Employment Contracts in Indonesia: A Comprehensive Overview

In the realm of Indonesian employment, clarity and legal adherence are paramount. Government Regulation No. 35 of 2021, known as GR 35/2021, delves into the intricacies of work agreements, defining them as formal understandings between employers and employees encompassing work conditions, rights, and obligations. Law No. 13 of 2003 concerning Manpower further emphasizes the necessity of employment contracts. GR 35/2021 identifies two primary types based on the nature of work: the Fixed-Term Employment Agreement (PKWT) and the Indefinite Time Employment Agreement (PKWTT). Employment contract in Indonesia play a pivotal role in providing clarity on rights, obligations, and legal protection, especially in the context of employment termination.

What is an employment contract? How is it in Indonesia?

An employment contract is a private agreement between two parties with one party (the employer) exerting a hierarchical relation with another party (the employee). The relation is defined in a contract called “Working contract”. This relation is critical as a person having this relation without a contract can claimed to have its contract redefined as a working contract. Indonesia regulates the working relation with the Ministry of Law and Human Rights with the deputy ministry Kemnaker.

A working contract in Indonesia has to follow some provisions but in general both parties can define and have some clauses as much as they want and refer to the company regulation if this one has been approved by the ministry. The working contract defines the relation and how parties will interact to each other and their rights and obligations during the duration of the contract.

Key Requirements for Employment Contract in Indonesia

Apart from complying with Article 1320 of the Criminal Code, the formulation of an employment contract must adhere to specific provisions outlined in Law 13/2003. These include mutual agreement, legal capacity, a specified job, and alignment with public order, decency, and applicable laws.

Types of Employment Contracts in Indonesia

Fixed-Term Employment Agreement (PKWT)

PKWT, often utilized for time-bound projects, is a written agreement registered with the manpower office. It is valid for a maximum of five years or until project completion. If the work extends beyond the contract period, an extension can be agreed upon, not exceeding an additional five years. GR 35/2021 mandates compensation to employees at the conclusion of the working period.

Indefinite Time Employment Agreement (PKWTT)

In contrast, PKWTT establishes a permanent employment relationship, applicable to all types of work. Unlike PKWT, PKWTT can be made verbally, with no mandatory registration. If an oral agreement is reached, the employer must issue a written letter of appointment to the employee.

Differentiating PKWT and PKWTT

The distinctions between PKWT and PKWTT are notable, particularly post the enactment of the 2020 Job Creation Law. A summarized table based on GR 35/2021 highlights differences in terms of the type of work, working period, agreement form, registration, and termination of employment relations.

Essential Elements in Employment Contract in Indonesia

According to GR 35/2021, PKWT must include company details, employee information, job specifics, wages, rights and obligations, validity period, and signatures of both parties. PKWTT, as per Law 13/2003, should encompass company details, employee information, job specifics, wages, working conditions, agreement details, and signatures.

The Significance of a Written Employment Contract in Indonesia

An employment contract serves as a pivotal document outlining the rights and obligations of both parties, offering legal certainty, and becoming a foundational guidepost in case of violations. Its importance lies in providing clarity for individual rights and obligations, legal certainty, dispute mitigation, and ensuring adherence to contractual provisions.
In conclusion, candidates should thoroughly comprehend employment contracts before signing, as these agreements offer legal protection to both employees and employers. The nuanced understanding of these contracts contributes to a harmonious and legally sound work environment in Indonesia.

Special Considerations for Foreign Workers: Temporary Employment Contracts in Indonesia

An Employment Contract for Foreigners in Indonesia

In line with the previously discussed types of contracts contingent on job nature, a distinct provision exists for foreign workers in Indonesia. As stipulated by Article 42 of the Manpower Law, employment contracts for foreign employees must specifically be temporary in nature. In essence, this implies that expatriates are restricted from assuming permanent positions within the Indonesian workforce. However, avenues for further employment with different companies become viable once the existing contract concludes.

