Employment Laws in Indonesia: Contracts & Compliance

Main Employment Laws and Regulations in Indonesia

Navigating the employment landscape in Indonesia involves understanding various laws and regulations. Here's an in-depth look at the primary employment laws and their implications.

Manpower Law

The Manpower Law, also known as Law No.13/2003, serves as the principal labor law in Indonesia, addressing various aspects of employment. It provides guidance on issues like working hours, leave, minimum wage, and termination of employment procedures. It also mandates employers to protect their employees' rights and well-being, making it an integral part of global HR compliance.

Trade Union Law

The Trade Union Law (Law No. 21/2000) safeguards employees' rights to form and join trade unions, providing a platform for employee representation. They play an important role in advocating for better working conditions and improving communication between employees and companies. This becomes particularly relevant when building distributed teams, where employees might feel detached from decision-making processes.

Social Security Law

Indonesia’s social security system is governed by Law No. 40/2004 on the National Social Security System and Law No. 24/2011 on BPJS. Employers must register eligible employees for applicable BPJS programs, including BPJS Ketenagakerjaan and BPJS Kesehatan. This requirement holds true even for international contractors, fostering an inclusive work environment, a principle central to Indonesian labor law.

Law on Elimination of Sexual Violence in Employment

Indonesia takes a firm stance against sexual violence in the workplace through this law (Law No. 12/2022), which respects the rights of male and female workers. It not only provides a definition of what constitutes sexual violence but also sets forth legal procedures and penalties under the employment laws in Indonesia. Complying with this law is critical to avoid common legal troubles for global businesses.

Types of Employment Contracts

Navigating employment contracts, such as fixed-term employment agreements, is important for effective workforce management in Indonesia. An understanding of the types of contracts ensures legal compliance and facilitates a cordial and productive working relationship between organizations and employees, encouraging a positive employer-employee relationship.

Definite Term Employment Contract (PKWT)

A Definite Term Employment Contract, also known as PKWT, is a contract or a fixed-term employment agreement with a predetermined duration. A PKWT (fixed-term employment agreement), including extensions, may not exceed a total period of five years, subject to the requirements under Government Regulation No. 35/2021.

A PKWT must be made in writing in Indonesian using Latin letters and include information such as the employer and employee details, position or type of work, workplace, wages, rights and obligations of the parties, contract period, date, and signatures.

Employers must ensure that the PKWT includes:

• The name, address and type of business
• The type of work
• The place of work
• The amount of wages and the method of payment
• The terms and conditions of employment
• The start and end date of the contract

A key aspect of PKWT is that it's typically used for a certain type of work, is temporary in nature, can be completed within a specific period, or are seasonal. Employees are entitled to understand these terms as part of their employment agreement.

Indefinite Term Employment Contract (PKWTT)

An Indefinite Term Employment Contract, or PKWTT, has no specified end date. This type of contract is ideal for long-term engagements or for work that is permanent in nature and abides by the employment laws in Indonesia.

Similar to PKWT, the PKWTT should also have details of the name, address, type of business, type of work, location, wage details, and conditions of employment. But, it does not need to have an end date. This forms part of the stipulations in the employment agreement.

One must note that an oral indefinite-term employment contract is considered a legal and binding agreement in Indonesia. However, it is recommended that employment agreements be put into writing for practical and legal reasons. 

Choosing between a definite-term PKWT and an indefinite-term PKWTT agreement affects contract duration, required clauses, benefits, and termination exposure. As hiring volumes increase, maintaining the correct documentation and employment records for each worker can create a significant administrative burden.

Skuad Manage helps companies coordinate employment administration across supported markets by enabling teams to:

• Generate employment contracts aligned with applicable local labor laws
• Maintain employee records and contract details from a single platform
• Track statutory benefits, paid leave, and parental entitlements
• Coordinate applicable social insurance, pension, and severance contribution workflows
• Support payroll processing in 70+ currencies with automated tax withholding and year-end reconciliation
• View contractor records, agreements, and payment history alongside employee information

Book a demo to see how Skuad supports employment administration as your team in Indonesia grows.

Misclassification and its Consequences

It is important to correctly classify your workers, as misclassifying employees as independent contractors can lead to severe penalties. Incorrect worker classification may create employment, tax, social-security, or contractual risks depending on the circumstances and obligations involved. It could also result in businesses having to pay back taxes and benefits, including health insurance, retirement, and other in-kind benefits.

