Indonesia: Employment & Labour Law (3rd edition)

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This country-specific Q&A provides an overview to employment laws and regulations that may occur in Indonesia .

This Q&A is part of the global guide to Employment & Labour Law. For a full list of jurisdictional Q&As visit http://www.inhouselawyer.co.uk/practice-areas/employment-and-labour-law-3rd-edition/

  1. Does an employer need a reason in order to lawfully terminate an employment relationship? If so, describe what reasons are lawful in your jurisdiction?

    Yes, an employer needs a reason to lawfully terminate an employment relationship. We set out below the reasons for termination under Law No. 13 of 2003 on Labour (“Labour Law”):

    • violation of the employment agreement, company regulation or collective labour agreement;
    • death of an employee;
    • resignation of an employee;
    • absence without leave of an employee;
    • employee’s gross misconduct;
    • detainment of an employee;
    • eficiency;
    • liquidation of the employer;
    • change of status, merger, consolidation and change of ownership of the employer;
    • asset sale (e.g., a division of the employer is sold to another entity); and
    • an employment agreement is terminated based on a final and binding decision of the Indonesian court.
  2. What, if any, additional considerations apply if large numbers of dismissals (redundancies) are planned?

    Under the Labour Law, an employer must take all preventive measures before terminating an employment – this consideration must be taken for all types of termination, including mass termination. In the event of a termination of employment, the employer should consult with the labour union or individual employees before commencing termination. However, please note that consulting with the labour union or the individual employees does not necessarily mean that the employer must obtain their approval or consent. If a termination of employment is unavoidable the employer must obtain approval for termination of employment from the industrial relations court (“Labour Court”).

  3. What, if any, additional considerations apply if a worker’s employment is terminated in the context of a business sale?

    The are two types of business sales in Indonesia, which are change of ownership due to share transfer and asset sale. In a change of ownership, the employer does not have any rights to terminate employment, however if the employer wants to initiate termination, it must do so on the basis of mutual termination of employment and pays the employee the highest termination formula under the Labour Law. Whereas, for an asset sale, employees are not regarded as assets that can be transferred in an asset sale transaction. As such, the purchaser in the asset sale must :

    • transfer the employees to the new company (with the consent of the employees) or
    • conduct a termination and rehire. In scenario,
    • the purchaser would consider in the years of service or seniority of the employees in determining [new employment terms and conditions]. In scenario,
    • the old employer (i.e., the seller) would terminate the employees and then the purchaser would hire the employees with 0 years of service.
  4. What, if any, is the minimum notice period to terminate employment?

    The Labour Law only sets out the notice period for a termination of employment due to resignation, which is a minimum of 30 days. As unilateral termination of employment is restricted in Indonesia, an employer cannot simply terminate an employee by serving a notice period for termination of employment.

  5. Is it possible to pay monies out to a worker to end the employment relationship instead of giving notice?

    Yes, this is possible. Kindly be advised that in a mutual termination of employment, an employer would offer the employee a termination payment for the employee to agree to terminate the employment relationship. As mentioned above, termination by way of serving a notice period would be considered a unilateral termination of employment and therefore restricted. If the employee does not agree to the termination of employment, then the employee will remain with the employer and no termination of employment will occur.

  6. Can an employer require a worker to be on garden leave, that is, continue to employ and pay a worker during his notice period but require him to say at home and not participate in any work?

    There is no concept of garden leave in Indonesia – however, if there is a specific provision in the employment agreement and/or company regulation of the employer, an employee may be put on a garden leave period.

  7. Does an employer have to follow a prescribed procedure to achieve an effective termination of the employment relationship? If yes, describe the requirements of that procedure or procedures.

    Yes, an employer must follow the prescribed procedure to terminate an employment relationship. Depending on the reason for termination of employment (e.g., violations of the employment agreement, company regulation or collective labour agreement; non-performance) the employer is required to serve three consecutive warning letters in order to be able to terminate. Each warning letter is valid for six months – however, an agreed timeline for improvement can be agreed between the employer (i.e., a timeline for improvement that is shorter than six months). After three consecutive warning letters, an employer has the right to terminate the employment agreement of the employee. If the employee contests the termination, the employer would have to attend a dispute settlement process.

    We set out below the dispute settlement process in Indonesia.

    A. Bipartite Negotiation

    Law No. 2 of 2004 on Settlement of Industrial Relations requires all industrial relation disputes, including disputes over termination of employment, to be first resolved through bipartite negotiations in a consultative manner.

