Foreign employers in Indonesia need to account for employee entitlements from the start of employment, not only when an employee leaves. The main obligations include wages, religious holiday allowance (THR), BPJS contributions, working hours and overtime, statutory leave, compensation for fixed-term employees, and termination payments.
The amount and timing of these costs depend on the employee’s contract, salary structure, length of service, and, for termination payments, the reason the employment relationship ends.
Permanent vs Fixed-Term Employees
Indonesian employment law distinguishes between permanent employment agreements (PKWTT) and fixed-term employment agreements (PKWT). The distinction affects how the employment relationship can be structured and what payments arise when it ends.
A fixed-term contract can only be used for work permitted under Indonesia’s PKWT rules. For a PKWT based on a specified period, the initial contract and any extension generally cannot exceed five years in total. Different rules apply to a PKWT based on completion of specified work.
PKWT employees are also entitled to compensation when the contract ends. An employee who has worked continuously for 12 months is generally entitled to compensation equal to one month’s wage, while shorter or longer periods are calculated proportionately.
Hiring employees under PKWT or PKWTT contracts? Contact MAP Resources Indonesia at info@mapresourcesindonesia.com
The choice between permanent and fixed-term employment should reflect the work being performed. A fixed-term contract cannot simply be used as a cheaper substitute for permanent employment where the position does not qualify for PKWT treatment.
Salary and THR
Employers must structure salary payments in line with Indonesian wage rules, including the applicable provincial, regency, or city minimum wage where the minimum-wage rules apply.
Foreign employers also need to budget for religious holiday allowance, or THR. Employees who have worked continuously for at least 12 months are generally entitled to one month’s wage. Employees with at least one month but less than 12 months of continuous service generally receive THR on a proportional basis.
THR is separate from the employee’s normal monthly salary and must be paid before the employee’s relevant religious holiday in accordance with the applicable rules.
BPJS Health and Employment
Employers also need to incorporate Indonesian social security into payroll.
Eligible employees must generally be registered with BPJS Kesehatan for health coverage and BPJS Ketenagakerjaan for employment-related social security programs. Depending on the program, contributions are paid by the employer, the employee, or both.
The contribution base and rates differ between programs, so BPJS should be calculated as part of each payroll cycle rather than treated as a separate year-end employment cost.
Need support with Indonesian payroll and BPJS? Email MAP Resources Indonesia at info@mapresourcesindonesia.com
The employer remains responsible for meeting its BPJS obligations even where payroll administration is outsourced to another provider.
Working Hours, Overtime, and Leave
Indonesia generally provides for normal working time of 40 hours per week. This can be structured as seven hours per day over six working days or eight hours per day over five working days, subject to exceptions for certain sectors and types of work.
Work beyond the applicable normal working hours generally requires overtime pay, subject to exceptions for certain positions and sectors. Overtime is generally limited to four hours per day and 18 hours per week, excluding overtime worked during weekly rest days or public holidays.
Employees are also generally entitled to at least 12 working days of annual leave after 12 months of continuous service. Indonesian employment rules provide additional forms of statutory leave and absence for qualifying circumstances.
Employers should reflect these requirements in their working-hours and overtime arrangements and leave policies, particularly where a foreign parent company’s global HR policy provides different entitlements.
What Is Payable When Employment Is Terminated?
The cost of terminating an employee cannot be determined from salary and length of service alone. The reason for termination affects which payments are due and the multiplier applied under Indonesia’s termination rules.
For permanent employees, the calculation can involve severance pay, long-service pay, and compensation of rights, depending on the circumstances of the termination. PP 35/2021 remains the applicable regulation governing these termination-payment rules.
Compensation of rights can include unused annual leave that remains valid and other entitlements provided under the employment agreement, company regulation, or collective labor agreement.
Reviewing the employment cost of a restructuring or termination? MAP Resources Indonesia can assist at info@mapresourcesindonesia.com
This makes the termination ground important when estimating workforce-restructuring costs. Two employees with the same salary and service period can have different termination payments if their employment ends for different legal reasons.
How Are Foreign Employees Treated?
Employing a foreign national does not remove the employer from Indonesia’s employment framework. The company must also comply with the separate rules governing the use of foreign workers, including the applicable approvals and immigration requirements.
Foreign workers who have worked in Indonesia for at least six months generally fall within Indonesia’s mandatory social security framework, including the applicable BPJS requirements.
Employment entitlements and foreign-worker authorization should be treated separately. Holding the required immigration or work authorization determines whether the foreign national can lawfully work in Indonesia; it does not replace the employer’s applicable wage, payroll, social security, or employment obligations.
Manage Employee Entitlements with MAP Resources Indonesia
MAP Resources Indonesia advises foreign employers on meeting employee entitlement requirements through their Indonesian employment and payroll arrangements. Contact us today at info@mapresourcesindonesia.com.
