Hiring Employees in Indonesia
A company must have a clear understanding of all manpower laws and regulations when hiring employees in Indonesia. The Indonesian Manpower Law regulates the rights and obligations between employees and companies. Besides the Manpower Law, there are a multitude of implementing regulations which are frequently amended or renewed.
The Manpower Law and its implementing regulations set a high level of protection for the employees. It is therefore essential for companies to understand what their obligations are when hiring employees, to avoid manpower disputes or violations of applicable legislation.
Manpower Regulations on Salary and Overtime
Manpower Regulation on Minimum Salary
Indonesian does not set a national minimum wage. The minimum wage in Indonesia varies between business fields and regions. Generally the wages in the Jakarta province are one of the highest in the country, while wages in more remote areas are significantly lower.
Since 2015, the Indonesian government uses the following formula to determine the increase of minim wage each year:
Minimum Wage Old Year x (Annual National Inflation Rate + Annual National GDP Growth Rate) = Minimum Wage New Year
Over the last few years the minimum wages of employees rose by 8-8.5% per year. The formula provides a certainty to investors on the annual increase of the minimum wages. Before 2015, the annual increase often rose to two-digit numbers, which caused great concerns under the business community.
Manpower Regulation on Overtime
Companies in Indonesia must pay overtime to employees in lower-level positions, if they work beyond the normal working hours. Manager level positions and upwards, are usually not entitled to overtime payment, as they receive a higher salary. Overtime work requires an order in writing from the company and the acceptance thereof in writing from the employee.
The Manpower Law regulates the normal working hours for either a 5-day working week and a 6-day working week:
- 5-day work week. The first 8 hours in a day are considered normal working hours. All additional hours are overtime hours. There is a maximum of 40 normal working hours in a week.
- 6-day work week. The first 7 hours in a day are paid out as normal working hours and additional hours are overtime hours. Also for the 6-day work week there is a maximum of 40 hours per week.
Overtime during working days
The overtime calculation during working days is as follows:
- for the first overtime hour: 1.5 times the hourly salary (hourly salary calculation: 1/173 x monthly salary)
- for every subsequent overtime hour: 2 times the hourly salary
Overtime during weekends or public holidays
Overtime during weekends and public holidays is calculated as follows:
5-day work week
- the first 8 hours: 2 times hourly salary
- 9th hour: 3 times hourly salary
- 10th and 11th hour: 4 times hourly salary
6-day work week
- the first 7 hours: 2 times hourly salary
- 8th hour: 3 times hourly salary
- 9th and 10th hour: 4 times hourly salary
Employees are not allowed to work more than 11 hours per day (5-day work week) or 10 hours per day (6-day work week). In addition, employees are prohibited to work more than 14 overtime hours per week.
Religious Holiday Allowance for Employees in Indonesia
When hiring employees, companies are under the obligation to pay them religious holiday allowance (Tunjangan Hari Raya – THR). Religious holiday allowance (THR) is not a bonus, which means that an employee has the right to receive it, regardless of his or her job performance. As such, the manpower regulations do not allow a company to reduce the religious holiday allowance (THR) of the employee under any condition.
Companies must pay the religious holiday allowance (THR) to their employees once per year. Employees who have been employed by the company for more than 12 months are entitled to receive a religious holiday allowance (THR) in the amount of one month salary. Employees who work at a company for at least a month, but less than 12 months, will receive their religious holiday allowance proportionally. The proportional calculation of the religious holiday allowance (THR) is as follows:
Employment term/12 x 1 monthly salary.
When calculating the amount of religious holiday allowance (THR), companies must base the compensation on the basic salary of the employee plus fixed allowances (if any). Variable allowances such as travel allowance or meal allowance are not part of the religious holiday allowance (THR).
The payment date of the religious holiday allowance (THR) depends on the religion of each employee. The manpower regulation defines the following religions and religious holidays:
- Muslims: Eid al-Fitr
- Catholic Christians and Protestant Christians: Christmas
- Hindus: Seclusion Day
- Buddhists: Vesak Day; and
- Confucians: Chinese New
Not later than seven days before the religious holiday, the company must pay out the religious holiday allowance (THR) to the employee.
Annual leave and Public Holidays
Paid Annual Leave
Companies must provide employees at least 12 days of annual leave, after these employees work for 12 consecutive months at the company. Therefore when hiring employees, the companies are under no obligation to provide annual leave during the first 12 months of employment. If the employee wishes to take annual leave, then the employer must allow the employee to take it. Although, the company can decide to postpone the annual leave entitlement for up to six months, in case there is an valid reason to do so.
There is no provision in the legislation governing the compensation (such as money) as a replacement of annual leave, in case the employee did not take all annual leave in a given year. Moreover, the manpower law does not require the companies to carry over the remaining annual leave days to the new year.
As a result, employees who do not take all their annual leave days during a year, will lose their right:
- to take the remaining annual leave days; and
- to receive any form of compensation for the remaining annual leave days.
