For Japanese companies considering expanding their operations to Indonesia, or those already operating there, how does the recruitment process work? Indonesia has unique employment customs and a complex labor law system. In particular, drafting employment contracts and handling employment disputes requires local expertise.

This article focuses on "Indonesian employment" and "employment contracts" and explains key points of Indonesian labor law that should be reviewed before hiring employees. From a law firm perspective, we've summarized the key points HR managers and business owners need to know. For those planning to hire employees locally in Indonesia, please refer to this information

1. Understanding Types of Employment Agreements
Employment agreements in Indonesia are generally divided into two types:

Fixed-Term Employment Agreement (PKWT)
Characteristics: An employment contract that specifies a specific time period and duties. This contract can be extended for a specific period between the company and the employee. However, based on Article 6 of Government Regulation of the Republic of Indonesia No. According to Government Regulation No. 35 of 2021 concerning Fixed-Term Employment Agreements, Outsourcing, Working Hours and Rest Periods, and Termination of Employment, the maximum term for a fixed-term employment contract is five years.

Advantages: Makes it easier for companies to respond to fluctuations in demand and allows for flexible workforce planning.
Note: This only applies to tasks specified by law, and there is no probationary period. If an employee is terminated before the contract expires, compensation must be paid.

Provisions regarding Fixed-Term Employment Agreements (PKWT) are regulated in Articles 4 to 14 of Government Regulation of the Republic of Indonesia Number 35 of 2021 concerning Fixed-Term Employment Agreements, Outsourcing, Working Hours and Rest Periods, and Termination of Employment.

Permanent Employment Agreement (PKWTT)
Characteristics: This is a general employment contract with no fixed term. This contract applies when hiring an employee as a permanent employee.
Advantages: This contract encourages long-term employee retention and contributes to organizational stability.
Note: Dismissal requires valid reasons and complicated procedures. Indiscriminate dismissal increases the risk of lawsuits from workers. For detailed information regarding the employment of Indonesian citizens, please refer to this link
Indefinite Term Employment Agreements (PKWTT) are regulated by Government Regulation of the Republic of Indonesia Number 35 of 2021 concerning Fixed Term Employment Agreements, Outsourcing, Working Hours and Rest Periods, and Termination of Employment.

2. Correct Knowledge of the Trial Period
Unlike the probationary period in Japan, Indonesian labor law only allows a probationary period of up to three months for Permanent Employment Contracts (PKWTT).
• Permanent employment contracts (PKWT) may not include a probationary period.
• Termination of employment during the probationary period is relatively easy, but written notice is required.
• Probationary periods exceeding three months are considered invalid, and the employee is considered a permanent employee from the start date.

3. Termination Rules
Indonesian labor law places great emphasis on worker protection. As a result, dismissals are strictly limited and, as a general rule, are not permitted without a valid reason.

Cases in which dismissal is permitted
• Adverse developments in the company's financial condition: bankruptcy, closure, etc.
• Serious misconduct by employees: embezzlement, disclosure of confidential company information, etc.
• Poor employee performance: where no improvement is seen after repeated warnings based on labor regulations.
• Resignation at the employee's request.
• Employee resignation for personal reasons

Key points in the dismissal procedure
• Notification to the Industrial Relations Dispute Settlement Agency: Documents explaining the grounds for dismissal, the affected employees, and details of compensation payments must be submitted.
• Notice of Dismissal: It is important to provide the employee with a formal notice of dismissal and obtain their signature as proof of acceptance.
• Severance Pay: Severance pay, as required by law, must be paid based on length of service and the reason for dismissal. The calculation method is complex, so consulting a professional is highly recommended.
For more information on dismissal, please refer to here

4. Salary and Benefits
The wage structure for workers in Indonesia is based on the regional minimum wage (UMP/UMK).

• Minimum Wage: The minimum wage, set annually by each state and prefecture, is the legally mandated minimum wage.
• Overtime: The maximum working hours are 40 hours per week. Any hours worked in excess of this limit must be paid overtime. The calculation method varies depending on the working hours and days.
• Holiday Allowance (THR): A bonus paid before religious holidays, such as Idul Fitri (Eid al-Fitr). Employees who have worked for at least one year should receive one month's salary.

5. Industrial Dispute Resolution
Issues related to employment agreements or work regulations can escalate into labor disputes.

• Efforts for amicable resolution: The first step is for the employer and employee to discuss the issue. It is important to maintain written records and prioritize mutual agreements.
• Industrial Relations Dispute Settlement Agency (PHI): Disputes are resolved in stages, starting with mediation by the Ministry of Manpower, followed by mediation, and then litigation in the labor court.

Conclusion

Working in Indonesia requires a thorough understanding of complex labor laws that differ significantly from those in Japan. In particular, drafting employment contracts and handling termination procedures carry significant risks without specialized knowledge.

• To prevent employment disputes before they occur, it is crucial to clearly define the terms when signing an employment contract and establish comprehensive employment regulations.
• In the event of a dismissal or dispute, it is advisable to avoid hasty judgments and instead consult with experts (lawyers, consultants) experienced in local laws and regulations.

Employment regulations are also governed by "Law Number 6 of 2023 of the Republic of Indonesia (Issuing Government Regulation Number 2 of 2022 concerning Job Creation) and Law Number 13 of 2003 of the Republic of Indonesia (Concerning Manpower)." The latter law is no longer in effect in its entirety; However, the provisions of Law Number 13 of 2003 remain applicable to matters not regulated in Law Number 6 of 2023.

Our law firm specializes in serving Japanese companies operating in Indonesia and handles various employment law questions. If you have any questions regarding employee recruitment or employment agreements, please contact us without hesitation.