Few facts about Indonesian Manpower Law: Hiring Process in Indonesia

The Indonesian Manpower Law regulates the interests of the workers and the employers. It is important to familiarize yourself with employer rights and obligations according to the law.

In this article, we will explain the legal aspects an employer in Indonesia must know. A special section is dedicated to discuss employee termination, which can be complex and costly for the less prepared employer.

Furthermore, you will also find answers to questions such as: what are the alternatives to hiring permanent employees? And how exactly can you benefit from the employer of record service in Indonesia?

Legal Obligations for an Employer According to the Indonesian Manpower Law

The most obvious obligation is to provide all your full-time employees with health insurance and basic social security benefits.

The Indonesian government has created a public health insurance scheme (BPJS Kesehatan) and social security program (BPJS Ketenagakerjaan) for your employees. You have to make sure all your full-time staff are registered for both programs.

The costs of these programs (which will depend on the employee’s gross monthly salary) must be partially covered and paid each month by the employer. Below are the details of both programs’ payment scheme:

Indonesian National Social Security System

Types of social security Borne by employers (%) Borne by employees (%) 
Retirement savings (JHT) 3.7 2 
Work-related injury insurance (JKK) 0.24 – 1.74 depending on business classification 0 
Pension plan (JP) 2 1 
Non-work related accidental death insurance (JKM) 0.3 0 

Indonesian National Health Insurance System

Types of social security Borne by employers (%) Borne by employee (%) 
Health insurance 3*) 2*) 
*) from maximum of IDR 8,000,000 gross salary 

Aside from social security, there are also some basic working conditions that you must provide for your employees:

Subjects Conditions as per the Manpower Law Regulations 
Work Agreement Indefinite duration is mandatory, unless the jobs: 

Are temporary/seasonal by nature 

Concern a project that will end in less than 3 years (based on reasonable estimation) 

Concern a new product/activity that is still in its experimental stage 

If the agreement is only valid for a certain time, the validity term must be no longer than 2 years. This agreement can only be extended once and no longer than 1 year 

Probation period Maximum 3-month probation period for indefinite work agreement – non extendable 

Not allowed for time based work agreement 

Working hours Maximum 40 hours per week, either: 

7 hours per day, 6 days a week 

8 hours per day, 5 days a week 

Overtime Maximum overtime work is 3 hours a day or 14 hours in a working week 

Overtime must be performed with the employee’s consent 

Employees have the right to receive overtime pay 

Employees working during public holidays must receive overtime pay too 

Minimum wage The standard will depend on the provincial/municipal regulations of each province/city/district 

Employers must comply with the relevant minimum wage standard — you may be allowed to make postponement if you are currently unable to comply with the regulation 

You are not obliged to pay for the days your employee fails to perform work, unless it is due to illness or family matters, including: 

The death of an immediate family 

A child’s wedding 

A son’s circumcision 

Severe illness If your permanent employee is absent from work due to a severe illness, they are entitled to a monthly salary: 

For the first 4 months of absence, they must receive 100% of wage 

For the second 4 months of absence, they must receive 75% of  the wage 

For the third 4 months of absence, they must receive 50% of the wage 

For subsequent months, they must  receive 25% of the wage until a termination occurs 

Company regulation Must specify: 

The rights and obligations of the employer and employee 

The expected working conditions, ethics and rules of conduct of the company 

Validity term of the regulation 

Must be registered to Ministry of Manpower following to the law: 

If employee’s union requires a change in the company regulation, the employer must agree to negotiate 

Employee Termination

The Manpower Law states that both employees and employers must strive towards avoiding employee termination. However, if you must terminate an employee, it is important that both parties understand their rights and responsibilities.

