Indonesian Manpower Law: How To Hire in Indonesia

The workforce is regulated by the Indonesian Manpower Law, which protects the rights and interests of both workers and employers. The Manpower Labour Law can and does change frequently, and employers must be familiar with current regulations and how they affect hiring practices.

In this article, we have provided updated information and given special focus to the topics of recruitment, employment contracts and benefit packages, and termination.

Finding employees in Indonesia

Depending on the skill level you are searching for, you will find a number of resources for recruiting in Indonesia.

Indonesian job portals

Among the most popular job boards used in Indonesia are Jobstreet, JobIndo, and JobsDB. Recruitment postings on these boards, however, are for simple-to-fill positions and can potentially garner thousands of applications.

Executive search firms

When hiring for mid-to-upper management positions, the portals above are unlikely to be helpful. Those sites don’t cater to senior experts and candidates with higher levels of experience and positions.

Finding the best-qualified candidates for management roles is best through an executive search firm, such as Emerhub Talent Solutions.

The process of hiring employees in Indonesia

Conducting employee background checks

Once you have found your best candidate(s), you can never be too sure until you do a background check. This will verify all of the information about the candidate, guaranteeing there were no false claims and, even worse, that there is no criminal history.

Emerhub’s personal background check services provide an extremely thorough screening for potential candidates, covering the areas of employment history, education, references, criminal records and more.

Types of Employment contracts in Indonesia

When hiring an employee in Indonesia, you must specify what type of employment contract you are offering. Employment contracts are legally binding and must adhere to the Indonesian Manpower Law.

Temporary or fixed-term contract (PKWT)

It often applies to seasonal workers. The longest period that an employee can stay on one contract is 2 years, with a possible 12-month extension. No probation is needed for fixed-term contracts.

PKWT contracts must be written in Indonesian, or if the employer is foreign, bilingual contracts with English are suitable, ensuring that conflicts cannot arise from language misunderstandings. Contracts that are not written in Indonesian are automatically classified as PKWTT.

Permanent, or indefinite term contract (PKWTT)

Permanent employment contracts have no set end-date for employment. There is a maximum 3-month probationary period, and afterward the employer is required to give an appointment letter to the employee. The permanent contract is the most common employment contract in Indonesia.

Indonesian Manpower Law on hiring freelancers

Freelance, or daily work, contracts are considered PKWT, but it is stipulated that the employee cannot work for more than 21 days in a month. Companies often hire daily workers for periods of increased and irregular volume. If the employee works for more than 21 hours, the contract is automatically considered PKWTT.

All contracts must be written in Indonesian. They can be written with both Indonesian and an English translation, but contracts must have an Indonesian version to be legally binding.

Company Regulations or Peraturan Perusahaan (PP)

In addition to employment contracts, companies must also have Peraturan Perusahaan (PP) This is the internal regulations of a company, understood and legally binding to both the company and its employees. Company Regulations must always comply with the Indonesian Manpower Law.

Clauses within the PP are typically referred to when settling industrial disputes – disagreements between management and employees that fall outside their terms of employment. Examples include labor strikes and lock-outs.

Employment benefits packages in Indonesia

Salary

Salary negotiations often refer to the offer of a net or gross amount for monthly salary. With a net payment, the employer pays the employee’s Income Tax (PPH 21), social and health insurance (BPJS) contribution.

The majority of the Indonesian job candidates, especially the junior employees, state their expected salaries as a “take-home-pay” or a net salary.

Overtime Pay

When including overtime as part of employee working schedules, companies must pay employees adequately for the extra hours. Overtime hours must be agreed upon in writing with the employee.

Many employees enjoy the opportunity to work overtime, especially in busy seasons or holidays, with additional pay added to their salary. However, companies are not allowed to replace incentives and bonuses with overtime pay.

Hours worked beyond the following are considered overtime in Indonesia:

7 hours per day and 40 hours in a week; for 6 days per week; or
8 hours per day and 40 hours in a week; for 5 days per week

The maximum hours of overtime that employees can work are 3 hours per day, and 14 hours per week. In addition to paying the overtime fee, companies must provide enough rest time, and adequate food and drinks (minimum 1,400 calories for 3 hours of overtime).

