Fixed Term Employment – Indonesian Government Recent Standing

22 March 2023

Employment Newsletter – March 2023

Fixed Term Employment – Indonesian Government Recent Standing

 

Employment is an inseparable part of investment (whether direct/indirect, foreign/domestic) topic. Matters such as costing, actuarial, valuation, benefits, and liability rising from an employment relationship are pivotal when assessing investment viability and would continue to be a pivotal part during the establishment process.

Indonesian Law No. 13 of 2003 regarding Manpower sets out the key pillars of employment relationship, but on 5 October 2020 (after 8 months of deliberation), the Indonesian House of Representative enacted the Job Creation Law which is also known as the Omnibus Law.

The Omnibus Law has, since then, been followed by the respective implementing regulations.

Specific for employment sector, not only the Omnibus Law (including its implementing regulations) has eased several obligations for employer, but also provide clearer guidelines of employment relationship for both employer and employee.

One of the material changes brought by the Omnibus Law is the fixed term employment (FTE) arrangement which is now governed by the Indonesian Government Regulation No. 35 of 2021 (“GR 35/2021”). FTE is commonly used in sectors such as manufacturing, technology development, services in Indonesia.

 

Key highlights of FTE arrangement

Principles of FTE arrangement

Under GR 35/2021, FTE should be based on time period, or the completion of certain works. GR 35/2021 further specifies that FTE shall only be utilised for the following nature of works:

1. The work that is expected to be completed in short period of time (less than 5 years).
2. The work that is seasonal.
3. The work that relates to new product, new activities, or additional products which still on experimental stage.

 

FTE based on completion of certain works shall only be utilised for the following nature of works:

1. One time-off work.
2. Work that is temporary in nature.

 

Reporting of FTE arrangement

In implementing FTE arrangement, the FTE arrangement (including the relevant agreement) must be reported to the local manpower office. As the local manpower office undertakes the authority to perform market audit to ensure compliance to manpower regulations, the local manpower office may exercise its authority to ensure compliance to the reporting requirements applicable to FTE arrangement.

Failure to comply may result in administrative sanctions.

 

Prohibited provisions and termination of FTE arrangement.

GR 35/2021 prohibits FTE contracts to have probationary period with no exception to such prohibition. Where a probationary period is applied to employees under FTE arrangement, such probationary period will be counted towards the permissible term of employment under FTE arrangement.

Omnibus Law and GR 35/2021 introduced extensive list of permitted termination which include, amongst others, efficiency in case of losses in business operation, employer entering into suspension of debt payment obligation (similar to administration on common law jurisdictions), and violation of employment agreement.

FTE Monetary compensation shall be given at the end of FTE; amount of the compensation shall be calculated based on the formula sets out under GR 35/2021. We set out summary of the formula prescribed by GR 35/2021 as Appendix 1.

While the Omnibus Law and GR 35/2021 provide extensive approved bases of termination and clearer guidance of termination process/requirements, it does not provide the employer with unilateral right to terminate. Employers are required to continue to either (i) seek the approval fo the industrial relations court, or (ii) reach mutual agreement with the respective employee regarding the termination.

 

Closing note

Although the Ominbus Law and its implementing regulations introduce clearer guidance around employment arrangements, Indonesia remains imposing strict process and requirements applicable to termination of employment.

Hence, it is pivotal for businesses (whether local or foreign) to map the requirements and processes applicable to employment relationship from content of agreement up to formalising termination to ensure compliance.

 

Appendix 1

Calculation formula of the compensation entitlement in relation to the permissible ground of termination

 

No	Item	Legal basis and service period	Note
1	Severance Pay (Uang pesangon)	GR 35/2021 (Article 40 (2)) < 1 Year = 1 Month Salary > 1 Years – < 2 Years = 2 Months Salary > 2 Years – < 3 Years = 3 Months Salary > 3 Years – < 4 Years = 4 Months Salary > 4 Years – < 5 Years = 5 Months Salary > 5 Years – < 6 Years = 6 Months Salary > 6 Years – < 7 Years = 7 Months Salary > 7 Years – < 8 Years = 8 Months Salary > 8 Years = 9 Months Salary	The employment contract should not provide any provisions in derogation to this requirement. In case of any provisions contradicting or derogating the regulatory requirement, such provision will be deemed as invalid.
2	Service Pay (Uang penghargaan)	GR 35/2021 (Article 40 (3)) > 3 Years – < 6 Years = 2 Months Salary > 6 Years – < 9 Years = 3 Months Salary > 9 Years – < 12 Years = 4 Months Salary > 12 Years – < 15 Years = 5 Months Salary > 15 Years – < 18 Years = 6 Months Salary > 18 Years – < 21 Years = 7 Months Salary > 21 Years – < 24 Years = 8 Months Salary > 24 Years or more= 10 Months Salary   Specific for non-permanent employee/employee under FTE arrangement: GR 35/2021 (Article 16 Paragraph (1))   < 1 month = None > 1 Month – < 12 Months = (Service period/12) x (1 month salary + fixed allowance) < 12 Months = 1 month salary + fixed allowance > 12 Months = (Service period/12) x (1 month salary + fixed allowance	The service pay shall be made upon the completion of the initial period of a FTE contract prior to any extension thereof, as well as to the completion of any extension of that FTE contract.
3	Rights compensation pay	No minimum amount required under the regulation.	As this is subject to the employment agreement and company regulation, the company may opt to not offer rights compensation pay.
4	Separation pay	No minimum amount required under the regulation.	As this is subject to the employment agreement and company regulation, the company may opt to not offer separation pay.

 

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MURZAL & PARTNERS

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