Growing your business’s operations to Indonesia is not as simple as drafting offer letters. Indonesia labor law has distinct regulations with detailed requirements, so employers can run into difficulties without a solid understanding.
In this article, we will break down the essential aspects of the country’s regulations as practical guides for foreign companies to successfully operate in Indonesia.
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Why Understanding Indonesian Labor Law is Crucial for Foreign Companies
Understanding the country’s labor law is mandatory for every foreign company as it can provide convenience in the following crucial aspects.
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Avoiding Legal and Administrative Risks When Hiring Locally
It can help foreign companies ensure that the employment procedures meet the legal standards and prevent potential disputes.
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Ensuring Fair and Compliant Employment Practices
Compliance with employment practices means maintaining fair employment processes while boosting employee satisfaction.
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Building a Trustworthy Employer Brand in Indonesia
Companies that are compliant convey a commitment to responsibility, which strengthens their reputation in the local market.
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Supporting Long-Term Business Growth and Local Partnerships
By being compliant, companies are also implementing long-term and strategic investments for sustainable success.
Overview of Indonesian Labor Law
Now, let’s move along to an overview of the broader framework of labor law in Indonesia as a core principle for fair and legal recruitment practices.
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Is Labor Law in Indonesia Friendly to Foreign Employers?
Indonesia labor laws are designed to protect employees, but do not impossibly restrict foreign companies who want to operate here.
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The Importance of Understanding Local Compliance Before Hiring
Labor laws in Indonesia govern all crucial aspects, like contracts, wages, and even termination procedures. Failing to obey the regulation can lead to legal disputes and discredit companies’ reputation.
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Key Institutions: Ministry of Manpower, BPJS, and Tax Authorities
In Indonesia, three key institutions supervise labor matters, including the Ministry of Manpower, BPJS, and tax authorities.
The Ministry is in charge of managing foreign worker permits, BPJS secures employees with social security benefits, and the tax authorities manage payroll deduction and income tax.
Types of Employment Contracts in Indonesia
Indonesia’s labor law has three types of employment contracts, which include:
1. Fixed-Term Employment (PKWT)
It is a type of employment with specified duration, such as six months, one year, and so on that will automatically end after the term is reached.
2. Indefinite-Term Employment (PKWTT)
In contrast with PKWT, this type of employment does not specify an end period, but has a probationary period for three months.
3. Important Clauses: Termination, Probation, and Renewal
Employment contracts need to clearly note the conditions for termination, probation, and specify renewal procedure to extend the contract after the initial work term.
Employee Rights and Entitlements Under Indonesian Law
Indonesia labor law also outlines explicit standards on employee rights, and here are the five main areas that you need to know.
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Working Hours and Overtime Rules
Employees work for 40 hours maximum in a week. Overtime is permitted as long as it is compensated.
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Annual, Sick, and Maternity Leave
Employees accept 12 days annual leave, 3 months maternity leave, and sick leave should have a doctor’s note.
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Public Holidays and Paid Leave Structure
Indonesia has 15 public holidays in a year, and employees are granted paid leave for these.
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Social Security (BPJS Kesehatan & BPJS Ketenagakerjaan)
Employers are obliged to register their employees with health insurance like BPJS Kesehatan and employment insurance like BPJS Ketenagakerjaan.
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Employee Benefits and Allowances
Based on company policy, employees can receive benefits like meals, transport, and housing allowance.
Employment Termination and Compensation Rules
Termination and compensation are strictly regulated under Indonesia labor law to give protection for employees’ rights.
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What Constitutes Legal vs Illegal Termination?
Legal termination, like resignation or company closure, should follow a legal basis, but if it is done without proper process or cause, it is considered illegal.
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Probation Period and Termination Protocol
Termination can occur during 3 months probation, but it still has to be done legally.
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Notice Period and Termination Procedure
Written notice should be provided within 30 days before resignation or pay in lieu.
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Severance, Long Service Pay, and Compensation Pay
Employees are also allowed to get severance, long service pay, and compensation pay based on the terms of employment.
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What Employers Must Avoid to Stay Compliant
Employers should not terminate without cause or withhold compensation that is legally required.
Special Considerations for Remote and Hybrid Work in Indonesia
Remote and hybrid work are now becoming more common in Indonesia, so the labor laws are starting to gradually address these adaptations.
1. Is Remote Work Covered Under Indonesian Labor Law?
Yes. Remote workers are still protected under labor regulations just like office workers.
2. BPJS and Tax Compliance for Hybrid/Remote Employees
Employers are still obliged to enroll hybrid/remote employees in BPJS and ensure tax compliance with PPh 21.
3. Local Supervision and Cross-border Reporting
Foreign employers must ensure proper supervision and report employment to the local authorities.
4. How to Maintain Legal Employment Without a Local Entity
EOR is a great choice in this matter as they can act as a third-party service that allows companies to hire and manage employees legally in Indonesia.
Ensuring Compliance Through Abhitech’s Employer of Record (EOR) Service
Navigating the complexity of Indonesia labor law can be challenging, but Abhitech’s EOR service is here to help you simplify the process.
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We Handle Contracts, Payroll, BPJS, and Labor Reporting
Abhitech’s EOR service ensures full compliance by handling the entire local employment, from contracts to labor reporting on your behalf.
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One-Stop HR Administration for Foreign Companies
Our service presents a complete solution for foreign companies, allowing them to focus more on core operations.
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Hire Employees in Indonesia Without Establishing a Legal Entity
Without needing to set up a legal entity in Indonesia, Abhitech helps you hire top local talent to support your business.
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EOR vs Setting up Your Own Company: Pros and Legal Simplicity
Employing EOR is much simpler, faster, and legally streamlined than establishing your own company.
Stay Compliant with Indonesian Labor Law–Work with the Right Partner
Indonesia, with its thriving economy, offers significant business opportunities, but understanding and complying with labor law is critical.
Indonesia labor law has many administrative steps, but the process can be managed with the right and strategic partner. With Abhitech’s EOR, you can strategically scale your business without the burden of local establishments.
Contact us today and let us handle all the compliance or explore more insightful EOR solutions for your business’s global expansion here!
