How to Termination of Employment Relationship in Indonesia

Employment matters in general, and the termination of employees in particular, can often be both complex and confusing. Indeed, for the unwary Employer, they can also have significant impact both in terms of time and cost. Accordingly, it is important for management personnel to have a certain amount of background knowledge on Indonesian employment issues prior to entering into (and certainly before terminating) any employment relationship.

How to Termination of Employment Relationship in Indonesia

This Memorandum details in brief some of the major issues and procedures relating to the termination of Indonesian employees in private companies.

The advice given in sections I and II below relate to the procedures for termination of employment for an indefinite period and the calculation of the costs of termination or resignation. Where an Employee is subject to a working agreement for a specified time (i.e. a fixed-term contract), different rules apply. These rules are discussed briefly in section III below. Brief advice is also given in section IV on certain ways in which an Employer's liability may be limited. Please note there are many strategies, tactics and practical procedures and problems which have to be considered in any employment termination or dismissal. It is not within the scope of this Makarim & Taira S. Memorandum to discuss these and, accordingly, with the exception of section IV below, we will only discuss the legal and regulatory provisions relating to this topic.

On 25 March 2003, Law No. 13 of 2003 on Manpower (the "Manpower Law") became fully effective. The Manpower Law contains specific provisions on termination of employment and amends, but does not replace, the principal existing regulation governing manpower termination, namely Minister of Manpower Decree No. Kep-150/Men/2000 dated 20 June 2000 on the Settlement of Working Relationship Severance and the Stipulation on Severance Monies, Service Monies and Compensation in Private Companies, (as amended, "Decree 150/2000"). The Manpower Law, which was subject to much lengthy and vociferous debate and negotiation, contains provisions favourable to Employers in respect of the controversial entitlements given in Decree 150/2000 upon voluntary resignation and dismissal for serious offences. However, the compromise given to Employees in exchange includes greater entitlements upon termination for longer-serving Employees.

The other main legislative change in the field of employment termination is the passing of Law No. 2 of 2004 on Industrial Relations Dispute Settlement ("Law No. 2"). Although Law No. 2 was approved and enacted on 14 January 2004, its implementation was delayed for a year and it has only been effective since 14 January 2006.

In this Memorandum, "Manpower Department" means the Ministry of Manpower and Transmigration, "PPHI" means the Industrial Relations Court.

It should also be noted that although Indonesia"s employment regulations apply to expatriates as well as to Indonesians, in practice the termination of expatriates may be dealt with differently by the authorities.

Finally, the precise inter-relationship between and among Decree 150/2000, the Manpower Law and its implementing regulations is still not entirely clear and it also perhaps true to say that there are still uncertainties in relation to manpower termination issues in general and the vexing problem of termination of employment for serious misconduct in particular.