Termination and Severance Pay in Indonesia: What Foreign Employers Need to Know

Foreign employers operating in Indonesia must navigate a labor landscape that places strong protections on employee rights, especially during termination. Dismissing an employee improperly — whether due to misunderstanding local norms, underestimating regulatory requirements, or applying home-country policies — can lead to legal disputes, delays, and significant financial exposure.

For multinational companies, especially those scaling teams or restructuring, understanding Indonesia’s termination procedures and severance rules is crucial for smooth exits and operational continuity.

Legal overview from an employer’s perspective

Termination practices in Indonesia are regulated by a legal framework that has been modernized in recent years through the Job Creation Law and its implementing regulation, Government Regulation No. 35/2021. While the reforms aimed to streamline employment processes and support business flexibility, Indonesia remains a country where employee termination is subject to defined legal grounds and compensation requirements. Foreign employers must be particularly attentive to these obligations, as failure to comply can result in labor disputes that are often settled in favor of the employee.

Grounds for termination under Indonesian law

The law permits termination only under specific circumstances. These include organizational restructuring or downsizing, serious or repeated employee misconduct, prolonged illness or disability that prevents work, and employee resignation, retirement, or death. Termination through mutual agreement is also allowed and often used as a risk-managed approach in complex situations.

For foreign employers, it is important to distinguish between what may be customary in global operations and what is enforceable locally. Terminating an employee without following due process, even in cases of apparent misconduct, can result in the employer being required to pay full severance entitlements.

Terminations based on performance must be backed by documented performance reviews and formal warnings, conducted over time.

Risks of unlawful dismissals in Indonesia

Not all terminations carried out by employers are considered lawful under Indonesian labor law. A dismissal becomes unlawful when it lacks valid legal grounds, bypasses procedural requirements, or violates the terms of the employment agreement. Even when the employer believes the rationale is sound, failure to follow the proper process, such as issuing formal warnings or documenting repeated misconduct, can result in the dismissal being challenged and overturned.

In cases where the termination is found to be unlawful, employers may face serious consequences. These include reinstatement orders, payment of back wages, or additional compensation beyond what would normally be owed under standard severance rules.

This risk is especially high for foreign employers unfamiliar with local norms or who apply global HR standards that are not fully aligned with Indonesian legal expectations. Care must be taken to adapt internal termination practices to Indonesian regulations and labor culture. By ensuring documentation, legal justification, and transparency, employers significantly reduce their exposure to disputes or claims of unfair dismissal.

Understanding severance and compensation obligations

Employers in Indonesia are required to provide statutory payments to terminated employees, unless the employee resigns voluntarily. The severance package typically consists of three main components: severance pay, long service pay, and compensation pay. These entitlements are determined by the employee’s length of service and the reason for termination.

The table below summarizes each element:

Type of Payment	Description	Calculation Basis
Severance Pay	Basic compensation for termination	1 to 9 months’ salary based on years of service
Long Service Pay	Additional reward for extended service	2 to 10 months’ salary for employees with 3+ years of service
Compensation Pay	Reimbursement for benefits and rights not used	Includes unused leave, relocation costs (if any), housing, and medical entitlements

Each component is calculated using the employee’s most recent monthly salary. For example, an employee with five years of service terminated due to company restructuring would typically be entitled to:

• 5 months’ salary in severance pay
• 2 months’ salary in long service pay
• Compensation for unused leave and other contractual benefits

Employers are not allowed to negotiate severance packages below these statutory minimums. Even mutual terminations must meet or exceed these amounts.

Calculating the cost of termination for foreign-led teams

Calculating severance is formulaic, but it can still be financially significant. For example, an employee with five years of continuous service who is terminated due to operational downsizing may be entitled to two times the base severance amount, a long service reward, and full compensation pay. If their monthly salary is 10 million rupiah, the final package may exceed 100 million rupiah.

Foreign employers must also consider that fixed-term (contract) workers are not exempt. If a contract is terminated early without cause, the employer must pay the wages that would have been earned for the remainder of the contract. Budgeting for these outcomes is essential in workforce planning and restructuring strategies.

Managing the termination process internally

Termination in Indonesia requires more than just final pay calculations. A structured, documented process is essential. Employers should conduct internal reviews to confirm the legal grounds for dismissal and ensure all relevant warnings or performance reviews have been administered. Termination should be communicated formally, ideally through a signed notice letter, and the employee should receive a final payslip detailing the breakdown of severance and entitlements.

Foreign companies are also expected to follow certain norms during employee offboarding. These include respectful communication, a clear explanation of the reasons for termination, and transparency in explaining the final payout. Though not mandated by law, such practices significantly reduce the likelihood of disputes and help maintain a good reputation among local staff and authorities.

Dealing with disputes and legal escalation

If a terminated employee rejects the employer’s decision, Indonesian labor law requires that both parties engage in bipartite negotiations as a first step. If this fails, the matter may escalate to mediation or arbitration through the local manpower office, or eventually to the Industrial Relations Court. Most termination disputes in Indonesia are resolved through settlements, but the process can still be time-consuming and disruptive.

To avoid reaching this stage, foreign employers must prioritize proper documentation from the start of employment. This includes clear employment contracts, performance tracking systems, and records of disciplinary action.

When disputes do arise, these documents serve as the employer’s main line of defense.

Minimizing termination risks in Indonesia

Terminating employees in Indonesia is a complex process that must be handled with legal awareness and cultural sensitivity. For foreign employers, the risks of getting it wrong are high, but so are the benefits of managing terminations correctly: reduced exposure, fewer disputes, and a stronger employer brand in the market.

With proper planning, transparent communication, and locally informed HR practices, terminations can be managed smoothly, even in a highly regulated environment like Indonesia.

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