Indonesia’s Omnibus Law: Significant Changes for Contract Workers

Posted by Written by Ayman Falak Medina Reading Time: 5 minutes
  • Indonesia’s GR 35/2021 stipulates significant changes to fixed-term employment contracts, outsourcing, hours of work, and the termination of employment procedure.
  • The regulation also obligates employers to pay compensation to employees if their fixed-term contracts are being extended.
  • The government hopes GR 35/2021 will provide greater legal protection for workers.

In our third article in the Omnibus Law series, we examine Government Regulation No. 35 of 2021 (GR 35/2021) on fixed-term employment contracts, outsourcing, hours of work, and the procedure for the termination of employment.

GR 35/2021 has been one of the most anticipated implementing regulations as the government hopes it will provide greater protection to workers. The regulation 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.

Indonesia’s-New-Fixed-Term-Contract-System

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 (for example, 10 years). Failing to adhere to these rules will result in the employee deemed to be on a permanent employment contract.

Compensation for FTC workers

Prior to the Omnibus Law, any party terminating the FTC was required to pay the other party compensation equivalent to the employee’s salary for the remaining time of the FTC. If an FTC expired naturally, then neither party would have to pay compensation.

This has changed with GR 35/2021, which now obligates the employer 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.

How is compensation calculated?

Compensation is calculated using the following formula:

Contract-period

When an FTC expires and is then extended, the compensation for the initial contract must be paid when the FTC expires.

For any ongoing FTCs, the compensation payment will be calculated from November 2, 2020, the date from which the Omnibus Law came into effect. Further, foreign workers are not entitled to the aforementioned compensation.

Registration

GR 35/2021 requires employers to register their FTC employees via an online system at least three working days from the date of signing the work contract. If this is not feasible, then the employer can undertake manual registration at the local employment office at least seven working days after the signing of the contract.

Working hours

Normal working hours in Indonesia is 40 hours per week, which can be divided into eight hours per day for five working days or seven hours per day for six working days.

GR 35/2021 recognizes working hours of less than 40 hours per week if the company has the following characteristics:

  • Undertake work that can be completed in less than 35 hours per week;
  • Are able to implement flexible working hours; and
  • Undertake work that can be completed outside a particular location.

Overtime

The regulation extends the overtime working hours to four hours per day and 18 hours per week, which does not apply to public holidays.

GR 35/2021 requires that collective labor agreements, company regulations, or employment agreements specifically state which roles are entitled to overtime pay. If this is not expressed, then the employee will automatically be entitled to receive this payment.

The regulation does include provisions on employees that are exempt from overtime pay eligibility. These are:

  • Employees that hold certain positions with responsibilities as thinkers, controllers, planners, executors, etc.;
  • Workers whose working hours cannot be capped, such as those in managerial roles; and
  • Workers that are paid high salaries.

Outsourcing

The new regulation makes it clear for employers to include the provisions of transfer of rights protection in the contract in the event of a change in an outsourcing company.

Termination of employment

GR35/2021 sets the procedures to unilaterally terminate employment.

The employer must first notify the employee in writing, setting out the reasons for termination, and the termination payments and entitlements at least 14 business days before the date of termination.

If the employee has no objection to the termination, then the employer can notify the Ministry of Manpower of this notice. If, however, the employee objects to the termination, they must provide, in writing, the reasons for this within seven business days from receiving the termination notice.

Any disagreements related to termination should be discussed between the relevant parties to agree to mutual separation. If this fails, then the matter can be brought to the local employment office for mediation, and if this fails, to the Industrial Relations Court.

Termination payments

Under Indonesian law, termination payments are comprised of severance payments, long service pay, and compensation of rights. There is another component called separation pay, but this must be stipulated in the employment agreement.

Compensation pay refers to compensation for any untaken annual leaves and other costs incurred such as for relocation.

Long service pay refers to a type of compensation given to employees based on the number of years they have worked at the company. An employee who has had their contract terminated may be eligible for the long service pay in addition to the severance pay, as illustrated in the following tables.

Severance-Payment-in-Indonesia

Service-Payment-in-Indonesia

Reg 35/2021 does provide changes to calculating termination pay for certain cases such as merger or consolidation of the company resulting in the termination of the employee, or closure of the company due to mounting losses, among others. In such cases, the severance pay is not as high as mentioned in the previous tables.

Termination-Payment-Formula-1

Our Omnibus Law series

Please view our other articles in our Omnibus Law series by clicking the links below:

Regulation No. 37 of 2021 (GR 37/2021) concerning the new unemployment benefit program

Regulation No. 5 of 2021 (GR 5/2021) concerning risk-based business licensing

Regulation No. 34 of 2021 (GR 34/2021), on the process of hiring foreign workers in Indonesia

Regulation No. 10 of 2021 (GR10/2021) on the positive investment list


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ASEAN Briefing is produced by Dezan Shira & Associates. The firm assists foreign investors throughout Asia and maintains offices throughout ASEAN, including in SingaporeHanoiHo Chi Minh City, and Da Nang in Vietnam, Munich, and Esen in Germany, Boston, and Salt Lake City in the United States, Milan, Conegliano, and Udine in Italy, in addition to Jakarta, and Batam in Indonesia. We also have partner firms in Malaysia, Bangladesh, the Philippines, and Thailand as well as our practices in China and India. Please contact us at asia@dezshira.com or visit our website at www.dezshira.com.

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