Employment Contracts in Indonesia: Complete Legal Guide for 2026

What is an employment contract in Indonesia?

Under Law No. 13 of 2003 on Manpower and the Job Creation Law (Law No. 11 of 2020), an employment contract is a binding agreement between employer and employee outlining terms of work, rights, and obligations. It establishes a subordinate relationship: employees follow employer directives, receive wages, and are entitled to statutory benefits. By contrast, service agreements involve independent contractors, who retain autonomy and lack employee benefits.

Contributing Advisor

Cruisietta Kaylana

Assistant Manager, Human Resources

Written contracts are crucial. Although verbal agreements are technically valid under the Civil Code, they expose employers to significant risks—penalties, retroactive benefit claims, and challenges in proving terms during disputes. Courts often side with employees when written agreements are absent, making proper documentation essential for compliance and protection.

Types of Employment Contracts in Indonesia (PKWT, PKWTT and More)

Indonesian employment law recognizes several distinct contract types, each serving specific business needs and worker categories.

Indefinite-Term Employment Agreement (PKWTT) – Permanent contracts

PKWTT contracts represent the standard form of permanent employment in Indonesia, characterized by their indefinite duration and enhanced job security. These agreements don't have predetermined end dates, continuing until termination, retirement, or death. Permanent employees enjoy comprehensive benefits including full social security coverage, severance pay entitlements, and career development opportunities.

PKWTT contracts can be verbal or written, though written form is strongly recommended for clarity and legal protection. These contracts typically include probationary periods up to three months during which employers can assess employee suitability. Termination requires legal justification and due process, including proper documentation and severance payments.

Fixed-Term Employment Agreement (PKWT) – Temporary contracts

PKWT contracts serve temporary, seasonal, or project-based work with specific duration limits. Under current regulations, PKWT contracts can extend up to five years maximum, including all extensions. These contracts must be written in Indonesian language and cannot include probationary periods.

PKWT arrangements are restricted to specific work types: completion-based projects, time-limited seasonal work, or temporary non-permanent activities. If work continues beyond the five-year limit or doesn't meet PKWT criteria, the contract automatically converts to PKWTT status.

Upon contract completion, employers must provide compensation equal to one month's salary per year of service, calculated proportionally. This compensation requirement, introduced by the Omnibus Law, applies regardless of whether contracts expire naturally or terminate early.

Freelance or daily work agreements

Daily work agreements cater to irregular, variable-volume work where employment needs fluctuate. Workers under these arrangements work less than 21 days per month and receive daily wages based on actual attendance.

If daily workers exceed 21 working days monthly for three consecutive months, their status automatically converts to PKWTT. These agreements must be written and specify worker details, work type, wages, and other benefits. Daily workers receive religious holiday allowances (THR) and social security coverage but typically lack other employee benefits.

Part-time employment agreements

Part-time contracts involve less than 35 hours weekly or fewer than seven hours daily. Common in-service industries, these arrangements offer flexibility for both employers and workers. Part-time employees receive hourly wages rather than fixed monthly salaries and are entitled to proportional benefits.

Outsourcing and subcontractor arrangements

Outsourcing in Indonesia involves triangular relationships between user companies, outsourcing companies, and workers. The Job Creation Law modified outsourcing provisions, though specific regulations continue evolving. Workers maintain employment relationships only with outsourcing companies, not user companies.

Transfer of Undertaking Protection of Employment (TUPE) clauses must protect workers when outsourcing companies change. These provisions ensure employment continuity and rights preservation during service provider transitions.

Special industry contracts (Maritime, Project-Based, Creative Sector)

Specialized industries often require tailored contract provisions addressing unique working conditions, safety requirements, or project timelines. Maritime workers, construction personnel, and creative professionals may need contracts addressing specific industry regulations, working locations, or intellectual property considerations.

Key differences between PKWT and PKWTT employment contracts in Indonesia

This comparison table clearly illustrates the fundamental distinctions between temporary and permanent employment arrangements, helping employers choose appropriate contract types for their specific needs.

Mandatory clauses in Indonesian Employment Contracts

Indonesian labor law mandates specific clauses in all employment contracts to ensure clarity and legal compliance.

