Severance pay is one of the most critical HR obligations for employers operating in Indonesia.
For foreign companies entering this rapidly growing market, understanding how severance pay in Indonesia works is essential to avoid legal risks and unexpected costs.
Indonesia’s labor regulations impose strict rules on employee termination, including mandatory severance pay calculation.
This is why many international companies rely on an Employer of Record (EOR) to manage employment responsibilities efficiently and lawfully.
What is Severance Pay in Indonesia?
Severance pay (known locally as Uang Pesangon) is the financial compensation an employer is legally required to pay to an employee upon the termination of their employment contract.
In Indonesia, the total termination package usually consists of three components:
- Severance Pay (Uang Pesangon): Based on the length of service.
- Service Appreciation Pay (Uang Penghargaan Masa Kerja – UPMK): A reward for long-term loyalty, typically starting after three years of service.
- Compensation of Rights (Uang Penggantian Hak – UPH): Payment for unused annual leave, relocation costs, or other benefits stipulated in the employment contract.
Legal Framework Governing Severance Pay in Indonesia
The primary regulation governing employment and termination is Law No. 13 of 2003 on Labor, which was significantly amended by Law No. 11 of 2020 on Job Creation (Omnibus Law) and further clarified by Government Regulation No. 35 of 2021 (PP 35/2021).
These laws standardize the Indonesia severance pay calculation across different industries. Under the Job Creation Law, the government introduced a more balanced approach to severance to encourage investment while still protecting worker rights through the Unemployment Insurance (JKP) program.
How to Calculate Severance Pay Under the Job Creation Law
Severance pay calculation in Indonesia is not a “one-size-fits-all” formula. The total amount an employee receives depends on their length of service and the specific reason for termination. Under the Job Creation Law, three primary components make up the total termination package:
1. Severance Pay (Uang Pesangon – UP)
This is the basic compensation based on how long the employee has been with the company. The Indonesia’s severance pay calculation for this component follows a fixed scale:
- < 1 year: 1 month’s salary
- 1-2 years: 2 months’ salary
- 2-3 years: 3 months’ salary
- 8+ years: 9 months’ salary (maximum)
2. Long Service Pay (Uang Penghargaan Masa Kerja – UPMK)
This component acts as a reward for long-term loyalty and only applies to employees who have worked for at least 3 years.
- 3-6 years: 2 months’ salary
- 6-9 years: 3 months’ salary
- 24+ years: 10 months’ salary (maximum)
3. Compensation of Rights (Uang Penggantian Hak – UPH)
This is the reimbursement of entitlements that the employee has earned but not yet used. This typically includes:
- Unused annual leave that has not expired.
- Relocation costs (if the employee was moved to a different city for work).
- Other benefits stated in the employment agreement or company regulations.
The Importance of “Termination Reason”
It is crucial to note that the severance pay in Indonesia is heavily influenced by the reason for dismissal. For example:
- Business Efficiency or Merger: Employees may receive 1x the standard severance pay.
- Company Bankruptcy: The multiplier might drop to 0.5x.
- Retirement: Employees often receive a higher multiplier, such as 1.75x the standard rate.
Because the rules are case-specific, accurate interpretation of PP 35/2021 is vital. Miscalculation can lead to industrial disputes, which is why many companies use a compliant payroll system to ensure every decimal point is correct.
Example of Calculating Severance Pay in Indonesia
Imagine an employee, Budi, was terminated due to company restructuring after working for 4 years with a monthly salary of IDR 10,000,000.
- Severance Pay: 5 months’ salary = IDR 50,000,000.
- Service Appreciation (UPMK): For 4 years, Budi is entitled to 2 months’ salary = IDR 20,000,000.
- Compensation of Rights (UPH): Assuming 5 days of unused leave = (5/25) x IDR 10,000,000 = IDR 2,000,000.
- Total Payout: IDR 72,000,000.
Common Challenges for Foreign Companies Managing Severance Pay
Managing severance pay in Indonesia can be challenging for foreign businesses unfamiliar with local labor laws.
Common challenges include:
- Misinterpreting severance pay calculation rules.
- Keeping up with regulatory changes.
- Handling disputes with employees.
- Managing payroll, tax, and statutory benefits accurately.
Without local expertise, these issues can expose companies to compliance risks and operational delays.
What Is an Employer of Record (EOR) in Indonesia
An Employer of Record (EOR) in Indonesia acts as the legal employer on behalf of a foreign company.
This arrangement allows international businesses to hire local employees without establishing a legal entity in Indonesia. The EOR assumes responsibility for employment contracts, payroll, tax compliance, and severance pay obligations.
By using an EOR, companies can remain compliant with Indonesian labor laws while focusing on business growth.
Why Choose Abhitech as Your Employer of Record in Indonesia?
Abhitech provides a reliable and compliant EOR solution for companies hiring in Indonesia. With deep local expertise, Abhitech helps businesses manage employment complexities, including severance pay in Indonesia.
1. Fast Onboarding and Legal Compliance
Abhitech ensures all employment contracts, registrations, and documentation comply with Indonesian labor regulations. This minimizes legal risks and enables faster onboarding for local employees.
2. Payroll, Tax, and Benefits Administration
Managing payroll and severance pay calculation requires precision. Abhitech handles salary payments, income tax, BPJS registration, and statutory benefits accurately and on time.
3. Simplified Hiring Process for Foreign Companies
With Abhitech acting as the legal employer, foreign companies can hire Indonesian talent without setting up a local entity. This significantly reduces time, cost, and administrative burden.
4. Dedicated Support for HR and Employee Management
Abhitech provides ongoing HR support, from employee relations to termination processes, ensuring severance pay in Indonesia is handled fairly and compliantly.
How Abhitech Helps Companies Hire in Indonesia Efficiently
Abhitech’s EOR services streamline the entire employee lifecycle, from hiring to offboarding.
By combining local legal expertise with structured HR processes, Abhitech helps companies:
- Stay compliant with severance pay regulations.
- Avoid costly miscalculations.
- Scale teams efficiently in Indonesia.
This makes Abhitech an ideal partner for startups, SMEs, and global enterprises expanding into the Indonesian market.
Start Hiring in Indonesia with Abhitech
Navigating severance pay in Indonesia doesn’t have to be a barrier to your expansion. By partnering with an EOR, you gain a local compliance expert that protects your business from legal risks while ensuring your employees are treated fairly according to Indonesian law.
Abhitech helps simplify this process by providing Employer of Record (EOR) services that support compliant hiring without the need to establish a local entity.
From employment contracts to payroll administration and termination settlements, every stage is handled in accordance with Indonesian labor laws. This allows businesses to manage their workforce confidently while minimizing compliance risks.
To gain deeper insights, you can explore our blog for practical guidance on hiring and compliance in Indonesia, or reach out to our team to discuss your specific workforce needs.
FAQ About Severance Pay & EOR Services in Indonesia
1. How is severance pay calculated in Indonesia?
Severance pay calculation in Indonesia is based on length of service, monthly salary, and termination reason. It may include severance pay, long service pay, and compensation of rights as regulated by law.
2. Is severance pay mandatory for all terminations?
No. Severance pay in Indonesia depends on the termination circumstances. Certain resignations or dismissals for specific reasons may limit or exclude severance entitlements.
3. Is payroll and tax compliance handled by an EOR?
Yes. An Employer of Record like Abhitech manages payroll processing, income tax withholding, statutory benefits, and severance pay compliance in accordance with Indonesian regulations.
