Hiring independent contractors in Indonesia provides benefits that differ from hiring employees.
Independent contractors are self-employed people or entities that provide services for you as non-employees. Less complicated compliances and access to global talent are some of the main reasons entrepreneurs hire them.
Here, we provide reasons when to hire independent contractors in Indonesia. We also show when and how to convert them into full-time employees in Indonesia.
Benefits of hiring independent contractors in Indonesia
Easier contract termination
Firstly, independent contractor agreements can have more flexible terms than employment contracts.
You can end the relationship with an independent contractor by terminating the contract, following the agreement terms. In comparison, terminating an employee will need you to follow the requirements according to Indonesia’s employment law.
It involves giving a notice letter to the employee 14 days before the layoff. Then, you will need to report the termination to the Ministry of Manpower.
If the employee disagrees, you will need to negotiate with the employee or work union or mediate with the Ministry of Manpower. In case both methods fail, you will need approval from the Court of Labor.
No mandatory non-negotiable benefits
Secondly, there will be no need for you to provide the mandatory benefits of an employee to an independent contractor. An independent contractor is a service provider, so there is a lot more freedom to negotiate the terms.
Since an independent contractor is not your employee, it will not be necessary to provide the same benefits and rights as an employee. The mandatory benefits for an employee in Indonesia include the following:
- Social security
- Withholding taxes
- Severance pay
Project and time-based payment
Thirdly, you can pay the independent contractors on a project or time basis. Thus, nobody needs to get paid after the contract has finished.
Moreover, paying per specific project or task can end up being cheaper since you only pay for the deliverables and not the time spent.
At the same time, the independent contractor can potentially earn more since they are free to take on additional assignments from other clients.
Access to a bigger pool of Indonesian and international talents
Fourthly, hiring independent contractors allows you to not only have access to talents in your base country. But also talents from all over the world, including Indonesia.
Independent contractors have the flexibility to work from a different location than your office. But they can still manage to finish the project. Meanwhile, you can also have the flexibility to hire independent contractors from a bigger pool of talents to choose from.
You can hire talents based on their experience and expertise on the project or task you would like them to do. It gives you more talent options instead of hiring the only available talents in your location.
Faster onboarding process
Last but not least, there will be a faster onboarding process when hiring independent contractors. It is because independent contractors are experts and experienced in their field of work.
That being so, you will not waste your time and money to train independent contractors to do their job. They will be able to start work immediately, and there will not be a moment of idleness.
Downsides on hiring independent contractors in Indonesia
Independent contractors can leave without notice
Due to easier contract termination, independent contractors can also decide to leave and end the contract at any time. It can disrupt your business’ workflow and productivity.
As a result, you will need to find other independent contractors to handle your projects. Yet, not all independent contractors can provide the same quality of work even if they have the same level of expertise.
Delivering services to many clients
Since independent contractors are part of informal employment, they can deliver services to as many clients as they want. It can cause inconvenience if they cannot deliver and finish their tasks on time.
Besides, it can be hard for them to hurry your project before the due date when you need them to.
High costs for more extensive and long-term projects
Independent contractors tend to be hired for short-term projects. Hence, they adjust their standard fee for the short-term as well.
Hiring independent contractors for more extensive and long-term projects increases their fees. Thus, causing high costs for your business.
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When to transfer the independent contractor into your employee?
When you want to save costs on the long term
If you have recurring payments to your independent contractor, it might be more expensive than hiring them as your employees right away.
A simple example is hiring a virtual assistant from UpWork who charges USD 10 hourly rate. In contrast, a full-time dedicated virtual assistant salary range is US$ 500 – US$ 800 per month.
When you want a sense of security from the independent contractor
Employment shows a total commitment from both parties. Employment also provides a significant length of security for your team.
You and your team will be able to rely on the same person for particular projects and tasks. In this case, you will not need to find independent contractors available for the job.
Moreover, the independent contractor will have a sense of security as well when becoming an employee. It includes getting income tax proof of payment which enables them to obtain higher credit scores, health coverage, and a steady career path.
When there is an increase in internal engagement and better productivity
A suitable independent contractor for your business will lead to an increase in internal engagement and better productivity.
You will be better off transferring the independent contractor to an employee at that point. That is if you want to keep the engagement and productivity for the long run.
How to transfer your independent contractors as employees in Indonesia?
By having a legal entity in Indonesia
In essence, you are required to have a legal entity in Indonesia to employ legally. Two legal entities enable you to conduct business activity and earn profit in Indonesia.
Foreign-owned company (PT PMA)
A PT PMA is a legal entity that allows foreign ownership up to 100% depending on the business classification. You will be able to hire employees and get work and stay permits for them.
However, there are requirements you will need to follow. Such as the following:
- A minimum paid-up capital of IDR 10 billion
- A minimum of 2 shareholders
- A registered company address
Locally-owned company (PT PMDN)
A local PT is a legal entity that only allows local ownership. Despite that, foreigners can use a nominee company to register their locally-owned company and hire employees.
The requirements of a locally-owned company are less difficult for entrepreneurs to follow. For instance, the minimum paid-up capital starts from IDR 50 million for a small-scale company.
Not only Indonesian employees, but you can also hire foreign employees and provide them permits. That is if you add IDR 1 billion to the local company’s capital per employed foreigner.
By using Employer of Record
Another alternative is through Employer of Record. Employer of Record is a service provider that can hire employees under their payroll without the need for you to register a legal entity in Indonesia.
Using an Employer of Record such as Emerhub is beneficial if you want a faster transfer of an independent contractor to be your employee. Besides, you will not need to have a significant amount of money for the paid-up capital of a legal entity.
Moreover, we will follow all the legal requirements of employment in Indonesia for you. Our Employer of Record services include but are not limited to the following:
Offering letters & employment contracts
Emerhub will draft offering letters for your candidates of independent contractors in Indonesia. And employment contracts following the rules and regulations in Indonesia.
Local HR support
Emerhub can assist you with local HR support in Indonesia. Our local HR support will provide you and your employees with answers outside the scope of your business.
It includes leaves, cultural holidays, documents, and other HR-related subjects that you or your employees may not know. With our local HR support at hand, you will not need to hire a full-time employee to handle your human resources.
Emerhub will do monthly payroll for your employees. Our payroll includes the following:
- Paying salaries
- Withholding taxes from the wages
- National health and social security (BPJS)
Emerhub can provide laptops and workstations for you and your employees to work in Indonesia. Our workstations are located conveniently in Jakarta and Bali.
It is time for you to focus on your business while Emerhub handles legal compliance. Fill in the form below for your inquiries on recruiting independent contractors in Indonesia, registering a legal entity, or using our Employer of Record service.