Public Holidays and collective holidays in Indonesia
Public Holidays for Employees in Indonesia
Each year, Indonesia has a generous number of public holidays. Main reason for this is that Indonesia celebrates religious events of multiple religions. While the public holiday events are fixed, the dates of some of the religious holidays may shift from year to year. Therefore, on yearly basis the government will issue a regulation on the exact dates of the public holidays in the upcoming year. These public holidays in Indonesia include the following days:
- New Year’s Day
- Chinese New Year
- Ascension Day of Prophet Muhammad
- Nyepi (Day of Silence)
- Good Friday
- International Labor Day
- Ascension Day of Jesus Christ
- Idul Fitri
- Pancasila Day
- Idul Adha (Sacrifice Day)
- Independence Day
- Islamic New Year
- Birthday of the Prophet Muhammad
Collective Holidays for Employees in Indonesia
Besides the public holidays, the Indonesian government sets each year the collective holidays. The collective holidays (cuti bersama) are usually scheduled before or after Christmas and Idul Fitri. The collective holidays originally apply to civil servants. Therefore, all government offices are closed during these collective holidays.
Companies can decide not to implement the collective holidays in their organization and remain operational. When companies decide to implement the collective holidays in their organization, they can deduct these collective holidays from the remaining annual leave of employees.
Manpower Termination Compensation
When a company terminates the employment relationship of one of its employees or when an employee decides to resign, the company may need to pay a termination compensation. The type and amount of termination compensation depends on the type of work contract:
1. Termination of Employment under a Permanent Work COntract
Permanent employment agreements are ongoing, without a termination date. This type of agreement is for jobs which have a permanent and on-going nature. The employment agreement will continue until either the employee or the company terminates it.
The permanent employment agreement entitles the employee to receive a generous termination compensation in case the company terminates the employment relationship. This should be taken into account by the company before hiring any employee. Upon termination of an employment agreement, an employee may be eligible to receive the following types of termination compensation:
- severance pay;
- reward pay for the years of service;
- compensation pay; and/or
- separation pay.
To determine the exact amount of termination compensation and for which type of compensation the employee is eligible, the following factors need to be taken into account:
- The current salary of the employee;
- The period of employment in the company;
- The party who initiated the termination; and
- The reason of termination of the employment relationship.
The Manpower Law regulates a fixed formula for calculating the severance pay, reward pay and compensation pay. This formula regulates the mandatory minimum allowance a company must pay to an employee (read also: Termination Compensation when Terminating Employees in Indonesia). The Manpower Law does not regulate the separation pay formula. Therefore, companies must regulate this in their company regulations or collective labor agreement.
2. TERMINATION OF EMPLOYMENT under a Fixed-Term Contract
Fixed term employment agreements can be made for a maximum term of two years. The Employment Law allows companies to extend the fixed term employment agreements once, for a period of maximum one year. After this extension, the company can renew the agreement one time for a maximum period of two years. Between the last extension and the renewal of the agreement, there must be a grace period of 30 days.
For the calculation of termination compensation for fixed-term employees a different formula applies. In case the company terminates employment relationship before the expiry date of the agreement, the company must pay the employee a compensation in the amount of wages until the expiry date of the agreement.
Example: The fixed term employment agreement of an employee expires at 31 December. However, the company terminates the employment contract at 31 August. In this case the company terminates the contract four months before the expiration date. Therefore, the company is required to pay the employee four months salary for the months, September, October, November and December.
It is worth noting, that vice versa the same applies. In case an employee resigns before the expiration date of the fixed-term employment contract, the company has the right to receive compensation in the amount of salary until the end of the contract.
3. TERMINATION OF EMPLOYMENT under a Freelance Contract
When hiring employees under a freelance agreement, the company only needs to pay the employee in line with its attendance. Companies are not allowed to use freelance agreements for all types of jobs. Hiring employees on freelance contracts is possible under the following conditions:
- the work of the freelance employee experiences fluctuations. These fluctuations may occur both in work time and work volume;
- the work is for a limited number of days per month and in any case for not more than 21 days per month.
In case of termination of the employment relationship, the company is under no obligation to pay a termination compensation.
Payment of Taxes and Social Securities to Employees
When hiring employees, Indonesian companies must process their taxes and social securities. The processing of taxes and social securities entails the following procedures:
1. Initial registration of social securities (BPJS) under the company.
In case employees previously worked for another company or have an individual social security policy, the social securities need to be transferred from the previous company to the new company.
2. Monthly payment of social securities.
When a company is hiring employees, their social securities must be paid on monthly basis to the social security authorities. The company must pay the monthly premiums to two different social security bodies:
- BPJS Manpower. The manpower social security covers a pension fund an work accident and death insurance for the employee.
- BPJS Healthcare. The healthcare insurance covers a basic health insurance for the employee.
Both the employee and the company must contribute to the BPJS manpower and healthcare social security. The monthly premiums are based on a percentage of the gross salary of the employee. Read more about the detailed overview of the BPJS premiums.
3. Monthly payment and reporting of taxes
The company must pay the monthly income taxes of its employees before the 10th day of each month. After that, the company must report the payment of taxes to the tax authority before the 20th day of each month.