Employee and employer identity details

Contracts must include complete company information: name, address, and business type. Employee details must specify name, gender, age, and residential address. These identity provisions establish legal standing and facilitate official communications throughout the employment relationship.

Job description and location

Employment contracts must clearly define job titles, work responsibilities, and performance expectations. Detailed job descriptions prevent disputes and establish measurable performance standards. Work location specifications are particularly important for companies with multiple offices or remote work arrangements.

Contract Duration and Probation Period

PKWTT contracts may include probationary periods up to three months, while PKWT contracts cannot include probationary clauses. Contract duration must be explicitly stated for fixed-term arrangements, with clear start and end dates.

Salary and Payment Terms (including THR / Religious Holiday Allowance)

Contracts must specify wage amounts, payment methods, and frequency. Religious Holiday Allowance (THR) provisions are mandatory, requiring employers to pay one month's salary annually to employees working twelve months or more. For shorter-term workers, THR is calculated proportionally based on service duration.

THR payments must be made at least seven days before religious holidays, covering Eid-al-Fitr for Muslims, Christmas for Christians, Nyepi for Hindus, Vesak for Buddhists, and Chinese New Year for Confucianists. Foreign workers may still be entitled to THR depending on company policy and local employment agreements, though the law mainly applies to Indonesian workers.

Working Hours, Overtime, and Rest Days

Standard Indonesian working hours are 40 hours weekly, typically structured as eight-hour days over five days. Contracts must clearly outline overtime policies and compensation rates, as work beyond standard hours requires additional payment. Rest day provisions and leave entitlements must also be specified.

Rights and Obligations of Both Parties

Employment contracts must clearly delineate employer obligations including wage payment, workplace safety, and regulatory compliance. Employee rights encompass safe working environments, timely compensation, and fair treatment. Mutual obligations create balanced employment relationships and prevent misunderstandings.

Termination Conditions and Notice Period

Contracts should specify lawful termination grounds, notice requirements, and severance calculations. Clear termination clauses protect both parties and ensure compliance with Indonesian labor law requirements for employment ending procedures.

Dispute resolution clauses

Including dispute resolution mechanisms helps resolve conflicts efficiently without immediate resort to formal legal proceedings. These clauses can specify mediation, arbitration, or other alternative dispute resolution methods.

Compliance checklist

Legal requirements and compliance

The Job Creation Law and Constitutional Court Decision 168/2023 have introduced several modifications including extended PKWT duration to five years, mandatory compensation for fixed-term contract endings, and revised termination procedures. The court decision requires prioritizing Indonesian workers over foreign nationals and stricter compliance with five-year PKWT limitations.

Minimum wage regulations have been updated through Regulation 16/2024, mandating 6.5 percent UMP and UMK increases for 2025 and introducing Sectoral Minimum Wages (UMS) for industries with unique working conditions. Employers are advised to review and update all employment contracts, payroll systems, and internal HR policies to ensure full alignment with the regulatory framework and recent court interpretations.

Electronic signatures and digital contracts legality

Electronic signatures are legally recognized under Indonesian law when they meet criteria specified in Law No. 11 of 2008 on Electronic Information and Transactions (ITE Law). Government Regulation 35/2021 explicitly permits employment agreements to be "drafted and ratified as electronic documents".

For validity, electronic signatures must be accessible, unchanged, and authenticated using government-recognized electronic certificates. While digital contracts offer efficiency benefits, employers should ensure proper authentication, data security, and digital literacy to avoid implementation challenges. Employers using digital employment contracts should utilize certified electronic signature providers registered with Indonesia’s Ministry of Communication and Informatics (Kominfo) to ensure legal validity and evidentiary strength in potential disputes.