    If the bipartite negotiation manages to resolve the dispute, then the parties will draw up and sign a settlement agreement. The settlement agreement must be registered at the Labour Court. If a bipartite negotiation fails, then one or both parties can report their dispute to the relevant local office of the Ministry of Manpower (“MOM”).

    B. Mediation/Conciliation

    If the bipartite negotiation does not reach an agreement, one or both disputing parties can report their dispute to the relevant local office of the MOM. The local office of the MOM is required to offer both parties the option of conciliation or mediation.

    The mediator/conciliator must try to persuade the parties to settle the dispute. If there is no settlement, the mediator/conciliator must issue a recommendation at the latest 10 days after the first mediation/conciliation session.

    If the parties agree with the recommendation, the mediator must assist the parties in preparing a settlement agreement. The settlement agreement needs to be registered at the Labour Court.

    If the dispute is not resolved through mediation/conciliation, then the mediator/conciliator will issue a written recommendation. If the mediator's/conciliator's written recommendation is rejected by one or both parties, then one or both parties may continue by way of filing a lawsuit to the relevant Labour Court.

    C. Labour Court

    If a party does not agree with the recommendation of the mediator/conciliator, it may bring the case to the Labour Court whose jurisdiction covers the workplace of the employee.

    The proceedings at the Labour Court theoretically should not exceed 50 working days from the first hearing.

    D. Supreme Court

    For disputes over termination of employment, if a party does not agree with the decision of the Labour Court, it may bring the case to the Supreme Court (through the Sub-registrar office of the Labour Court) at the latest 7 working days after the date of the decision (for parties who are present at the court decision hearing) or 7 working days after the date of decision notification (for parties who are absent).

  8. If the employer does not follow any prescribed procedure as described in response to question 7, what are the consequences for the employer?

    If an employer does not follow the termination procedure in Indonesia – the termination of employment will not be binding and the employee will be still be deemed as an employee of the employer.

  9. How, if at all, are collective agreements relevant to the termination of employment?

    Under the Labour Law, a collective labour agreement is a document that sets out the terms and conditions of employment that have been agreed by the employer and a labour union or several labour unions. A collective labour agreement is relevant in relation to termination of employment as a collective labour agreement would usually sets out specific provisions on termination of employment and what actions of the employees can be grounds for termination of employment.

  10. Does the employer have to obtain the permission of or inform a third party (e.g local labour authorities or court) before being able to validly terminate the employment relationship? If yes, what are the sanctions for breach of this requirement?

    Yes, prior to commencing a termination of employment, an employer would need to obtain approval on termination of employment from the relevant industrial relations court. Unless the employer and the employee agree to a mutual termination of employment, the lack of approval for termination may gives the employee a ground to challenge the termination and submit a claim against the employer based on the ground that the employment relationship was terminated unilaterally.

  11. What protection from discrimination or harassment are workers entitled to in respect of the termination of employment?

    With regards to discrimination, the Labour Law provides protection to employees by regulating that an employer must not discriminate an employee including in the context of termination.

  12. What are the possible consequences for the employer if a worker has suffered discrimination or harassment in the context of termination of employment?

    The potential consequences for an employer that carries out a discrimination in the work place would be the issuance of an administrative sanction or potential claims at the Labour Court by the discriminated employees. Administrative sanctions under the Labour Law can be in the form of:

    • verbal warning;
    • written warning;
    • limitation of business activities;
    • temporary halt of business activities;
    • revocation of licenses.
  13. Are any categories of worker (for example, fixed-term workers or workers on family leave) entitled to specific protection, other than protection from discrimination or harassment, on the termination of employment?

    We set out below the categories of workers that are provided special protection from discrimination or harassment in a termination of employment:

    • an employee who is sick for a period not longer than 12 months;
    • an employee who is carrying out a state duty;
    • an employee who is conducting a religious duty;
    • an employee who gets married;
    • an employee who is pregnant or recently had a miscarriage;
    • an employee who has direct relations or if an employee marries a co-worker;
    • an employee who becomes a member of a labour union;
    • an employee who has different religious view, pollical views, race, religion, gender, physical well-being, skin colour and marital status; and
    • an employee who is disabled.

    Kindly be advised that if an employee is terminated due to any of the above reasons, the termination of employment is deemed as null and void and the employee must be reinstated to his/her former position.

  14. Are workers who have made disclosures in the public interest (whistleblowers) entitled to any special protection from termination of employment?

    Yes, an employer who have made disclosure of his/her employer’s violation of the Indonesian penal code is provided special protection in that they cannot be terminated by the employer based on such disclosure. If an employee is terminated due to making disclosure, the termination of employment is deemed as null and void and the employee must be reinstated to his/her former position.

