Employment Contracts in Indonesia: Fixed-Term Vs Permanent

Posted by Written by Ayman Falak Medina Reading Time: 2 minutes

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Indonesia’s workforce of over 140 million makes it an attractive destination for foreign employers, yet hiring in compliance with local regulations requires careful attention to contract structure.

The country’s labor framework — primarily set out in the Omnibus Law and Government Regulation 35 of 2021 — recognizes two types of employment agreements: fixed-term (PKWT) and permanent (PKWTT). The distinction determines how long employees may be hired, what benefits they receive, and how contracts may end.

Employers must draft written, bilingual agreements that specify job scope, duration, and termination rights. These documents form the foundation of lawful employment in Indonesia and are essential for avoiding disputes. Misclassification between fixed-term and permanent work can lead to back pay, administrative penalties, or the conversion of contracts to permanent status.

For foreign companies, getting this classification right from the outset is critical to maintaining flexibility while staying compliant.

Fixed-term contracts for time-bound roles

A fixed-term contract, or PKWT, applies when the nature of the work is temporary or project-based. It suits companies expanding into Indonesia or running projects with clear completion dates. Each contract must state its start and end date and may run for a maximum of five years, including extensions.

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Because PKWT workers are engaged for limited periods, employers are not required to pay severance upon termination. Instead, they must provide compensation when the contract concludes, calculated as a portion of total wages earned. The contract must be written in Indonesian and registered with the relevant labor authority to be valid.

When correctly implemented, this structure allows foreign employers to scale operations with predictable costs and without long-term liabilities.

Permanent contracts for ongoing employment

Permanent contracts, or PKWTT, are designed for continuous roles forming part of the company’s core operations. They have no fixed end date and ensure employee continuity within the business. Employers may include a probationary period of up to three months before the employee gains full permanent status.

Once employment ends, workers are entitled to severance and long-service pay based on tenure, generally between one and nine months of salary under Government Regulation 35 of 2021. All permanent employees must also be registered in BPJS Ketenagakerjaan and BPJS Kesehatan for mandatory social security and health coverage. This framework promotes stability and retention but requires consistent budget planning and long-term compliance management.

Structuring employment contracts for compliance and flexibility

Choosing the right employment framework in Indonesia requires balancing flexibility and long-term stability. Fixed-term (PKWT) contracts suit project-based or time-bound roles, while permanent (PKWTT) contracts are used for core functions that support ongoing operations. Misclassifying a permanent role as temporary can result in regulatory penalties and forced reclassification, whereas excessive reliance on PKWTT can increase severance obligations. Employers should therefore match each contract type to the job’s duration, scope, and strategic importance.

Compliance ultimately depends on accurate documentation and procedural discipline. Many disputes arise when employers overlook Indonesian-language requirements, fail to register contracts, or extend PKWT agreements beyond the five-year limit. These issues are avoidable through regular HR reviews, standardized templates, and timely legal guidance.

A balanced workforce model combining PKWT for project teams and PKWTT for long-term staff ensures operational agility and compliance. Clear job descriptions, renewal terms, and periodic contract audits maintain a predictable and legally sound employment structure.

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