What Are the New Severance Pay Rules Under Indonesia’s 2026 Employment Law?

Indonesia’s 2026 Employment Protection Law changes severance entitlements for acquisitions, company closures, and certain dismissals. It also introduces severance reserve requirements and additional protections during termination disputes.

Law No. 27 of 2026 took effect on October 28, 2026, replacing Law No. 13 of 2003 and the employment provisions of the Job Creation Law. Foreign-owned companies (PT PMAs) must comply with the updated requirements, although certain procedures await implementing regulations.

How Is Severance Pay Calculated Under the New Rules?

Severance is calculated using an employee’s basic salary and fixed allowances. Length of service determines the basic entitlement, while the reason for termination determines the applicable multiplier.

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The statutory minimum basic severance schedule starts at one month’s salary and reaches nine months for employees with eight years or more of service. Long-service pay ranges from two to ten months’ salary for employees who have completed at least three years of service.

Consider an employee with seven completed years of service:

Additional payments may cover unused annual leave, eligible return travel expenses, and outstanding contractual entitlements.

The following severance examples use this employee unless otherwise stated.

How Have Severance Entitlements Changed for Acquisitions and Company Closures?

Where an employer decides not to retain an employee following a merger, acquisition, or corporate restructuring, the employee receives twice the basic severance amount. If the employee declines continued employment, the multiplier is one instead.

A business transfer does not automatically terminate existing employment contracts.

Closure following two consecutive years of financial losses provides one times basic severance, compared with the previous 0.5-times multiplier. Permanent closure by the owners provides one times basic severance and 1.5 times long-service pay.

What Severance Applies to Other Reasons for Termination?

Where an employer fully funds a qualifying pension program, its contributions may be counted toward statutory retirement-related termination payments. The employer must pay any shortfall between the qualifying pension benefits and the required entitlement.

The prolonged illness or workplace disability provision generally applies after an employee has been unable to work for more than 12 months.

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Employees who resign voluntarily generally receive outstanding rights and applicable separation pay (uang pisah), rather than statutory severance. Similar treatment may apply to employees absent without a valid explanation for at least five consecutive working days, subject to the required written summonses.

Where separation pay applies but the employment documents do not specify an amount, a minimum of one month’s salary may be established.

Company efficiency measures are no longer listed as a separate termination ground.

Can Employees Claim Severance When Their Employer Breaches Employment Obligations?

Employees may request termination where an employer fails to pay wages on time for at least three consecutive months, threatens employees, or fails to fulfil agreed employment obligations.

Their entitlement depends on whether the alleged misconduct is established:

When Is an Employer Prohibited from Terminating an Employee?

Dismissal is prohibited on specified grounds, including pregnancy, marriage, lawful trade union activities, religious observance, reporting alleged employer crimes, discrimination, and certain medically certified illnesses or workplace disabilities.

Employers that fail to comply with a legal reinstatement obligation may face imprisonment of up to two years or a criminal fine. Separate corporate penalties may also apply.

Do Fixed-Term Employees Receive Severance Pay?

Employees on fixed-term employment contracts (PKWT) generally receive contract compensation rather than the ordinary severance entitlements applicable to permanent employees.

Under the applicable implementing rules, 12 months of service generally provides one month’s salary, with proportional compensation for other service periods.

For an employee earning IDR 9 million (USD 497) per month:

Article 15(5) of Government Regulation No. 35 of 2021 excludes foreign employees working under fixed-term contracts from this compensation requirement. The exception remains relevant to the extent that it does not conflict with the updated employment legislation.

Early termination may create an additional liability for wages covering the remaining contract period, subject to statutory exceptions.

For example, ending a contract with six months remaining could create a separate liability of IDR 54 million (USD 2,983).

Failure to pay fixed-term compensation may result in administrative sanctions, including written warnings, fines, and temporary suspension of business activities.

What Are the New Severance Reserve Requirements?

Covered employers must establish severance reserve funds managed by a government institution rather than relying solely on internal accounting provisions.

The funds are intended to finance termination entitlements other than retirement for employees who are not enrolled in a pension program.

Micro and small enterprises are exempt from this requirement. Their termination payment amounts are determined through agreement with employees rather than automatically applying the standard severance schedules.

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For other employers, including PT PMAs, implementing regulations have not yet specified contribution amounts, payment schedules, fund management procedures, or withdrawal arrangements.

Failure to maintain the required reserves may result in written warnings, restrictions on business activities, temporary suspension of operations, or revocation of business licenses.

New implementing regulations must be issued within one year of enactment. Existing regulations remain applicable where they do not conflict with the updated legislation.

What Procedures Must Employers Follow When Terminating Employees?

Bipartite negotiations must generally be completed within 30 working days.

Exceptions include voluntary resignation, expiry of a fixed-term contract, retirement, and an employee’s death.

Must Employers Continue Paying Wages During Termination Disputes?

An employer may suspend an employee from working during a termination dispute but must continue paying wages and applicable benefits until the dispute reaches a legally binding resolution.

For the employee earning IDR 18 million (USD 994) per month:

The calculations exclude additional benefits and assume full monthly wages remain payable throughout the stated periods.

What Happens to Termination Cases Filed Before October 28, 2026?

Industrial-relations lawsuits registered before October 28, 2026, remain subject to the previous employment framework when determining the substance of the claims, even if the court issues its judgment after that date.

What Happens if Employers Fail to Pay Severance?

Deliberate nonpayment of statutory severance, long-service pay, or compensation for outstanding employee rights can result in imprisonment of up to four years or a criminal fine. Separate corporate penalties may also apply.

Where a collective settlement or final industrial-relations judgment establishes unpaid entitlements, the recognized debt receives statutory protection against the employer’s assets and payment priority. Criminal penalties do not extinguish the underlying payment obligation.

Review Your Employment Obligations with MAP Resources Indonesia

MAP Resources Indonesia assists foreign-owned companies with severance calculations, termination-related financial planning, and employment compliance. For assistance with your company’s obligations, email info@mapresourcesindonesia.com.