A Guide to Hiring in Indonesia

Companies must adhere to the Manpower Law when hiring local employees as it regulates the rights and obligations between employers and employees.

Contributing Advisor

Cruisietta Kaylana

Senior Associate, Human Resources

Formal offer letter

Once a company has agreed to hire a candidate, they will need to send an official offer letter, which sets out the clear expectations of both parties. The letter should include:

• The candidates’ job position;
• Salary and benefits;
• Starting date;
• Job description; and
• Type of contract.

Fixed-term contracts

There are three types of fixed-term contracts (FTC):

• FTC based on the completion of work;
• FTC based on the period of time; and
• FTC related to non-permanent work.

All FTC types are for work that is temporary and can be completed within a set time period, therefore any contract extensions cannot be for prolonged periods (five years maximum in total). Failing to adhere to these rules will result in the employee being deemed to be on a permanent employment contract.

Compensation for FTC workers

The employer is obligated to pay compensation to the employee even if the employee terminates the FTC prematurely.

The employers must pay compensation upon:

• The expiry of an FTC;
• Each extension of the FTC; and
• Early termination of the contract, irrespective of who terminates the contract.

How is it calculated?

Compensation is calculated using the following formula:

When an FTC expires and is then extended, the compensation for the initial contract must be paid when the FTC expires.

For any ongoing FTCs, the compensation payment will be calculated from November 2, 2020. Further, foreign workers are not entitled to the aforementioned compensation.

Working hours

Normal working hours in Indonesia are 40 hours per week, which can be divided into eight hours per day for five working days or seven hours per day for six working days.

Working hours of less than 40 hours per week are recognized if the company has the following characteristics:

• Undertake work that can be completed in less than 35 hours per week;
• Can implement flexible working hours; and
• Undertake work that can be completed outside a particular location.

Overtime

The regulation extends the overtime working hours to four hours per day and 18 hours per week, which does not apply to public holidays. Collective labor agreements, company regulations, or employment agreements should specifically state which roles are entitled to overtime pay. If this is not expressed, then the employee will automatically be entitled to receive this payment.

The overtime payment is based on the employee’s monthly wage. Every hour, the calculation is applied, which is 1/173 times the monthly wage.

The calculation of the overtime payment is also categorized by the day of the overtime: working days, weekends, or public holidays. The regulation does include provisions on employees that are exempt from overtime pay eligibility. These are:

• Employees that hold certain positions with responsibilities as thinkers, controllers, planners, executors, etc.;
• Workers whose working hours cannot be capped, such as those in managerial roles; and
• Workers that are paid high salaries.

Outsourcing

Employers must include the provisions of transfer of rights protection in the contract in the event of a change in an outsourcing company. The outsourcing company must be a legal entity and comply with the business license they were issued from the central government.

Hiring foreign workers

For a local company to employ a foreign worker, they must prepare a Foreign Worker Utilization Plan (Rencana Penggunaan Tenaga Kerja Asing (RPTKA)) — a document that details the specific work, position, and length of employment the foreign employee will undertake in Indonesia. The RPTKA now also serves as the basis for the MOM to grant visas and stay permits.

Obligations for companies when hiring in Indonesia

Employer compliance obligations

Income tax in Indonesia is mostly paid by withholding by the employer. The tax withheld by employers must be remitted to the government body every month.

Employee compliance obligations

Expatriate employees are required to complete an annual tax return and compute their tax liability by March 31 of the following tax year.

The majority of PIT is paid through statutory employer withholdings on earned income. However, for any other income that a taxpayer in Indonesia earns regularly, they must make monthly provisional tax payments to the tax department based on the income earned in the previous year.

Healthcare and Social Security

Indonesia’s social security programs are run by two organizations – the Social Security Administrator for Health (BPJS Kesehatan) for healthcare and the Workers Social Security (BPJS Ketenagakerjaan) for socio-economic protection. 

In the private sector, the employer must pay four percent and the employee the remaining one percent. For civil servants, the government contributes three percent while the employee contributes two percent.

The BPJS ketenagakerjaan's program covers the following:

• Work compensation – provides protection for accidents occurring during or as a result of work;
• Old age benefits – provides protection for participants that are in retirement, laid off;
• Pension benefits – provides guaranteed income in retirement; and
• Life insurance – upon the death of the participant, their heirs can claim the benefits.

Public holidays and annual leaves

Indonesia’s government entitles its citizens to some public holidays. In addition to official public holidays, the government also provides joint leaves (collective leave days). The Manpower Law entitles all employees to 12 days of annual leave per year.