Here is what the law requires:

Negotiate with the employee (and his workers’ union, if he is a member of one) before proceeding with the termination

Give three warning letters to your employee (in the case of termination due to violations of work agreements/company regulations)

Pay severance pay and other remuneration as per regulation

Details of the pay can be found below:

Types of payment 
Severance pay 1-month wage for an employment of less than a year 

2-month wage for employment of 1-2 years 

3-month wage for employment of 2-3 years 

And so on and so forth until maximum 8 years of service 

Reward for service 2-month wage for employment of 3-6 years 

3-month wage for employment of 6-9 years 

4-month wage for employment of 9-12 years 

5-month wage for employment of 12-15 years 

6-month wage for employment of 15-18 years 

7-month wage for employment of 18-21 years 

8-month wage for employment of 21-24 years 

10-month wage for employment of 24 years or more 

Compensation pay A sum of money compensating the days of annual leave that the employee has not taken 

A penalty to return the employee to his family 

Compensation for housing allowance, medical and health care allowance, for 15% of the severance pay 

Other compensations stipulated under the work agreement 

Detachment money Depends on the work agreement/company regulation 

What you owe to the dismissed employee can be found in the table below:

Severance pay and/or reward for service

Compensation money

2 x severance pay

2 x reward for service

Compensation money

Cause of termination Employee’s rights 
General causes, e.g. declining work performance, failure to meet targets, etc.  
Rationalization in the company 2 x severance pay 

Reward for service 

Compensation money 

Employee resigns at her own will Compensation money, or 

Detachment money (for non-managerial employees) 

Grave misconducts Compensation money, or 

Detachment money (for non-managerial employees) 

Change in the status of company ownership When the employee is not willing to continue his employment: 

Severance pay 

Reward for service 

Compensation money 

When the new employer is not willing to continue the employment: 

2 x severance pay 

Reward for service 

Compensation money 

Severe chronic illness for more than 12 months / Disability due to a work-related accident  
Five days of missing Compensation money 

Detachment money 

Imprisonment No obligations, but you have to support his dependents during the time he is imprisoned: 

1 dependent: 25% of the employee’s monthly salary 

2 dependents: 35% 

3 dependents: 45% 

4 dependents or more: 50% 

Employers have to support the imprisoned employee’s dependents for as long as 6 months 

Retirement age 2 x severance pay 

Reward for service 

Company goes bankrupt and closes down Severance pay 

Reward for service 

Compensation money 

Death of the employee 2 x severance pay 

Reward for service 

Compensation money 

Paid to the employee’s heir 

Alternatives to Hiring Permanent Employees in Indonesia

Freelancers Salary depends on the volume of work and attendance 

Must work less than 21 days in a month 

Employers do not have to pay for social security/health insurance 

Contract workers Fixed monthly salary 

Eligible for social security/health insurance alike permanent workers 

No rights for severance pay — contract workers terminated before the end of their terms will only receive compensation pay 

Available for certain positions (See further from table: ‘Work Agreement’) 

With many options available, it is important to make smart choices as an employer when it comes to both who to hire and how to hire them.

Employer of Record in Indonesia (EOR)

For those who are not looking to open an entity in Indonesia, you can still hire employees, both locals and expatriates, by registering them under Straits Partners payroll. By using the employer of record service in Indonesia, you do not need to maintain the overhead and other compliance, compared to having an entity in Indonesia.

Who is Using Employer Of Record?

Non-Residence Business Relocating their employees to Indonesia for handling projects 

Hiring Indonesians in Indonesia 

Receiving a work and stay permit but not have any corporate sponsors 

Running a host country payroll 

Conducting market research 

Residence Business Looking to hire without wanting to maintain an operating company 

For further reading on the same topic, see how EOR is used for International Expansion.

Outsource Payroll Services to Handle Employee Finances

Outsourcing payroll services allows a professional bystander, such as Straits Partners, to get involved and take care of all your employee-related financial transactions through our entity.

For example:

Managing the whole cycle of payroll (salary calculation, income tax deduction and payment, salary and salary slips distribution)

Maintaining employees social security and health insurance

Most important is that this service also helps avoid legal uncertainties, which often occur for starting entrepreneurs.
Straits Partners provides you with the legal framework necessary for entering Indonesia. Contact us through the form below or directly via the company registration page to discuss how we can further assist you.

Feel free to reach out to us: [email protected]

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