The ongoing raids will likely uncover a large number of breaches of the Regulation (which may attract serious criminal sanctions) given many are unaware of the significant changes it implements and its lack of any transitional provisions.
Before the Regulation, the Investment Coordinating Board (BKPM) employed a ratio policy: BKPM could, in its discretion, approve the establishment of foreign investment (PMA) companies and representative offices if, for every foreign employee, there were at least three Indonesian employees. In some cases, as many as 10 Indonesian employees were required to be employed for every foreign employee, depending on the sector.
The Regulation transforms the policy into a rule, such that every PMA company and representative office must now employ 10 Indonesian employees for every foreign employee, regardless of the sector.
This reform may undermine the business models of, for example, service PMA companies and representative offices, whose operations in Indonesia may be too small to support the required headcount.
It may also expose many companies to criminal sanctions, which may be imposed personally on president directors, should they fail to comply.
The ratio rule does not apply with respect to all foreign workers. Foreign directors and commissioners (Company Officers) do not count towards the number of foreign employees.
The Regulation expands the category of foreigners requiring work permits, which are difficult and time-consuming to obtain.
Before the Regulation, it was clear that resident employees and Company Officers required work permits. It was not clear with respect to non-resident Company Officers.
The Regulation specifically provides that companies must obtain work permits for their non-resident Company Officers. Companies that do not may be fined up to Rp400 million (about AU$40,000) and face criminal sanctions.
If non-resident Company Officers require work permits, the consequences include:
Although President Joko Widodo (or Jokowi) recently ‘ordered’ that foreign workers should no longer be required to hold such permits, this is not yet reflected in any amending regulation and hence the Regulation continues to apply.
It is also likely that:
Although the Regulation is likely to make employing foreign workers more difficult, there may be one small reprieve. The Regulation revokes a seven-year-old requirement that foreign workers be able to communicate in Indonesian. It is unlikely, however, that this will induce more foreigners to work in Indonesia, as the previous requirement was seldom enforced.
Still, this is a positive development and consistent with President Jokowi’s ‘order’ that all such requirements, at both the national and regional level, be revoked.
As Indonesia seeks to grow inbound foreign investment, the translation of the Jokowi administration’s policies, including in relation to foreign workers and Company Officers, into actual regulatory reform will be important in creating certainty and hence confidence.
Jared Heath is a Special Counsel who was previously seconded to one of Indonesia’s leading law firms, Soemadipradja & Taher (S&T). Cameron Grant is a lawyer currently seconded to S&T.
S&T is recognised as a market-leading provider of legal services to foreign companies investing in Indonesia. 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.
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