Company Practices to Follow When Terminating an Employee in Indonesia

In Indonesia, terminating an employee is subject to strict regulations and guidelines outlined in the Labor Law, which dictates the acceptable grounds for employee termination and the payment of severance. We discuss key aspects of the Labor Law as it applies to terminating employment contracts and list some of the steps companies can take to minimize the risk of labor disputes due to unfair termination practices.

In principle, Indonesia’s Labor Law discourages the termination of employees and encourages employers, labor unions, and the government required to make every effort to avoid it.

Indonesia’s Government Regulation in Lieu of Law No. 2 Year 2022 made major aimed at simplifying the procedure for terminating an employee. Further, the law sets out different amounts of compensation available to employees depending on their specific situation when leaving the company.

Grounds for terminating an employee in Indonesia

The general grounds for the termination of an employment contract related to the employee include:

• Violation of the employment agreement (after being given three written warnings by the employer);
• Absent through sickness of more than 12 months;
• Absent from work for more than five days without a valid reason;
• Misconduct of the employee (intimidation, destruction of office property, among many others);
• The employee has reached their retirement age; or
• The employee has been convicted of a crime.

The employee can be terminated due to circumstance related to the company, such as:

• Business insolvency;
• Merger or acquisitions;
• Downsizing due to continued financial loss for the business; or
• Bankruptcy.

Unfair grounds for termination

Under Indonesia’s Labor Law, an employer is prohibited from dismissing an employee under the following circumstances:

1. The employee is unable to work due to an illness based on a diagnosis from a doctor for less than 12 months;
2. The employee marries;
3. The employee performs religious rites that are based on their religion;
4. The employee has a marital or blood relationship with another employee in the same company, unless it is specifically regulated in the employment contract;
5. The employee is prevented from working because they are undertaking State duties;
6. The employee reports the employer to the authorities because of a criminal act committed by the employer;
7. Any type of discrimination;
8. The employee is permanently disabled due to a work accident;
9. A female employee is pregnant, miscarries, gives birth, or is nursing a baby; or
10. The employee joins a labor union.

The dismissal process

When terminating an employee in Indonesia, the employer must notify the employee in writing the reasons for the termination, and the termination payments and entitlements at least 14 days before the date of termination.

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If the employee agrees to the terms of the termination of employment, then the employer can notify the Ministry of Manpower. However, if the employee disagrees, the employee must write the reasons for their objection within seven days from receiving their termination notice.

Both parties should aim to agree to a mutual separation. If disagreements persist, then the relevant parties can bring the matter to the local Ministry of Manpower office for mediation. If this fails, the case can be brought before the Industrial Relations Court who will make the final decision.

Termination payments

Termination payments in Indonesia are comprised of three components:

1. Severance payment;
2. Long service pay; and
3. Compensation of rights.

There is another component called separation pay but this is not mandatory and must be stipulated in the employment contract to be eligible.

Long service pay refers to a type of compensation given to employees based on the number of years they have worked at the company. Compensation pay refers to compensation for any untaken annual leaves and other costs incurred such as for relocation.

As such, it is therefore possible for an employee who has had their contract terminated to receive long service pay in addition to the severance payment.

New termination payment calculation

However, Government Regulation 35 of 2021 (GR 35/2021) has changed the method of calculating termination payments and now it is possible for the employee to not receive a severance pay as high as the previous tables have shown.

These specific circumstances are highlighted in the following table.

Severance payment for fixed term contract workers

Under implementing regulation 35 of 2021 (GR35/2021), the government recognizes 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.

GR 35/2021 states that 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 (5 years maximum in total). Failing to adhere to these rules will result in the employee deemed to be on a permanent employment contract.

Under GR 35/2021, the employer is now 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.

It 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.

Steps companies can take to ensure compliance

Companies can implement the below measures to ensure compliance with Indonesia’s Labor Law on the termination of employment contracts and minimize the risk of legal disputes arising from unfair termination practices:

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