Latest Developments and Practical Considerations in Indonesian Labour Law— Understanding the Latest Legal Framework and Compliance through the Lens of Religion, Culture, and Practice —

Introduction

Indonesia is one of the most populous and fastest-growing countries among ASEAN nations. A growing number of Japanese companies are entering the Indonesian market across various sectors, including manufacturing and infrastructure. Considering the planned relocation of the capital and the steady increase of the labour force, Indonesia is expected to remain a key investment destination in the years ahead.

At the same time, the country’s labour law regime is frequently amended, and its practical application tends to be fluid. Given that many of the regulations are designed to protect workers and that administrative practices vary across regions, a mere reading of the legal text alone is often insufficient for a full understanding.

This article examines the key issues that arise in practice in Indonesia, covering employment contracts, social security, minimum wages, work rules, and dismissal systems, as well as religious and cultural considerations, restrictions on the employment of foreign nationals, and relations with trade unions.

This article has been prepared with the invaluable cooperation of Ms. Meidyna Budiarti and Ms. Nurul Hasanah, both attorneys at IABF Law Firm  (https://iab-net.com/), a highly reputable Indonesian law firm known for its expertise in corporate and employment law. We would like to take this opportunity to express our sincere gratitude for their kind assistance.

Legal Basis of Employment Relations in Indonesia

Labour Laws

The Indonesian labour law framework is primarily built upon the Manpower Law (Law No. 13 of 2003) as lastly amended by the Job Creation Law (Law No. 6 of 2023), introduced as part of the 2020 omnibus reform (hereinafter referred to as the “Labour Law”). The Labour Law governs fundamental aspects of employment relationships, including employment contracts, working conditions, wages, termination, and social security, and are implemented alongside various Minister of Manpower Regulations and Ministerial Decrees.

On 31 October 2024, the Constitutional Court partially granted a petition for judicial review filed by the Labour Party, several major trade unions (including FSPMI, KSPSI, KPBI, and KSPI), and two individual workers, and rendered a decision declaring certain provisions of the Job Creation Law unconstitutional (Constitutional Court Decision No. 168/PUU-XXI/2023, hereinafter the “Decision”). As a result, 20 articles of the Job Creation Law were found conditionally unconstitutional and the word ‘may’ in 1 article were found unconstitutional. Furthermore, the Court ordered the House of Representatives to enact a new labour law separating employment-related provisions from the framework of the current Job Creation Law.

This ruling has significantly affected the labour law regime, requiring important amendments to the provisions previously established under the omnibus legislation. The content discussed herein reflects the post-Decision framework.

Collective Agreements, Work Rules, and Employment Contracts

Other sources governing employment relations include collective labour agreements concluded between employers and trade unions, company work rules established by employers, and individual employment contracts between employers and employees.

A collective agreement applies to all employees and thus serves as a consensual baseline for working conditions. Consequently, the working conditions stipulated in individual employment contracts must not fall below the standards set out in the collective agreement.

Employers with minimum ten employees must establish work rules and submit them to the Ministry of Manpower for approval. However, an employer that has concluded a collective agreement is exempted from this obligation. These rules must outline key aspects such as rights and obligations, working conditions, disciplinary standards, and their validity period. Where provisions overlap, the more favorable condition for employees prevails, reflecting a core principle of Indonesian labor law.

For employment contracts, please refer to the section below: Basic Framework of Employment Contracts.

Basic Framework of Employment Contracts

An employment contract is a written agreement between an employer and an employee stipulating individual working conditions and related terms. Although a contract may be formed verbally, it is customary in practice to execute it in writing to prevent potential disputes. As described later, a fixed-term employment contract must always be concluded in writing.

At a minimum, an employment contract must include the following information:
the employer’s name, address, and type of business;
the employee’s name, gender, age, and address;
job title;
work location;
the amount of wages and method of payment;
the rights and obligations of the employer and employee;
the commencement date and term of the contract;
the place and date of execution; and
the signatures of the contracting parties.

Two copies of equal legal validity must be executed—one retained by the employer and the other by the employee.

In Indonesia, employment contracts are classified into two types:

1. Permanent employment contracts (Perjanjian Kerja Waktu Tidak Tentu – PKWTT) and
2. Fixed-term employment contracts (Perjanjian Kerja Waktu Tertentu – PKWT).

These categories are determined by the nature of the work and the period of employment, and the classification materially affects the employee’s legal status and entitlements.

A PKWTT corresponds to a standard permanent employment arrangement. The probationary period may not exceed three months, and payment of wages below the statutory minimum during probation is unlawful.

Conversely, a PKWT is restricted to work of a specific nature or duration, and it is prohibited to engage employees on a fixed-term basis for work of a permanent nature.

Where the contract is based on the completion of a specific task, it must be concluded by agreement incorporating the following two essential elements:

1. the scope and limits defining when the task shall be deemed complete; and
2. the duration of the work, adjusted in accordance with the expected completion of the task.

A fixed-term employment contract must be executed in writing and registered with the local manpower office.