Position Limitations for Expatriates

Moreover, the scope of positions available for expatriates is constrained. As outlined in the Ministry of Manpower Regulation No. 228 of 2019, specific positions permissible for expatriates within each business sector are explicitly detailed. Examples include roles like general managers or financial advisors. Positions not explicitly listed in the regulation, except for those related to Human Resources, can be subject to negotiation. Additionally, for practical implementation, the temporary employment contract format must align with the template provided by the Ministry of Manpower. Although not mandatory, adherence to this format is requisite for obtaining relevant permits from the Ministry of Manpower.
These regulations underscore the careful navigation required by foreign workers in Indonesia, emphasizing the temporary nature of their contracts and the specific positions available to them within the defined regulatory framework.

Employment Contracts: Essential Elements and Best Practices

Before starting to draft a working contract, it is recommended to send a formal offer letter to the candidates and define the essentials information that have to be written later in the contract:

• Name of the parties
• Remuneration and bonus (how many months salary and when it will be paid)
• Key Performance Indicator to assess the bonus
• Starting date
• Probation period
• Job description
• Working hours and number of days of work per week
• Day off per year

The purpose is obviously to avoid any dispute in the future between the parties during the final signature. The contract itself should at minima take back the terms and conditions of the the offer letter. We recommend to have the contract in bilingual if the employee is a foreigner.

Once the contract is signed, both parties must hold a copy. The copy to keep is the one where the other party signs on the stamp duty.

Terminating Employment Contract in Indonesia

Terminating an employee in Indonesia is a regulated process guided by strict regulations outlined in the Labor Law. The termination process is subject to specific guidelines dictating acceptable grounds for termination and the corresponding severance payments.
In essence, Indonesia’s Labor Law discourages termination and encourages collaborative efforts among employers, labor unions, and the government. The purpose is to explore alternatives before considering termination. This article delves into key aspects of the Labor Law related to termination, highlighting steps companies can take to minimize the risk of labor disputes arising from unfair termination practices.

Grounds for Employee Termination

The termination of an employment contract in Indonesia is contingent on various factors, including both employee-related and company-related circumstances. Employee-related grounds include violation of the employment agreement, prolonged sickness, unexplained absences, employee misconduct, reaching retirement age, or being convicted of a crime. Company-related grounds encompass business insolvency, mergers or acquisitions, downsizing due to sustained financial losses, or bankruptcy.

Unfair Grounds for Termination

Certain circumstances are considered unfair grounds for termination, and employers are prohibited from dismissing employees in these situations. These include instances such as illness, marriage, religious practices, familial relationships within the same company, undertaking state duties. Some other case such as reporting the employer for criminal acts, discrimination, pregnancy, and joining a labor union can conduct to unfair termination.

The Termination Process

When terminating an employee, the employer must provide written notification. It has to outline the reasons for termination, termination payments, and entitlements at least 14 days before the termination date. If the employee agrees to the terms, the employer can notify the Ministry of Manpower. However, if disagreements arise, the employee has seven days to provide reasons for their objection.
Efforts should be made for mutual agreement, and in case of persisting disagreements, mediation can be sought at the local Ministry of Manpower office. If mediation fails, the Industrial Relations Court becomes the final arbiter.

Termination Payments

Terminated employees are entitled to termination payments, comprising severance payments, long service pay, and compensation of rights. The amount varies based on the length of employment. Long service pay is determined by the years of service, compensating employees for their dedication. Additionally, compensation for untaken annual leaves and other costs, such as relocation, may be included.

Understanding Severance Payments

Severance payments are calculated based on completed years of service. It is ranging from one month’s wage for less than a year of service to nine months’ wage for over eight years of service. The termination payment calculation includes severance payment, long service payment, compensation of rights, and separation pay.

Termination for Fixed-Term Contract Workers

For fixed-term contract workers, there are three recognized types. Based on the completion of work, based on a specific time period, and related to non-permanent work. These contracts are for temporary roles with a maximum extension of five years. Failure to adhere to these rules could result in the employee being deemed on a permanent contract.
Understanding the termination process and associated payments is crucial for both employers and employees. Ensuring a fair and legally compliant conclusion to the employment relationship in Indonesia

Severance payment for employee in Indonesia