Indonesia Employment Guide

Legal Framework

Indonesia employment relations are governed by the Manpower Law, Job Creation Law (UU No.6/2023) and Government Regulation PP 35/2021. The Manpower Minister Regulation No.7 of 2026, effective April 30, 2026, imposes strict restrictions on outsourcing arrangements. Without a local legal entity (PT PMA), foreign companies cannot directly hire Indonesian employees.

1. Employment Contracts

Two core contract types

• PKWT (Fixed‑term contract) Applicable to temporary, seasonal, project‑based work. Total cumulative term cannot exceed 5 years. Must be made in writing in Indonesian. Probation is prohibited. If used for permanent core business roles, it will be reclassified as a permanent contract retroactively中国国际贸….
• PKWTT (Permanent / indefinite‑term contract) For ongoing permanent positions. Probation maximum 3 months, salary cannot be lower than local minimum wage. Written contract recommended.

Critical principle: Reality over contract label

Labour courts adopt the substance‑over‑form rule. If contractors receive daily management, use company systems and integrate into core business operations, the authority will rule a de facto employment relationship, even under freelance or outsourcing agreements. Consequences include back payment of social security, THR holiday allowance and fines.

2. Outsourcing Restrictions (Key Update 2026)

Under Manpower Minister Regulation No.7/2026, outsourcing is only permitted for six categories of supporting non‑core activities:

1. Cleaning services
2. Catering & food supply
3. Security services
4. Drivers and staff transportation
5. Operational support services
6. Auxiliary work within mining, oil, gas and power sectors

✅ Mandatory rules

• Outsourced work must be independent from the company’s core business.
• Written outsourcing agreement is required and must be registered.
• The principal enterprise bears joint liability if the outsourcer defaults on salary, BPJS social security or THR payments. ❌ Consequence of illegal outsourcing: The labour authority may convert the arrangement into a permanent employment contract and order full back payments and administrative penaltiesANTARA New….

3. Working Hours & Overtime

• Standard working week: 40 hours. 5‑day week: maximum 8 hours per day 6‑day week: maximum 7 hours per day
• Overtime cap: max 4 hours per day, 18 hours per week. Mandatory meal provision for overtime exceeding four hours.
• Overtime pay rates
  • 1st hour on regular workdays: ×1.5 basic hourly wage
  • Subsequent weekday overtime hours: ×2
  • Rest day overtime (first 8 hours): ×2; beyond 8 hours: ×3
  • Official public holiday: ×4 (or compensatory rest plus ×2 wage)

4. Leave & Statutory Allowances

• Annual leave: 12 calendar days per year after 12 months continuous service. Unused leave must be monetised upon termination.
• Sick leave: Supported by medical certificate; graded pay rules apply according to duration of absence.
• Maternity leave: 3 months fully paid; extended arrangements available under new maternal protection provisions.
• THR (Tunjangan Hari Raya) mandatory holiday allowance Equivalent to one full month’s basic salary, payable 7 days prior to major religious holidays. Pro-rated for staff with less than one year’s tenure. Late payment attracts penalties.
• Public holidays: approximately 15–17 official national holidays each year.

5. Social Security (BPJS)

Mandatory BPJS enrolment for all formal employees, covering:

• BPJS Kesehatan (health insurance)
• BPJS Ketenagakerjaan: JHT (old-age savings), JP (pension), JKM (death benefit), JKP (unemployment benefit) Both employer and employee contribute according to statutory contribution rates. Failure to register triggers fines and back‑payment orders.

6. Termination & Severance Package

Dismissal cannot be executed arbitrarily. Mutual negotiation or legal grounds are required. The full severance package consists of three components calculated on basic salary plus fixed allowances:

1. Uang Pesangon (Severance Pay): capped at 9 months’ salary based on tenure
2. Uang Penghargaan Masa Kerja (Long‑service Reward): payable after 3 years of service, capped at 10 months’ salary
3. Uang Penggantian Hak (Entitlement Compensation): monetary equivalent for unused annual leave, repatriation travel and other contractual rights

Fixed‑term employees whose contracts expire receive proportional termination compensation; standard permanent staff severance does not apply. Employees dismissed for proven serious misconduct may receive zero severance.

7. Foreign Employee Compliance

All expatriate hires require official approvals:

• RPTKA: Foreign Manpower Utilisation Plan approved by the Ministry of Manpower
• IMTA: Foreign Worker Employment Permit
• KITAS: Limited stay residence permit

Key rules:

• Local manpower priority principle; foreign staff can only fill roles unavailable to Indonesian nationals.
• Mandatory Indonesian counterpart assigned for knowledge transfer requirements.
• Foreign employees are hired under fixed‑term contracts only.
• Strict sanctions for employing foreigners without valid permits, including fines and deportation.

8. High-Risk Compliance Pitfalls for Overseas Enterprises

1. Misclassification of permanent roles as outsourcing or freelance contractors.
2. Core business functions outsourced in breach of the 2026 outsourcing regulation.
3. Failure to pay THR or make timely BPJS contributions.
4. Unauthorised excessive overtime without proper documentation and overtime pay.
5. Attempting direct recruitment without PT PMA entity; illegal hiring via tourist visas.
6. Poorly drafted Indonesian‑language employment contracts lacking mandatory clauses.
7. Improper dismissal procedures leading to massive severance claims.

Gonex Indonesia HR Solutions

Gonex delivers compliant localised human resource solutions for Chinese companies expanding into Indonesia. With or without a local PT PMA entity, we provide integrated services including EOR, HRO, Global Payroll and expatriate visa support, helping enterprises mitigate labour dispute risks and achieve full Indonesian manpower regulatory compliance.

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