Indonesia has two major advantages that few countries can boast: it has the largest population in Southeast Asia and a population of citizens who will remain youthful well into the future.
Indonesia’s economy also depends on foreign investment to achieve its objectives for growth. That is why businesses are interested in expanding into this country.
But when it comes to expansion, sooner or later you will need to hire local employees. Hiring in Indonesia, whether locals or expatriates, comes with certain regulations that every business is required to comply with.
In the article, we share everything you need to know to compliantly hire employees in Indonesia and start operating in the country.
Requirements to hire employees in Indonesia
Employment and payroll law and compliance can be complicated in many Asian countries. Indonesia has surprisingly well-defined employment and legal basis, but there are still many differences from other countries to understand.
Laws are well defined, with one main law covering most areas of employment. But there are several different applications at both country and province level. The law also offers significant rights and benefits to all contracted employees, and it is important to understand this.
The requirement for all documentation to be in Bahasa Indonesian language is understandable and expected, but nevertheless often a complication for foreign companies.
To hire employees in Indonesia, a local company is needed. A contract must be signed between this company and any local employee, for either a fixed-term or open-ended term. Payroll and taxation are then handled by the company and remitted directly to the government.
Overview of options to hire employees in Indonesia
Setting up a new company in Indonesia is expensive and time-consuming for an overseas company. Two types of company can be set up:
- Establishing a foreign investment company requires a significant investment plan, and a minimum paid-up capital of 2.5 billion rupiahs. It can take several months to set up as well.
- A Representative Office is faster and cheaper to set up but is limited in scope. It cannot carry out commercial activities, issue invoices, or sign contracts.
An alternative to setting up a local company, either a foreign investment company or a representative office, is to use a local Professional Employment Organization (PEO) on your behalf. Such a company will hire employees and manage contracts, benefits, and payroll. This can be used either as an alternative to setting up a company or alongside one.
However, a company takes on employees, there is a lot to understand about the Indonesian market. This guide will help companies understand Indonesian employment law and requirements, how payroll operates, and how best to handle their Indonesian recruitment and employment.
Hiring & employment practice in Indonesia
Employment law in Indonesia
Employment in Indonesia is regulated mainly by one comprehensive law – Law No. 13 of 2003 on Manpower, also known as the Labour Law.
In general, local and foreign workers are treated the same under Labour Law. But there are some additional laws with relevance for foreign workers, including:
- Ministry of Manpower and Transmigration Regulation No. 16 of 2015 regulates sectors in which foreign employees can work.
- Ministry of Manpower and Transmigration Decision No. 40 of 2012 regulates positions that foreign workers can take.
Employees can be hired either on one of two types of a contract under Labour Law. Both of these carry similar treatment and rights for employees.
- Definite term employees (Pekerja Waktu Tertentu). Essentially a contract worker hired for a defined term project or seasonal work. The maximum duration for such a contract is two years (with a possible one-year extension).
- Indefinite term employee (Pekerja Waktu Tidak Tertentu). Permanent or open-ended contract for work.
Contracts must be written in the Indonesian language using the Latin alphabet. If a foreign language version is used as well, the Indonesia version is the legally binding version.
A contract must include:
- Employee details
- Position, type of work, place of work, salary
- Date of commencement and contract period.
Full-time work is defined as seven hours per day, 40 hours per week, and six days per week. Many employees though work eight hours per day for five days, and this can be agreed with employees.
Indonesian law does not recognize part-time work, and such employees would receive the same treatment and benefits as full-time employees.
Overtime should be paid for hours above this, at an hourly rate of 1/173 of the monthly wage. Overtime can only be performed for a maximum period of three hours per day and 14 hours per week. Management or executive staff can be exempted from overtime (but are paid a higher salary).
Probationary period, notice period, and severance pay
There is no allowance under the Labour Law for a probationary period. But with relaxed regulations regarding notice and severance, a contract can easily be terminated early.
Labor law in Indonesia does not define a notice period for employers to terminate a contract. In practice, though, many employers will offer a 30 day notice period to terminate a contract.
Terminations (where not for misconduct or employee resignation) require approval from the Industrial Relations Court.
Severance pay must be given to dismissed employees. The following rates apply if the termination is due to the fault of the employee. If the termination is for an employer-related reason, then double the standard severance pay (plus normal rates for others) should be paid:
- Standard severance pay. One month’s salary per year of service, up to 9 months in total.
- Appreciation pay. 2 months salary for the first 3 years of employment, plus 1-month salary every three years after. Up to a maximum of 10 months salary.
Additional compensation must be paid to cover unused holidays, relocation expenses, and a medical / housing allowance of 15% of the total severance and appreciation pay.
Employees are entitled to a maximum of 12 vacation days per year. This is accumulated as one day vacation for every 23 days worked. Employees also have to take one period of the holiday (out of this allowance) as six successive days.
Employees do not have to work on defined public holidays. If required, the Labour Law states that the overtime rate should be paid.
As most holidays are religious and linked to the lunar calendar, the exact date each year varies. The Minister of Manpower, together with the Minister for Religious Affairs, issue a joint statement each year with the defined dates. In 2020, there are 16 public holidays. In addition to this, the government defines an additional 8 days of leave around these, known as common leave (Cuti bersama). These are only obligatory for government workers, but most private companies offer them as well.
Employees are entitled to generous paid sick leave. This is paid by the employer and cannot be in any part recovered from the government.
Sick leave is fully paid for up to four months and is defined in the Labour Law as follow:
- First 4 months of leave: 100% of wages
- Second 4 months of leave: 75% of wages
- Third 4 months of leave: 50% of wages
- Additional months: 25% of wages
Maternity and family leave
Maternity leave for mothers is three months, on full salary. This should be taken half before birth and half after birth.
