Complete Guide to Indonesia’s Labor Law: Contracts, Leave, Wages & Termination

Indonesia’s labor law framework, the backbone of its workforce regulation, is designed to ensure equitable treatment of employees and foster economic growth. The Manpower Act No. 13 of 2003 governs the law and defines critical aspects of employment, including wages, working hours, leave entitlements, and termination processes. Thus, the law provides security and value to all involved.  

Recent amendments introduced through the Omnibus Law on Job Creation have streamlined and restructured regulations to enhance flexibility and attract foreign investment, keeping you informed and up-to-date with the latest changes in Indonesia’s labor laws. 

Updated Employment and Labor Law Regulation in Indonesia 

Indonesia’s labor regulations are grounded in several key legislative frameworks designed to protect employee rights and ensure fair employer practices: 

• Labor Law of 2003 on Manpower: Originally amended by Law No. 11 of 2020 on Job Creation, Government Regulation replaced it in Lieu of Law No. 2 of 2022. 
• Law No. 21 of 2000 on Labor Unions: Regulates establishing, operating, and protecting labor unions. 
• Law No. 2 of 2004 on Industrial Relations Dispute Settlement: Establishes procedures for resolving workplace disputes through conciliation, mediation, or arbitration. 

Types Of Employment Contracts in Indonesia 

Employment contracts in Indonesia are categorized based on their duration and nature of work. Each type has specific requirements and implications for both employers and employees: 

Permanent Employment Contracts (PKWTT) 

Permanent contracts provide employees with stability and long-term job security. They must be written and include detailed terms such as job descriptions, salaries, and benefits. 

Employees under this contract are entitled to severance pay and benefits upon termination, except in cases of serious misconduct. 

Fixed-Term Employment Contracts (PKWT) 

Fixed-term contracts are used for temporary positions or roles tied to specific projects. They are typically limited to a maximum five-year duration (including extensions).  

Employers must register these contracts with the Ministry of Manpower, ensuring transparency and compliance. Termination of PKWT does not entitle the employee to severance pay, but unused leave and other dues must be settled. 

Freelance and Outsourced Contracts 

These contracts are popular for project-specific or short-term roles. Freelancers are not considered formal employees and do not receive statutory benefits like healthcare or severance. On the other hand, outsourcing agreements must be facilitated through registered labor agencies, ensuring compliance with Indonesian labor law. 

Apprenticeship Agreements 

Apprenticeship contracts allow individuals to gain practical experience and build skills. These agreements must outline the program duration, type of work, and allowance (if applicable). Apprentices are not entitled to full employee benefits but are protected under general workplace safety and health regulations. 

Probationary Periods 

Under PKWTT agreements, employers can impose up to three months of probation on new hires. Probationary employees are entitled to wages and other statutory benefits but are not eligible for severance pay if dismissed during this period. 

Working Hours, Overtime, and Leave Policies in Indonesia 

Indonesia’s labor laws establish clear guidelines on working hours, overtime compensation, and employee leave entitlements to ensure workplace fairness and productivity. 

Working Hours in Indonesia 

Standard working hours are limited to 40 hours per week, typically split into 7 hours per day over six days or 8 hours per day over five days. Employers must adhere to these limits to comply with labor laws. Exceptions apply in specific industries, such as healthcare and manufacturing, which require continuous operations. 

Overtime Regulations 

Overtime is allowed for up to four hours per day or 18 hours per week. Employers must pay overtime compensation, calculated based on hourly wages, with rates typically ranging from 1.5 to 2 times the regular hourly rate. Written consent from employees is required for overtime work. 

Leave Policies in Indonesia 

Minimum Wage and Salary Regulations 

Indonesia’s minimum wage system is essential to its labor laws, ensuring fair compensation for workers nationwide. These regulations protect employees from exploitation while reflecting regional economic conditions. 

Hiring Foreign Workers in Indonesia 

Yes, foreigners can work in Indonesia, and many companies hire expatriates for specialized roles. However, employment must comply with Government Regulation No. 34 of 2021 on the Use of Foreign Workers, which requires: 

• A work visa for legal entry. 
• A work permit to authorize professional activities. 

Employers must follow these regulations to ensure lawful hiring and operations. 

Termination of Employment and Severance Pay 

Termination of employment in Indonesia is regulated to protect workers’ rights and ensure fair treatment. Employers must follow specific procedures and provide compensation where applicable. 

Grounds for Termination 

Employment can be terminated under various circumstances, including: 

• Resignation: Initiated by the employee, requiring a 30-day notice. 
• Mutual Agreement: Both parties consent to the termination terms. 
• Employee Misconduct: Serious violations of company policies. 
• Business Conditions: Economic challenges, company closure, or restructuring. 
• Retirement: As stipulated by company policy or statutory retirement age. 

Severance Pay Calculation 

Employees are eligible for severance pay based on their length of service. Compensation typically includes: 

• Severance Pay: Equivalent to 1-9 months of salary, depending on tenure. 
• Service Appreciation Pay: Additional pay for long-term service, calculated in tiers. 
• Compensation Pay: Covers unused leave, housing, healthcare, or other benefits based on the employment contract. 

Streamline Recruitment and Payroll Effortlessly with InCorp 

Managing compliance with Indonesia’s complex labor laws can be challenging for businesses. However, you don’t have to handle it alone. InCorp Indonesia (an Ascentium Company) can assist you with: 

• Recruitment: Ensuring you hire the right talent while complying with labor laws. 
• Payroll Management: Accurate and timely salary processing in line with regulations. 

Complete the form below to optimize workforce management and comply with labor standards.