Clients’ Alert – Preparing for Labor Law Changes in Indonesia
Overview of the Indonesian Constitutional Court Ruling No.168/PUUXXI/2023 issued on 31 October 2024 (the “Ruling”)
On 31 October 2024, the Constitutional Court finally deliver its final ruling on the pleads for judicial review of the Law No. 11 of 2020 on Job Creation Law – this ruling was delivered after almost a year of series of proceedings since the first plea was submitted.
The plea was submitted by several labor unions in Indonesia on the basis that the Job Creation Law (which significantly amended the landscape of Labor Laws in Indonesia) does not align with the principles of Indonesia 1945 constitution.
We set out below the impactful part of the Ruling and our recommended pro-active action to mitigate the potential changes in the future.
1. Labor rights
The Ruling envisages the importance of employer to, at all times, meet the general labor rights of employees. These rights cover the matters such as proportionality principle in determining wages, day offs for employees, and the general right of employees to have decent living.
The Ruling prescribes that the minimum wage determination should be a cross stakeholders product in the sense of both regional wage councils and representative of local governments should work together to conclude the appropriate minimum wage for employees.
Recommended action: businesses in Indonesia to start reviewing the existing hiring framework and how the wage was calculated. Determining the ‘proportionality’ and establishing ‘fair pay’ practice could be a struggle for businesses knowing the significance of subjective dependency, hence there could be a need of engaging a data-driven consultant to assist the businesses in setting up their view of what could be deemed as ‘proportionate’.
2. Hiring prioritise set for Indonesian talents
It has been a longstanding rule in Indonesia that employers must prioritise the hire of Indonesian talents before seeking for expatriates/non Indonesian talents. To date, the importance of this requirement remains dependent on individual/organisational. The Ruling clarifies that businesses are required to favor Indonesian hires over foreign nationals especially for roles that do not require specific skills that cannot be undertaken by Indonesian.
Recommended action: businesses to consider reviewing its hiring strategies and investing in local talent development to eventually support the localisation goals. This could be in a form of mentoring, or sharing knowledge between foreign hires and Indonesian hires.
3. Limitation on fixed-term employment arrangement
The Ruling emphasizes that any fixed-term employment, regardless of the purpose, must be limited to a 5 year term including any extensions. In addition to the limited term, the Ruling also prescribes that the fixed-term employment agreement must be in Bahasa Indonesia.
It is clear that the Constitutional Court attempts to ensure transparency in employment terms hence safeguarding the interest of employers and employees.
Recommended action: Businesses to consider performing audits of its existing employment contract to understand the prevailing language, and how it was drafted. It is expected that any dispute raising from unclear drafting or language misunderstanding would be ruled in favor of the employees in light of the Ruling.
Additionally, human resources policy/framework may need to be revisited to understand the impact of converting fixed-term employees to permanent positions, and to revamp the process of doing so.
4. Clearer rights in case of termination and dispute resolution
Termination processes have been the most complex matters to navigate – regional labor government could have a different interpretation, the employees have their own expectation, and employers would want to limit any form of indemnity for the employees as minimum as possible.
The Ruling is now mandating all terminations to be accompanied with a clear justification and it must be done through a formal procedures with sufficient notice to the employee. The Ruling also introduces the possibility of mandated reinstatement if the termination is not justifiable or no clear processes in place.
For completeness, the Ruling also touches briefly on an expectation to implement more efficient dispute resolution between employers and employees.
Recommended action: businesses to look into revamping its termination process including but not limited to ensure termination policies are well-documented, and align with the mandates of the Ruling. It would also be important to train the human resource teams to handle terminations fairly and the importance of thorough documentation.
The Ruling also pushes for the urgency to separate the labor laws from the Job Creation Law that was essentially enacted as an omnibus law. It is mandated that all judiciary authorities and governmental authorities to support the implementation of the Ruling including but not limited to produce the necessary regulatory products.
Indonesia Centre of Indonesian Labor Union (Gabungan Serikat Buruh Indonesia) voiced out its gratitude for the ruling of the Constitutional Court. For the organisation, the ruling may bring in a more balanced state between keeping business interests in engaging employees while giving clarity to the employee position.
Bearing in mind wide range of stakeholders who are looking after the Ruling and its impacts, we foresee changes to Indonesian labor laws to be formalised at the soonest and could be leaving businesses little to no time to adapt.
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