  15. What financial compensation is required under law or custom to terminate the employment relationship? How do employers usually decide how much compensation is to be paid?

    Under the Labour Law – a termination package consists of severance payment, long service payment and compensation of rights payment.

    We set out below further detail on calculation of termination payment in Indonesia.

    Calculation of Termination Payment

    Termination payment made to terminated indefinite period employees consists of 3 elements: severance pay, long service pay and compensation of rights, which is calculated using the employee’s respective years of service.

    A. Severance Pay (Article 156(2) of the Labour Law)

    • 1 month’s salary for a service period of less than 1 year;
    • 2 months’ salary for a service period of one year but less than 2 years;
    • 3 months’ salary for a service period of two years but less than 3 years;
    • 4 months’ salary for a service period of three years but less than 4 years;
    • 5 months’ salary for a service period of four years but less than 5 years;
    • 6 months’ salary for a service period of five years but less than 6 years;
    • 7 months’ salary for a service period of six years but less than 7 years;
    • 8 months’ salary for a service period of seven years but less than 8 years;
    • 9 months’ salary for a service period of 8 years or more.

    B. Long Service Pay (Article 156(3) of Labor Law)

    • 2 months’ salary for a service period of 3 years or more but less than 6 years;
    • 3 months’ salary for a service period of 6 years but less than 9 years;
    • 4 months’ salary for a service period of 9 years but less than 12 years;
    • 5 months’ salary for a service period of 12 years but less than 15 years;
    • 6 months’ salary for a service period of 15 years but less than 18 years;
    • 7 months’ salary for a service period of 18 years but less than 21 years;
    • 8 months’ salary for a service period of 21 years but less than 24 years;
    • 10 months’ salary for a service period of 24 years or more.

    C. Compensation of Rights (Article 156(4) of the Labor Law)

    • Compensation for annual leave not taken by the employee who is already entitled to take the annual leave;
    • compensation for travel expenses or costs for the employee and his family to return to the original location or hire;
    • compensation for housing and medical, amounting to 15% of the total amount of severance pay and long service pay; and
    • other compensation as stipulated under the employment agreement, company regulation or collective labour agreement.
  16. Can an employer reach agreement with a worker on the termination of employment in which the employee validly waives his rights in return for a payment? If yes, describe any limitations that apply.

    Yes, such an arrangement is possible. Where an employer and employee agree to mutually terminate the employment relationship, the termination payment must not be less than the amount prescribed under the Labour Law (i.e., the employer may provide more but not less than the amount stated in the Labour Law). Kindly be advised that such arrangement must be documented in a settlement agreement, which must be registered at the relevant industrial relations court.

  17. Is it possible to restrict a worker from working for competitors after the termination of employment? If yes, describe any relevant requirements or limitations.

    Yes, this is possible – however, the term of the non-competition provision must not be too restrictive in that the employee would not be able to find another job. In addition, the non-competition provision must either be set out in the employment agreement which was executed by the employer and the employee or in a separate agreement on non-competition.

    Based on our review of supreme court decisions, a non-competition clause can be implemented if it does not limit an employee from obtaining a job and is not for an excessive period of time. In addition, where an employer has made payment to an employee so that it does not join a competitor, the court would enforce such non-competition provision/agreement and there have been courts decisions where the employee is required to return the payment made to them by the employer for the non-competition period.

  18. Can an employer require a worker to keep information relating to the employer confidential after the termination of employment?

    Yes, this is possible. Generally, this is set out in the employment agreement or company regulation.

  19. Are employers obliged to provide references to new employers if these are requested?

    No, this is not required under the Labour Law. However, please be advised that an employer should provide an employee with reference of employment if they request such reference. Generally, such reference would usually be used to cash-in social security payment from the Indonesian Social Security Agency for Manpower and Indonesia Social Security Agency for Health.

  20. What, in your opinion, are the most common difficulties faced by employers in your jurisdiction when terminating employment and how do you consider employers can mitigate these?

    The most common difficulties in a termination of employment is the fact that even when an employer has reason for termination of employment, the employer is still required to pay a termination payment. In addition, the employee must consent to such termination (as unilateral termination of employment is very limited).

  21. Are any legal changes planned that are likely to impact on the way employers in your jurisdiction approach termination of employment? If so, please describe what impact you foresee from such changes and how employers can prepare for them?

    To date, we are not aware of any proposed major changes to the Labour Law.