Options Available to terminate Employees In Indonesia
A merger or acquisition often leads to considerable advantages in efficiency. These efficiency advantages are very welcoming for the company, but may lead to termination of employees of the target company. This often happens when certain positions become obsolete, because they exist already in the merging company or in the acquiring company. It is therefore for an employer important to understand its rights and obligations when terminating employees in Indonesia.
A merger happens when one or more Indonesian companies (PT with local shareholder or PMA with foreign shareholder) are merging all assets and liabilities together. When a merger is completed, the absorbed company no longer exists. An acquisition happens when a foreign company or and Indonesian company buys the majority shares in an Indonesian company. In this case both entities remain operational after completion of the transaction. More information on M&A transactions.
Article 163 of the Manpower Law regulates the right to terminate employees and employers during a merger or acquisition.
Employee Termination During a Merger or Acquisition (PT or PMA)
The Manpower Law gives the employer the right to terminate its employees during a merger or acquisition. The Manpower Law regulates the following situations:
- Employees are not willing to continue their employment. In this case the employees and the company agree terminate employment relationship. This allows the company to terminate the employment relationship by paying a minimum termination compensation of one time severance pay, one time reward pay and one time compensation pay.
- Employees are willing to continue their employment. Even though there is a willingness of the employees to continue their employment, the company has a right to terminate them. However, since the employees are willing to continue to work, they are have a right to receive a higher minimum termination allowance. Their minimum allowance is twice the severance pay amount, one time reward pay and one time compensation pay.
Employee Termination Procedure in Indonesia in M&A cases
The general termination procedure for employees is described in article 151 of the Manpower Law and in the Industrial Relationship Law. In case a company wants to lay off an employee, it must follow these procedures. In short, the procedures are as follows :
- Proven effort to prevent termination. Before a company decides to terminate any employees, it must make efforts to prevent termination from happening. For example, the company can assign employees to other departments within the company instead of terminating their employment.
- Negotiations between company and employee. When there is no option to prevent the termination, the company must enter into discussion with the employees. During these talks, the parties will try to agree on the terms of dismissal.
- Mediation, conciliation or arbitration. In case the parties cannot reach an agreement, they can refer the case to the manpower department for mediation, conciliation or arbitration. Mediation and conciliation will result in a non-binding decision. Arbitration will result in a binding decision and cannot be disputed in court.
- Labor court or supreme court. If a company or the employees disagree with the decisions in mediation or conciliation, the case can be forwarded to the labor court. In certain cases the parties can request the supreme court to give a final decision on the case.
Please see also our article on manpower dispute resolution in Indonesia for a detailed overview of the manpower dispute procedure.