Due to the stringent employment laws in Indonesia, it is essential to understand the implications of misclassification.

Minimum Employment Terms in Indonesia

A firm grasp of the minimum employment terms in Indonesia is essential when hiring tech talents, especially when considering legal and tax risks of remote employees working from abroad. Under the Manpower Law, certain terms are set to safeguard the interests of the employees, forming a part of the employment laws. Let's delve deeper into these.

Working Hours

The standard working hours for full-time employees in Indonesia should not be more than 40 hours per week. This is further broken down depending on the length of the work week.

• For a six-day work week, an employee should not work more than 7 hours a day.
• For a five-day work week, the maximum working hours are 8 hours per day.

These regulations aim to maintain a balanced workload and prevent employee burnout. It is essential to keep the hourly wage in mind during these calculations.

Overtime

While overtime work is allowed, it should be carefully managed to ensure compliance with the law. Overtime should not exceed 3 hours per day and 14 hours per week. Employers must pay overtime wages/salaries, which are usually set at a higher rate than regular wages. This provision is crucial to consider, especially when managing HR issues within distributed teams.

Minimum Wage

Indonesia adopts a regional minimum wage system, with each province setting its minimum wage annually. This wage is calculated basis of the region's cost of living, economic growth, and labor productivity. It is essential to be aware of these changes to avoid common HR compliance mistakes.

Social Security

Both the employer and employees must contribute to the Indonesian social security fund known as BPJS Ketenagakerjaan. The program comprises several components, including work accident insurance, old age benefits, pension insurance, and death benefits. This is another factor to consider while evaluating the pros and cons of hiring international contractors vs. employees.

What are the types of workers protected by Indonesian law?

Indonesia’s employment laws provide a wide umbrella of protection, covering different categories of workers. The scope of these laws ensures that everyone, from permanent staff to temporary workers, is treated fairly and equally.

Full-time employees

Full-time employees work for a standard number of hours each week. These workers have access to comprehensive benefits such as annual leave, sick leave, social security, and overtime pay.

Part-time employees

Part-time employees work fewer hours compared to their full-time counterparts. The employees under part-time may be subject to specific wage and employment rules depending on their working arrangement. Statutory entitlements depend on eligibility and the applicable employment regulations. It is essential to note that the employment law in Indonesia mandates this, ensuring fairness in the employment relationship.

Contract workers

Contract workers or definite-term employees work for a specific period under a contract that clearly stipulates the duration of employment. The stipulated period must meet the applicable minimum wage and hourly wage criteria. Employers must follow the termination procedure under Indonesian employment regulations, including providing termination notice where required and following dispute-resolution procedures if the employee objects to protect the rights of both parties. Although they might not enjoy the same job security as full-time staff, these workers are protected by Indonesian laws from misclassification and have rights to fair remuneration, holidays, and safe working conditions.

Temporary workers

Temporary workers are those employed for a specific project or for a set period. Workers engaged under Indonesian employment arrangements, such as PKWT or other legally recognized arrangements, receive rights and protections according to their employment status and applicable regulations. It's vital for organizations to correctly classify and manage these workers to avoid common HR compliance mistakes. Employment termination laws must be adhered to to avoid any potential industrial relations dispute.

Foreign workers

Foreign workers or expatriates are also protected under Indonesian employment laws. The workers employed in Indonesia are protected by applicable employment regulations, while immigration, work authorization, and benefit eligibility depend on their employment arrangement and legal status. However, both the employer and the foreign worker need to follow employment law processes, such as ensuring the proper work permits and visas are in place, avoiding legal troubles that could arise from non-compliance, and avoiding an industrial relations dispute settlement.

What are the anti-discrimination laws in Indonesia?

Indonesia staunchly upholds anti-discrimination principles within its employment landscape. The Constitution of Indonesia, the job creation law, as well as numerous laws and regulations, play a key role in preventing discrimination and ensuring a fair and equal working environment for all employees and contractors.

Article 27 of the Indonesian Constitution asserts that every person shall have equal status in law and government. This plays an important role in promoting equality in the workplace.

