Employment Contract

In Indonesia, an employment contract is a legally binding document that outlines the terms and conditions of the employment relationship between an employee and an employer. It serves to provide security to both parties involved. Employment contracts in Indonesia can be categorized into two types:

Fixed-term contracts (FTCs):

These are used for definite-term employees, also known as contract workers. FTCs must be made in writing and registered with the local Manpower office. They are typically used for work that is estimated to be completed within a certain period of time (up to 5 years), seasonal work, or work that is completed at once.

Indefinite-term contracts:

These may be oral or written, but must contain certain required provisions. They are used for permanent employment and may include a probationary period of up to three months.

It’s important to note that fixed-term contracts cannot exceed two years in length and cannot contain a probationary period. If they do, the probationary period will be considered null and void. Additionally, while there are no mandatory policies, certain clauses and policies are recommended to ensure compliance with local laws and regulations.

The contract must incorporate key conditions of the work relationship, such as:

There are full-time contracts, part-time contracts, casual (freelance), fixed-term contracts, traineeships with a probationary period, and piecework contracts (commission-only payment). Employees on full-time contracts work on a weekly basis (full week), whereas part-time workers are expected to work on a regular ongoing basis rather than a full week.

Casual employees, often known as freelancers, work on a project-by-project basis, as needed. They might agree with the employer to work a fixed number of hours and can decline the job offer. When an employee is engaged on a fixed-term contract, he or she is typically hired for a specific project or simply to replace another worker for a set length of time.

Trainees are individuals employed for a specific job in which they must perform practical work (for the purpose of learning new skills) without compensation from the company for which they work. Their compensation rates are often covered by an agreement or an award.

Contracts with a probationary term are written so that a business owner can be confident that the new employee is qualified for the position.

An employment contract is required since it specifies the rights, obligations, and duties of both the employee and the employer.

The scope of the work often comprises the job title, reporting supervisor, job description, and key performance indicators.

Salary, allowances, employee share option plans or equity awards, fringe benefits, and other benefits are all part of the remuneration package.

Annual leave, sick and hospitalization leave, and maternity leave are all covered in the benefits section. Some leaves that are not required by the Employment Act of 1955, such as compassionate leave, dental and optical allowances, and paternity leave, can also be included.

This provision is critical if an employee needs access to sensitive information. The confidentiality clause shields employers from the misuse of confidential information that could harm the organization.

The Intellectual Property provision is especially important if the employee is engaged to develop intellectual property for the company, such as a designer or inventor. An intellectual property clause assures that such rights are owned by the employer’s company.

Termination clauses are required to oversee each party’s obligations after the agreement expires. Before firing an employee, an employer must provide reasonable cause and an explanation.

In Indonesia, employment contract regulations are outlined in the Law No. 13 of 2003 on Manpower and the Government Regulation in lieu of Law No. 2 of 2022 on Job Creation. Employment contracts can be either fixed-term or indefinite-term. Fixed-term contracts must be written and registered, with a maximum duration of five years and no probation period. Indefinite-term contracts may be oral or written but must include certain minimum terms. Regular working hours are 40 hours per week, with regulated overtime that should not exceed four hours per day and 18 hours per week. Employees are entitled to 12 days of paid leave after a year of service. Contracts must be drafted in Indonesian, with an optional English translation. These regulations aim to protect workers’ rights and ensure fair treatment in the employment relationship.

Yes, Indonesian companies can hire foreign workers, but there are specific regulations they must follow. According to the Presidential Regulation No. 20/2018 on the Recruitment of Foreign Workers in Indonesia, the process for hiring foreign workers has been simplified to ensure a more efficient procedure1. However, companies must still comply with certain requirements:

Foreign Worker Utilization Plan (RPTKA): Companies must prepare an RPTKA, except for certain positions like directors or commissioners who are shareholders, diplomatic officials, or government officials required by the government.
Work and Immigration Permit: Employers are required to obtain a work permit for foreign workers through the TKA Online system managed by the Ministry of Manpower.
Employment Sectors: There are restrictions on the sectors in which foreign workers can be employed, and companies must ensure that the positions are not prohibited from hiring foreign workers under current legislation.

It’s important for companies to stay updated with the latest regulations as they can change, and non-compliance can lead to legal issues. For instance, the Minister of Manpower emphasized the prudent employment and utilization of foreign workers, highlighting the importance of considering the national interest and labor market conditions

Terminating an employment contract in Indonesia requires adherence to strict regulations to ensure fairness and legal compliance. The process begins with identifying valid grounds for termination, which can range from employee misconduct to business insolvency. Employers must provide written notice to the employee, detailing the reasons for termination and outlining the severance package, at least 14 days prior to the termination date. The severance pay is calculated based on the employee’s length of service and other entitlements.

Employers are encouraged to reach a mutual agreement with the employee on the termination terms. If the employee objects to the termination, they must submit their objections in writing within seven days, and both parties should seek mediation at the local Ministry of Manpower office. Throughout the process, proper documentation is crucial, including the termination notice and records of any mediation proceedings.

Finally, the employer must notify the Ministry of Manpower about the termination. This structured approach ensures that terminations are conducted legally and ethically, minimizing the risk of disputes and potential legal challenges.