It should be noted that employees who are in higher positions – while typically working longer hours – are not entitled to overtime pay since they generally have higher salaries.

Overtime pay calculation during a normal working week:

First, calculate the hourly rate = 1/173 x 1 monthly salary
The first hour of overtime = 1.5 x (hourly rate)
The second hour of overtime = 2 x (hourly rate)

Overtime fee calculation during the holidays:

First, the same calculation for hourly rate: 1/173 x 1 monthly salary
The first 5 hours of overtime = 2 x (hourly rate) for each hour
The 6th hour = 3 x (hourly rate) for that hour
The 7th – 8th hour = 4 x (hourly rate) for that hour

Paid Annual Leave

Manpower Law entitles employees to 12 days of annual leave per year. During these days, employees have time off but maintain their normal salary.

Employees are eligible for annual leave after they have worked for 12 months consecutively with a company. If the employee does not take the full 12 days within a year, the remaining days do not carry over to the next year.

Companies do have the right, however, to postpone employees’ annual leave, but the reason must be obvious (example: peak season, or mandatory attendance days). These stipulations can be explained in the PP/Company Regulations.

Festive Holiday Leave

It can be surprising to non-Indonesians when they realize how many holidays there are throughout the year. Indonesians celebrate a substantial number of holidays, national, religious, international and commemorative. The tanggal merah or “red dates” are public holidays when banks, schools, government offices and most businesses are closed.

The holiday calendar for 2020 lists 18 red days, but it could be more with extended Idul Fitri holidays.

Companies need to prepare for festive days, knowing that they will either be closed, or if they are open, they will pay their employees extra for holiday time.

Manpower Law also requires the religious holiday allowance, known as Tunjangan Hari Raya (THR), financial support for employees’ religious holiday.

Healthcare and social security program (BPJS)

As an employer, you must also provide basic health care and social security to all full-time employees. Badan Penyelenggara Jaminan Sosial (BPJS) is a public program, providing medical and old age coverage to all Indonesians.

There are two parts to the program – BPJS Kesehatan (health insurance) and BPJS Ketenagakerjaan (Social Security). Employers are required to make sure employees are registered for both.

BPJS Kesehatan Contribution of monthly salary

	Borne by employer	Borne by employee	Maximum gross salary for BPJS
Health Insurance	4%	1%	12,000,000

BPJS Kesehatan covers a maximum of five family members (employee, spouse, and three children). Additional members can be added with a contribution of one percent per person, per month.

BPJS Ketenagakerjaan contribution of monthly salary

	Borne by employer	Borne by employee
Pension Plan (JP)	2%	1%
Retirement savings (JHT)	3.7%	2%
Work-related injury insurance (JKK)	0.24% – 1.74%*	0%
Non-work related accidental death insurance (JMT)	3%	0%

*JKK contribution will depend on the industry and risks of working in that field.

More information on coverage for Social Security can be found here: Compliance in Indonesia.

Non-mandatory employee compensation benefits

As the workforce becomes more competitive with highly skilled workers, companies are finding ways to ‘sweeten the deal’ for hiring or rewarding their loyal employees. These benefits are not required by Manpower Law, but they go a long way for employee morale and job satisfaction.

Bonus structures for employees*
Additional days for annual leave
Expanded Inpatient and Outpatient health insurance to cover family members
Permission to work remotely
Mobile phone credit allowance
Meal allowance or stipend

*Bonuses (other than THR) are not regulated nor required by Manpower, but companies can set up a structure for their Company Regulations, based on performance.

Employment Termination in Indonesia

When terminating a contract, both employer and employee should clearly understand the action and consequences. In addition, both parties have rights and obligations, and proper procedures to follow.

Negotiations, you must first try to negotiate with the employee or their Labor Union.
Three consecutive warning letters must be given to the employee from the employer prior to termination.
After termination, calculate the remaining compensation owed, and pay to the employee.

Severance payment

In situations except for a serious offense, employees whose employment is terminated are owed a severance, with the amount depending on how long they were with the company.