Pursuant to the Decision, the maximum total period of a fixed-term contract, including extensions, is now capped at five years, whether the contract is based on the completion of a specific task or on a defined term. Consequently, provisions such as Articles 9(1) and (4) of Government Regulation No. 35 of 2021, which previously allowed extensions until the completion of the work, must be amended to conform to this five-year constitutional ceiling. This change establishes a clear constitutional limit on the duration of fixed-term employment relationships, which bears significant implications for both employers and employees.

In recent years, disputes concerning the validity of non-competition clauses in employment contracts have also increased. While not expressly prohibited by law, such clauses must be reasonable in terms of geographical scope, duration, and the nature of the restricted activities. Including a clearly defined liquidated-damages clause in the contract enhances enforceability in the event of a breach.

Wage Structure and Working Hours

Composition of Basic Salary and Allowances

The Indonesian wage structure generally consists of the following components:

• Basic salary + fixed allowances (e.g. functional, transportation, and meal allowances):
  The amount of fixed allowances must not exceed 25% of the total of the basic salary and fixed allowances combined.
• Variable allowances (e.g. shift allowance)
• Occasional allowances, such as the Religious Holiday Allowance (Tunjangan Hari Raya – THR) and bonuses.

In particular, the THR is a statutory payment that must be provided to all employees (both Indonesian nationals or foreign nationals working for Indonesian company in Indonesia) who meet the eligibility requirements. Employees with at least twelve months of continuous service are entitled to one month’s salary, while those with less than twelve months’ service are entitled to a prorated amount corresponding to the length of service.

Working Hours and Overtime

Standard working hours are set at seven hours per day and forty hours per week for a six-day work week, or eight hours per day and forty hours per week for a five-day work week.

Overtime work requires the individual consent of the employee, and it is unclear whether blanket or pre-approved consent is recognised. Overtime is limited to four hours per day and eighteen hours per week, and employers are required to maintain written or digital records of overtime instructions and consents.

The overtime pay rate in Indonesia is higher than in Japan:
From the first hour of overtime on weekdays, the employee must be paid at 150% of the regular hourly wage.

Furthermore, where overtime exceeds four hours in a single day, the employer has a legal obligation to provide a nutritious meal of at least 1,400 kilocalories, which cannot be replaced by monetary compensation. For reference, 1,400 kilocalories roughly corresponds to two servings of nasi goreng or slightly less than two servings of nasi uduk (rice with chicken, tempeh, egg, and sambal). Although the cost of living in Indonesia is generally lower than in Japan, the statutory obligation to provide meals during overtime imposes a tangible burden on employers.

Religious and Cultural Considerations in Workplace Management

Approximately 87% of Indonesia’s population is Muslim, and religious customs are deeply embedded in employment practices.
Employers have a duty to accommodate the religious practices of their employees to a reasonable extent.

For example:

• Employees must be permitted to leave their work temporarily to observe the five daily prayers (Subuh, Dzuhur, Ashar, Maghrib, and Isya).
• On Fridays, it is customary for male Muslim employees to attend Jummah (Friday prayers) at a mosque around noon.
• During the Ramadan (fasting) month, many companies adjust working hours earlier in the day to allow employees to break their fast (iftar) at sunset, in line with local practice.

Employees are entitled to paid leave for religious reasons, and dismissal on the basis of religion is strictly prohibited. Even where a collective agreement or work rules include specific provisions, employers must not infringe upon employees’ religious beliefs.
Violations may result in administrative sanctions or corrective orders from the authorities or courts, and employers may also be required to pay previously unpaid allowances retroactively. Consequently, failure to accommodate religious observance can cause significant legal and financial detriment to employers.

Social Security System (BPJS)

In Indonesia, all employees—including foreign nationals employed for at least six months—are required to enrol in the national social security system, known as Badan Penyelenggara Jaminan Sosial (BPJS).

The BPJS comprises two main aspects:

• Employment social security, covering work accident compensation, old-age benefits, pensions, survivors’ benefits, and unemployment benefits; and
• Health insurance, covering medical care.

The obligation to register lies with the employer, and failure to register may result in administrative sanctions, such as official warnings or suspension of access to public services. Even if an employee voluntarily registers, the contribution portion allocated to the employer remains the responsibility of the companythe company.

Termination of Employment, Resignation, and Dispute Resolution

Termination of Employment Contracts

An employment contract is considered ended  in the following circumstances:

• upon the death of the employee;
• upon the expiry of the contractual term;
• upon the completion of a specific task under a fixed-term contract;
• by a final and binding judgment of a court or the industrial relations dispute settlement body; or 
• upon the occurrence of specific events stipulated in the employment contract, work rules, or collective agreement.

Under Indonesian Labour Law, an employment contract cannot be considered terminated solely on the grounds of the employer’s death or a transfer of control resulting from a merger or acquisition (M&A).

In the event of an M&A, the new employer is, in principle, required to uphold the rights of existing employees, and those rights must not be diminished. However, if an employee chooses not to continue employment following the M&A, or if the employer exceptionally decides not to retain certain employees, those employees are entitled to compensation. The compensation differs between permanent and fixed-term employees and is calculated based on their length of service and employment status at the time.

