In Indonesia, a fixed-term employment agreement (PKWT), including extensions, cannot exceed five years. Employers can renew or extend a PKWT within that limit, but the work must still qualify for fixed-term employment.
When a contract approaches its limit, the employer must determine whether the employment can remain fixed-term or should move to a permanent employment agreement (PKWTT).
When Can an Employer Use a PKWT?
A fixed-term employment agreement (PKWT) can only be used for work that meets the legal conditions for fixed-term employment. It cannot be used for work that is permanent in nature.
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Indonesia allows PKWT arrangements based on a specified period or completion of particular work.
A permanent employment agreement (PKWTT) has no fixed end date.
Giving an employment agreement an expiry date does not by itself make the work eligible for a PKWT.
How Long Can a Fixed-Term Contract Run?
A PKWT can run for a total of up to five years, including extensions.
For a PKWT based on a specified period, the employer and employee can agree to extend the contract within this limit.
For a PKWT based on completion of particular work, the agreement should state when the work is expected to be completed. If the work finishes earlier, the PKWT ends when the work is completed. If it remains unfinished, the parties can agree to extend the contract, provided the total PKWT period does not exceed five years.
What Happens When a PKWT Is Extended?
Extending a PKWT can require a compensation payment even though the employee continues working for the same company.
When a PKWT is extended, the employer must pay statutory PKWT compensation (uang kompensasi) for the contract period that has ended. Compensation for the extension is then payable when the extended period ends.
Employees who have worked continuously for at least one month are generally entitled to this compensation. An employee who has worked for 12 continuous months receives one month’s wage. For shorter or longer periods, the amount is calculated in proportion to the period worked.
The statutory PKWT compensation requirement does not apply to foreign workers employed under a PKWT.
Renewing a PKWT? MAP Resources Indonesia can review the contract and compensation requirements. Email info@mapresourcesindonesia.com
Employers must also register a PKWT online with the Ministry of Manpower within three working days after it is signed. If online registration is unavailable, registration with the relevant regency or municipal manpower office must be completed within seven working days.
Does a PKWT Automatically Become Permanent After Five Years?
A PKWT does not automatically become a PKWTT simply because the five-year limit has been reached.
Once the maximum period has been reached, the employer cannot simply extend the same PKWT again. If the employment relationship continues, its legal basis must be assessed under the rules governing fixed-term and permanent employment.
If a PKWT does not meet the legal requirements, its consequences depend on which PKWT requirement was breached.
What Happens When a PKWT Ends?
When a PKWT expires or the specified work is completed, the employer generally owes PKWT compensation to an eligible employee.
An employee who has worked for 12 continuous months receives one month’s wage. Other periods are calculated proportionally. The calculation generally uses basic salary and fixed allowances, with different rules where the employee’s wage structure does not contain those components.
PKWT compensation is different from the severance payments that can apply when a permanent employee is terminated. Expiry of a valid PKWT does not give the employee the same severance rights as termination of a PKWTT.
If a PKWT is ended before its agreed expiry date, the employer must still pay PKWT compensation based on the period the employee has actually worked.
A separate rule can also require the party ending the contract early to compensate the other party for wages covering the remaining contract period.
Managing Contract Renewals With MAP Resources Indonesia
MAP Resources Indonesia assists foreign employers with Indonesian employment contracts and workforce compliance. Contact us at info@mapresourcesindonesia.com.