Limited paternity leave is also offered. Fathers are entitled to two days’ leave on full pay.
The Labour Law also defines specific allowances for fully paid family leave for certain events. Parents are entitled to 2 days’ leave for the baptism, circumcision, or marriage of a child. 2 days leave should also be offered in the event of a child’s death.
There is no national minimum wage in Indonesia. Instead, each of the 33 provinces set its own minimum wage. In 2020, Jakarta has the highest minimum wage, at 4.2 million rupiahs per month. Central Java has the lowest at 1.74 million rupiahs.
There are also some sector-based minimum wages that may be higher than the provincial minimum wage. These are set by business groups within each province or more locally.
Unusually, the minimum wage automatically increases each year using a cost of living formula defined by the government. This was 8.5% for the year 2020. Provinces may also alter their own rates of course.
Religious holiday allowance (Tunjangan Hari Raya)
Companies in Indonesia must pay a bonus once a year for all employees. This is essentially the same as the “13-month salary” system used in several other countries. But it is known as the Religious Holiday Allowance (Tunjangan Hari Raya, or THR) as it originated from the aim of helping people afford the celebrations of their religious festivals.
The THR payment is the equivalent of one month’s salary. All employees who have worked for the company for more than one month are eligible on both definite and indefinite terms. If the employee has worked less than a year, the payment is offered pro-rata for the number of months served.
It should be paid prior to the main religious festival of the employee. The majority religion in Indonesia is Muslim, and the allowance is paid before Idul Fitri (end of Ramadan). For Christians and Catholics, the festival is Christmas. Hindus, Buddhists, and Confucian festivals are also respected, but in practice, many companies pay it before either the Muslim or Christian dates.
Payroll, deductions, and taxes in Indonesia
There are two main mandatory social security related to deductions in Indonesia:
- Health-related social security, or BPJS Kesehatan. (BJPS stands for badan penyelenggara jaminan sosial) This gives employees, and their families, access to the state health system and hospital care.
- Workers social security, or BPJS Ketenagakerjaan. This provides cover includes work accidents, old-age pension, and death cover.
These two payments, along with income tax, should be deducted from the salary paid by the employer.
Mandatory deductions: Health-related social security (BPJS Kesehatan)
The total contribution for heath related social security is 5% of the employee’s monthly salary, with a salary limit of 12 million rupiahs.
This is split between employer and employee, with the employee contribution being withheld from salary and the employer contribution paid in addition. This differs for public and private companies as follows:
- Private sector companies. The employer pays 4% and the employee 1%.
- Public/state companies. The employer pays 3% and the employee 2%.
Mandatory deductions: Workers social security (BPJS Ketenagakerjaan)
The total employee contribution to workers’ social security is 3% of the employee’s monthly salary, with a salary limit of 8.5 million rupiahs (2019 level). This should be deducted from salary.
Employer contributions are more complicated and include:
- 2% contribution to the pension plan
- 7% contribution to old-age benefits
- 3% contribution for life insurance
- An accident insurance premium of up to 1.74% (varies)
Personal income tax
All employees, both local and foreign, pay the same income tax in Indonesia. This should be deducted by the employer, with further information or taxation handled by additional self-assessment by the employee.
Taxation is on a progressive scale, with higher income bands subject to higher tax rates.
For the year 2020, tax rates are as follows:
|Annual Income (band), rupiah||Tax rate, %|
|Under 50 million||5|
|50 to 250 million||15|
|250 to 500 million||25|
|Over 500 million||30|
Indonesia considers a whole family as one unit for taxation. The head of the household should declare the income of the dependent spouse and children in a tax return.
Deductions also apply for income tax. An individual taxpayer has a deduction of 54 million rupiah. This increases by 4.5 million rupiah for each dependent spouse and child.
How to hire employees in Indonesia without a local entity
For a large and diverse country, employment and payroll law in Indonesia is surprisingly consistent and well defined. There are several areas through where provinces diverge, such as minimum wage.
There are, of course, also many differences from laws and procedures in western countries. Companies, in particular, need to be very careful of the definition of contracts and be mindful of the fact that the same benefits apply to all workers, regardless of contract type. There is also little recognition of part-time or contract work.
Benefit payments are high. As is entitlement to payments at the termination of contracts. This reflects the background of employment in the country, which has traditionally been more long term and stable.
Understanding the regulations and procedures for contracts, payroll, and compliance can be confusing. Especially as much is handled in the local language. Instead of handling this themselves, companies can use a PEO (Professional Employer Organization) solution in Indonesia. Using this model, the company contracts with a qualified specialist company to act as the Employer of Record (EOR) for their Indonesian employees. This company will then handle the recruitment, contract management, payroll management, and required government payments and reporting for the company.
Some of the advantages of using a PEO in Indonesia include:
- No need to set up a legal entity/company in Indonesia. Setting up such a company is an expensive and committed task, and it may not be appropriate for a small company or one just starting to research the market or trade-in Indonesia.
- The company maintains day to day control of the employee.
- PEO will handle all paperwork, compliance, payroll administration, and government payments and filings.
- PEO can assist with the understanding of regional differences. Indonesia is a large country and different provinces have different costs, as well as different markets and areas of expertise for staff or partners.
- PEO provider has detailed knowledge of employment and payroll law and procedures and remains up to date with changes.
- Many laws and regulations are defined in the local language (and even different regional languages). The binding contract for employment must also be in Bahasa Indonesian. A local company can ensure accuracy with this.
- Many PEO providers can also provide employment and payroll services in other countries, helping companies explore or expand in other markets.