Indonesia’s Manpower Law provides equal employment opportunity and equal treatment without discrimination in employment relationships. Indonesia has adopted the principle of equal remuneration for men and women for work of equal value through ratification of ILO (International Labor Organization) Convention No. 100 under Law No. 80/1957.

Indonesia also has specific laws to combat sexual harassment at work, namely the Law on Elimination of Sexual Violence. It defines sexual violence, outlines punitive measures, and sets guidelines for preventing and handling such incidents in the workplace.

Moreover, Indonesia's Disability Law protects persons with disabilities from discrimination at work. This law promotes inclusivity by ensuring persons with disabilities have the same opportunities to contribute to and benefit from employment.

Indonesia's anti-discrimination laws promote a healthy and diverse workforce, which is essential when building remote or distributed teams. Understanding these laws can help businesses foster an inclusive culture, effectively manage global HR compliance, and avoid potential legal troubles.

What does the leave structure look like in Indonesia?

Leave entitlements form an integral part of employee benefits, directly impacting their work-life balance and productivity. In Indonesia, these rights are codified under the Manpower Law, ensuring workers have ample time to rest and recharge.

Here are the various types of leaves Indonesian workers are entitled to:

Annual leave

After 12 consecutive months of service, employees in Indonesia are granted 12 days of paid annual leave. Employees who meet the statutory eligibility requirements are entitled to annual leave, including at least 12 working days after 12 consecutive months of service. Companies should manage these leaves efficiently to maintain a harmonious work environment and avoid common global HR compliance mistakes.

Maternity leave

Indonesian law provides substantial support to expecting mothers. Female employees are entitled to at least three months of maternity leave. An additional period of up to three months may apply where special medical conditions are certified by a doctor. This is a significant benefit that could help your company attract and retain talented female employees, contributing to diversity within your remote or distributed teams.

Sick leave

Employees in Indonesia are entitled to sick leave as certified by a doctor. Employees unable to work due to illness are entitled to statutory wage protection based on applicable employment regulations and medical requirements.

Furthermore, Indonesian regulations provide protections for employees experiencing prolonged illness, including specific rules regarding wages and termination eligibility. These leaves, when planned and executed correctly, form an essential part of providing perks to your employees.

Other leaves

In addition to these, employees are also entitled to special leave for specific circumstances, such as marriage, death in the family, and performing religious obligations.

Adhering to these leave regulations not only ensures compliance with Indonesian employment laws but also promotes a healthier and more productive work environment. Understanding such entitlements is crucial while dealing with HR issues within distributed teams.

How does termination of employment work in Indonesia?

Termination of employment in Indonesia is a multi-step process guided by comprehensive legal frameworks. Both employers and employees must follow these frameworks meticulously to ensure fairness and lawfulness.

Bipartite Negotiations

Termination procedures generally require employer notice, employee response opportunities, and dispute-resolution steps, including bipartite negotiations where termination is disputed. This mandatory negotiation aims at reaching an amicable resolution before considering the option of termination. This discussion may result in a mutually agreed separation or even the continuation of employment.

Mediation by the Department of manpower

In the event of a deadlock in the bipartite negotiations, the parties can involve the Department of Manpower in a mediation process. The Department's role is to facilitate dialogue between the parties to achieve a peaceful resolution. Businesses must navigate this step carefully to avoid common global HR compliance mistakes.

Industrial relations court

If the mediation fails, the issue is escalated to the Industrial Relations Court. Here, the court examines the matter impartially and arrives at a legally binding decision. Certain Industrial Relations Court decisions may be challenged through cassation proceedings before the Supreme Court.

Severance and compensation

If termination is indeed the outcome, the employer is required to pay the employee certain benefits. These include:

• Severance pay: This is compensation for loss of employment, and it varies depending on the length of service.
• Long service pay: This is paid in recognition of the employee's length of service and commitment.
• Compensation rights: Compensation rights may include unused annual leave, return costs for the worker and family to the place where the employee was recruited, and other rights provided under applicable employment agreements or regulations.

The specifics of these compensations can be complex, making it crucial for companies to understand these legalities to avoid common legal troubles for global businesses.

Involuntary termination

For involuntary termination scenarios such as layoffs, additional regulations apply. Companies must prove that the layoffs are unavoidable due to economic conditions, force majeure, or business closure. In these cases, higher severance packages are typically applicable.