Social security registration (BPJS Ketenagakerjaan, BPJS Kesehatan)

BPJS participation is mandatory not only for local employees but also for foreign workers who have worked in Indonesia for at least six months, as stipulated under Manpower Law No. 13 of 2003, Government Regulation No. 44 of 2015 on BPJS Employment, and BPJS Ketenagakerjaan Regulation No. 10 of 2023.  The 2025 BPJS Ketenagakerjaan program targets 57.55 million active participants with updated contribution rates. Current rates include:

Employment contracts for foreign workers in Indonesia

Work Permit (IMTA) and Stay Permit (KITAS) requirements

Foreign workers require several permits for legal employment in Indonesia. The process begins with RPTKA (Foreign Worker Utilization Plan) approval from the Ministry of Manpower, followed by IMTA (Work Permit) issuance.

The VITAS (Limited Stay Visa) allow entry into Indonesia, after which foreign workers obtain KITAS (Limited Stay Permit) for residence authorization. The complete process typically takes ten weeks and requires US$100 monthly Development Fund payment in advance.

Position restrictions for expatriates

Indonesian law maintains protections for local workforce through position restrictions and knowledge transfer requirements. Foreign workers must demonstrate relevant competencies and are limited to specific positions for defined periods. Companies must appoint Indonesian counterparts for expatriate employees and provide training and education programs to facilitate technology transfer.

Fixed-term vs permanent for foreigners

Foreign workers can hold both PKWT and PKWTT contracts, though practical considerations often favor fixed-term arrangements aligned with work permit durations. KITAS permits are typically issued for 6-12 months with renewal possibilities. After 2-4 years of continuous renewals, foreign workers may qualify for KITAP (permanent residence permits).

Tax obligations for foreign employees

Foreign employees must comply with Indonesian tax obligations based on their residence status and income sources. Maintaining tax compliance is essential for KITAS renewals, IMTA validity, and continued legal employment, as required by Income Tax Law No. 7/2023 and DJP regulations for foreign taxpayers.

Termination of employment contracts in Indonesia

Lawful grounds for termination

Unlawful termination scenarios

Termination process and required documentation

Bipartite negotiations must precede formal termination procedures. If bipartite discussions fail, cases proceed to industrial relations dispute settlement mechanisms including mediation, conciliation, or arbitration. Proper documentation throughout this process is essential for legal compliance.

Severance

Terminated employees receive three compensation components: Severance Pay (UP), Long Service Appreciation Pay (UPMK), and Compensation Pay (UPH).

Termination payment calculation

Example calculation for an employee with 3.5 years’ service and IDR 10 million monthly salary:

• Severance Pay: IDR 40 million (4 months)
• Long Service Pay: IDR 20 million (2 months for 3+ years’ service)
• Compensation Pay: Unused leave, transportation, and other rights
• Total: Approximately IDR 60+ million plus additional compensations

Fixed-term contract expiry rules

PKWT contracts ending at expiration require compensation payment equivalent to one month's salary per year of service, calculated proportionally. This applies regardless of natural expiry or early termination. If contracts extend beyond five years total or don't meet PKWT criteria, they automatically convert to PKWTT status.

Best practices for drafting and managing employment contracts

Local language requirement (Bahasa Indonesia)

Indonesian language contracts are mandatory for agreements involving Indonesian entities or citizens. Supreme Court Circular Letter No. 3 of 2023 clarifies that contracts won't be cancelled solely for lacking Indonesian translations, provided the absence isn't due to bad faith.

Best practice involves executing bilingual documents simultaneously with both Indonesian and foreign language versions having equal standing. When inconsistencies arise, parties should specify which language version prevails.

Getting contracts reviewed by labor lawyers

Professional legal review is essential given Indonesian employment law complexity and frequent regulatory updates. Employment lawyers can identify compliance gaps, liability risks, and optimization opportunities that non-specialists might miss. Regular legal review helps avoid costly disputes discovered too late.

Periodic review and renewal tips

Employment contracts require regular updates to reflect legal changes, business evolution, and operational needs. Annual contract reviews ensure continued compliance with updated regulations like minimum wage adjustments and benefit modifications.

For PKWT renewals, employers should evaluate whether continuing arrangements meet fixed-term criteria or require conversion to PKWTT status. Extension timing is critical as gaps between contracts can create legal complications.

Using HR Software for contract management

Digital contract management systems can streamline compliance monitoring, renewal tracking, and documentation maintenance. However, employers must ensure electronic signature validity under ITE Law requirements and maintain proper authentication and security measures.