Where an employer passed away, his/her heirs may terminate the employment contract after consultation with the employee. Conversely, if an employee dies, the heirs are entitled to claim the employee’s statutory or contractual benefits.

Dismissal

Legal Procedures for Dismissal

Indonesian law provides certain reasons for dismissal or Termination of Employment (Pemutusan Hubungan Kerja).

Dismissal is legally regarded as a “last resort”, and the employer, employee, trade union, and government are all obliged to make every effort to prevent it.

Where dismissal becomes unavoidable, the employer must notify the employee and/or the trade union of the purpose and reasons for the dismissal. This requirement ensures transparency and enables the affected employee or trade union to fully understand the grounds for termination.
If the employee objects to the dismissal, both parties must engage in bipartite negotiations within 30 working days.

If no agreement is reached, the dispute must proceed to mediation or conciliation, and if that too fails, the case shall be adjudicated by the Industrial Relations Court, which will issue a legally binding judgment in accordance with applicable laws.

Under the original text of Labour Law, dismissal procedures were described as being conducted “in accordance with the procedures of the industrial relations dispute settlement body.”

However, under the Constitutional Court Decision, it was held that such wording is unconstitutional unless interpreted to mean that “dismissal may only be executed after obtaining a final and binding decision from the industrial relations dispute settlement body when bipartite negotiation fails.”

As a result, dismissal can now only occur after a final judgment confirming the lawfulness of termination.

Employer’s Obligation to Provide Compensation upon Dismissal

Employers are obliged under Labour Law to make certain monetary payments to employees upon termination.

Previously, the law stated that “the obligations of both parties under the employment relationship must continue to be performed until the settlement of the industrial relations dispute in each stage.”
However, the Decision held that such wording is unconstitutional unless interpreted to mean that “the obligations continue until a final and binding judgment is rendered pursuant to the Industrial Relations Dispute Settlement Law (IRDS Law).”

Accordingly, if an employer seeks to dismiss an employee but fails to reach agreement through negotiation, the obligations of both parties—including the employer’s duty to pay wages—continue until the final and binding judgment of the Industrial Relations Court.
In practice, this means that if dismissal proceedings are prolonged, the employer must continue paying the employee’s salary throughout the dispute period, which can have a substantial impact on the company’s finances.

To mitigate this burden, employers often explore the possibility of mutually agreed termination, which is regarded as an efficient and amicable alternative solution. Nevertheless, this remains a considerable burden for employers.

Other forms of termination—such as voluntary resignation, redundancy, bankruptcy of the employer, or mandatory retirement—each have their own compensation schemes.
Such compensation typically comprises three components: severance pay, service appreciation pay, and compensation for entitlements.

A notable feature of Indonesian Labour Law is that even in cases of disciplinary dismissal, severance compensation remains payable.

Previously, the law provided that severance pay should be “paid in accordance with the following provisions”, this means that it shall refers to the calculation scheme provided by the Labour Law.
However, the Decision clarified that such provisions must be interpreted as setting only the minimum level of severance to be paid; otherwise, they are unconstitutional.

Consequently, the statutory severance amounts represent a minimum entitlement, and employers may be required—by mutual agreement, work rules, or collective agreements—to pay higher amounts.

Restrictions on the Employment of Foreign Nationals and Directors

Employment of foreign nationals in Indonesia is subject to specific restrictions. In particular, foreigners may not occupy positions involving human resources management or decision-making authority. Accordingly, if a foreign national signs employment contracts or payroll documents, such acts may be deemed a violation of Indonesian law by the authorities.

Historically, there was a clear numerical ratio requiring ten Indonesian employees per foreign employee, but this requirement has now been abolished. Nevertheless, in practice, employers are expected to assign an Indonesian counterpart for purposes of knowledge transfer and capacity building.

Conclusion

Indonesia’s labour regime is characterised by following three key pillars:

• strong protections for employees;
• a workplace environment deeply shaped by religious and cultural practices; and
• a notably stringent dismissal process.

For Japanese companies, this landscape demands:

• continuous monitoring of local legal developments;
• constructive engagement with labour authorities and trade unions; and
• close relationship with local experts.

Japanese headquarters accustomed to domestic norms may find that a “Japan-centric” approach does not readily translate to Indonesian operations. A well-balanced strategy, one grounded in up-to-date legislation, informed by prevailing local practices, and sensitive to Indonesia’s cultural and religious context, might be essential for sustaining long-term growth in the Indonesian market.

At ZeLo, we provide legal services to support Japanese companies expanding overseas, including to Indonesia, as well as foreign companies entering the Japanese market.
Please let us know if you have further questions or may need assistance on this matter. For further information on the above, about our firm or any other matters, please contact through the form (https://zelojapan.com/en/contact).

---

The information provided in this article does not, and is not intended to, constitute legal advice and is for general informational purposes only. Readers of this article should contact an attorney to obtain advice with respect to any particular legal matter.