Years of service	Amount
Less than 1 year	1X salary
1 – 2	2X salary
2 – 3	3X salary
3 – 4	4X salary
4 – 5	5X salary
5 – 6	6X salary
6 – 7	7X salary
7 – 8	8X salary
More than 8	9X salary

Appreciation payment

UPMK is a reward for long-time service or tenure with a company.

Years of service	Amount
3 – 6	2 times salary
6 – 9	3 times salary

Reimbursement of rights

This is owed based on what was promised in the employment contract.

An example of this is the payout is for annual leave not taken is included in the contract. Other examples could include travel expenses back home, if the employee relocated for the position, as well as coverage for housing.

Separation payments

This is a voluntary payment from the employer to the employee, and it is the only payment that is not regulated in the Manpower Law. To avoid disputes which could end up in the Industrial Court, employers should be very clear about separation payments either in the employment contract or the PP.

Voluntary Resignation by Employee

When an employee resigns voluntarily, possibly for personal reasons, re-location, or moving to another company, the process for termination of their contract is not that complicated.

It is standard that the employee gives 30-days notice prior to his last day with the company. Some companies may choose to end the employee’s employment before that date.

Resigning employees are not eligible for severance pay. Depending on the circumstance of their resignation, they could still receive uang penggantian hak (rights replacement) and uang penghargaan masa kerja (long tenure reward).

Use the table below to understand the types of payments and which employees are eligible after termination.

Matrix of Employee Compensation after Termination based on the Indonesian Manpower Law

Cause	Severance payment	Appreciation payment	Reimbursement of Rights	Separation payment
Resignation	No	Yes, if working for more than 3 years	No	No
Termination due to serious mistake*	No	No	Yes	No
Termination due to violation of the working agreement	Yes, 1X salary	Yes, 1X salary	Yes	No
The employee decided to not continue employment due to change of company status (Ex: merger, acquisition, financial loss 2 years in a row)	Yes, 1X salary	Yes, 1X salary	Yes	No
Other cause of termination	Yes	Yes	Yes	Yes

Indonesian Manpower law regulations for hiring foreign workers

The hiring of foreign workers is also tightly regulated, but restrictions have been slowly loosening, allowing for more international workers to legally work in Indonesia. Foreign workers are recruited because they possess an acute set of skills and international knowledge.

Work and stay permits

Employers must provide both work (IMTA) and stay (KITAS) permits for the employee. Not all companies are permitted to hire foreign workers, so be sure to ask the Emerhub Talent Solutions team for the latest hiring laws.

Employment contracts

Foreign employees can only be hired on a temporary contract, PKWT. These contracts are for 6 to 12 months, and the 12 month contract can be extended every year. If there is any termination of the work agreement, the employee is not entitled to any severance payments.

Compensation regulations

Because the employee is on a temporary contract, he/ she is not eligible to receive the full-time benefits that are granted to local workers. This includes overtime, THR (festive holiday payment) or severance. If it was included in the contracts, the employee can still receive the Reimbursement of Rights payments.

Employer of Record

Hiring in Indonesia – both local and foreign workers – is restricted to companies that are located and legally registered in Indonesia. However, if you do not have a company in Indonesia, but you would like to hire a local team, you can do so by using Emerhub’s Employer of Record Service.

An employer of record (EoR) acts as the employer, hiring employees to be on their payroll, but these individuals have contracts and work for other companies. As an added benefit, the EoR provider takes care of all the regulations in the Indonesian Manpower Law for you.

Use cases for the employer of record

Providing legal status to employees without opening a company	Testing the market before opening the company
This could be for temporary projects where they are relocating employees, hiring a local team of Indonesians, foreign workers who need work or stay permit but don’t have local sponsors or conducting market research.	With Employer of Record, companies can save money on overhead costs and office space. Furthermore, foreign entities can expand into Indonesia faster by getting staff on the ground and moving, without having to wait for company registration. The EoR is also beneficial to help companies test the market before investing in a permanent location.

Indonesian Manpower Law: How To Find and Hire Employees

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