Termination in Indonesia can involve bipartite negotiations, mediation, possible court proceedings, and several compensation calculations. Inconsistent documentation or payment calculations can increase employment risk during an already sensitive process.

Skuad Shield helps teams coordinate employment-risk workflows across supported markets by enabling them to:

• Support employment contract generation aligned with applicable local labor laws
• Help administer statutory benefits, paid leave, and parental entitlements in line with local requirements
• Facilitate statutory contribution workflows covering applicable social insurance, pension, and severance obligations
• Assist with termination and offboarding, including notice and severance calculations as required locally
• Help flag worker classification risk before it becomes an employment issue

Book a demo to see how Skuad supports termination and offboarding workflows as your team in Indonesia evolves.

What are the data privacy laws in Indonesia?

Indonesia has a comprehensive personal data protection framework under Law No. 27/2022 on Personal Data Protection (PDP Law). These laws have implications for businesses, especially in the tech sector, where data handling is a daily occurrence.

The Electronic Information and Transactions (EIT) Law remains relevant for electronic systems, but personal data processing is primarily governed by Law No. 27/2022 on Personal Data Protection. According to this law, the use of any electronic information and documents belonging to a person should be based on the person's consent. The law also provides for a penalty for any person who intentionally, without authority, or unlawfully, alters, adds, reduces, transmits, deletes, moves, or hides electronic information and/or electronic documents belonging to another person.

Another vital regulation is the Minister of Communication and Informatics Regulation No. 20 of 2016 on Personal Data Protection in Electronic Systems (MOCI Regulation). It provides a set of guidelines on how to handle personal data electronically, including obtaining consent, the requirement of data destruction after a certain period, and the need to register with the Ministry of Communications and Informatics if you operate a public service.

Given that tech talents often work remotely and handle sensitive data, adherence to data privacy laws is critical to avoid any legal disputes and to maintain the trust of employees and clients. For instance, mismanagement of employee data can pose legal and tax risks, which can lead to significant financial and reputational damage.

How can employers support hiring in Indonesia?

Hiring in Indonesia requires coordinating employment contract types, statutory contribution workflows, leave entitlements, worker classification, and multi-step termination requirements. Skuad supports employment contract generation, statutory contributions, payroll processing in 70+ currencies, and termination and offboarding across supported markets. Companies expanding without a local entity can use Skuad as the legal employer across 160+ countries while retaining control over employees’ day-to-day work.

Book a demo to explore a more coordinated approach to hiring and employing your team in Indonesia.

FAQs

1. What is an employer of record in Indonesia?

An employer of record in Indonesia is a locally registered company that legally employs workers for a foreign business. It typically signs Indonesian employment contracts, runs payroll in rupiah, withholds PPh 21, registers staff with BPJS Ketenagakerjaan and BPJS Kesehatan, while the client directs daily work.

2. How much does an employer of record in Indonesia cost?

The total cost generally combines the employee’s gross salary, the provider’s monthly fee, employer BPJS contributions, applicable provincial or city minimum wages, benefits, and the annual THR religious allowance. Quotes should be reviewed in Indonesian rupiah because payroll location and compensation structure can materially change the monthly amount.

3. Can a foreign company hire employees in Indonesia without a local entity?

Foreign companies can typically hire Indonesian employees without forming a PT PMA by using an EOR that already has a local employing entity. The EOR issues the contract, processes rupiah payroll, registers BPJS coverage, and withholds PPh 21, while the foreign company manages role priorities and performance.

4. What compliance responsibilities does an EOR manage in Indonesia?

An EOR generally handles employment documentation, payroll withholding, BPJS enrollment, statutory benefits, and local reporting, but responsibilities should be defined in the service agreement. Indonesian obligations can include region-specific minimum wages, PPh 21 deductions, and THR payment no later than seven days before the employee’s religious holiday.

5. Is an EOR better than setting up a company in Indonesia?

An EOR is generally better suited to initial market entry, short projects, or smaller Indonesian teams that do not need local invoicing. Establishing a PT PMA may be more appropriate for long-term operations requiring direct hiring, business licensing, contracts, and an Indonesian Business Identification Number through the OSS system.

6. How quickly can an EOR onboard an employee in Indonesia?

Employee onboarding timelines vary depending on documentation, employment setup, payroll cycles, statutory registrations, and immigration requirements for foreign workers.