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W&P Newsletter – Omnibus Implementing Regulations On Employment: How They Might Affect You

On 2 February 2021, the Government issued various employment-related Government Regulations to further implement the Omnibus Law. You might be wondering what key updates that are brought by these regulations, and how they might affect you. In this newsletter, we discuss selected key employment issues that we believe would be relevant for your consideration when contemplating to invest in Indonesia or to your existing operation.

Fixed-Term Contracts

While the general rule of fixed-term contracts remains unchanged under Government Regulation No. 35 of 2021[1] (“GR 35”), yet it now allows the parties to contractually agree on the length of the initial term and, if needed, the extension period and the number of contract extension thereafter, so long that the total contract term does not exceed 5 years. In comparison with the previous regime where the provision is more rigid and that a contract can be extended one time only, this new provision offers more flexibility. Thus, the businesses can now extend the contract employees without having to be concerned about the potentials of breaching the rules on contract term limitation. It appears the increased flexibility is a way of the government to respond to the concern raised by the businesses that they had to invest more time and cost in training new employees because they were not permitted by law to hire the same employees that they already trained.

Another significant change introduced by GR 35 is that it requires the employer to pay “compensation after termination”[2] of 1 month salary for a 12-month term contract (or its prorate calculation if the contract term is less or longer than 12 months), when the contract expires, or as the case maybe, in the event the contract is terminated early by the employer.

In the case of early termination, in addition to the “compensation after termination”, the employee is also entitled to compensation in the amount of equivalent to the remaining unused period of the contract – which obligation has already existed even before the Omnibus Law.

In one public seminar, an official explained that the introduction of this “compensation after termination” was to accommodate requests from various labour unions during the induction of the Omnibus Law in late 2020.

Grounds For Termination Of Permanent Employees And The Corresponding Payments

In Indonesia, termination of permanent employees must be for cause and that the employer must disclose the reason for termination to the relevant employee.

The Omnibus Law no longer refers to ‘change of ownership in the company’ (the wording which was used by the old employment law) and instead it now refers to ‘(company) acquisition’ as a ground for employment termination, as an attempt by the regulator to clarify that the context in the law refers to a change of control in the company. GR 35 also adds some additional grounds for employment termination which include spin-offs and the company’s suspension of payment.

In case of severance pay, there are some notable changes brought by GR 35 that we believe would be positive developments for business, including:

  • severance amount: in most cases, the severance amount ranges from 0.5 to 1 time of the calculation formula (except for termination due to long-term illness, pension, and death), compared to 1 to 2 times previously;
  • in case of employment termination due to a criminal conviction[3]: unlike the previous regime where there was no differentiation, GR 35 distinguishes the type of payment payable to the employees, where if the criminal act causes losses to the company, the company is only obliged to pay (i) right compensation money; as well as (ii) separation money, but it has no obligation to make service pay as recognition of the term of service of the employee;
  • right compensation money: housing allowance as well as medication and care allowance are now removed from components of the right compensation pay. This means that the mandatory components to calculate right compensation money are only of: (i) unused annual leave and (ii) repatriation cost;
  • breach of employment contract or collective agreement: GR 35 sets guidelines on types of payment (including the calculation formula) payable to employees whose employment is terminated due to a breach of the employment contract, the company’s regulation, or the collective employment contract. In summary, a lower amount of payment is payable for breaches that are considered serious and a higher amount is payable for minor breaches.

Scope of Outsourcing Work

Previously, companies could only outsource their non-core activities. This specific limitation is omitted by the Omnibus Law which suggests that the scope of outsourcing work can now include core activities. Assuming this interpretation is also shared by the regulators, the new regime would provide more flexibility, particularly, for startup companies as they are not required to immediately hire employees at the beginning of their business.

Furthermore, unlike in the previous regime where there could be situations that the outsourced workers could by law be considered as the employees of the company using the outsourcing services; in the Omnibus Law and its implementing regulation, similar provision is no longer found – as such it could be regarded as a positive update for the businesses.

Hiring Foreign Workers

Preparation of a Foreign Worker Utilization Plan (or locally known by its Indonesian abbreviations, ‘RPTKA’) remains mandatory when business hiring foreign workers. The RPTKA must be submitted through online system to the office of Ministry of Manpower for its approval – which approval is key for the foreign workers to further apply for Indonesian visa and stay permit. However, some of these administrative requirements are now exempted if the expatriates are directors/commissioners and at the same time a shareholder holding certain amount of shares in the company (Government Regulation No. 34 of 2021[4], to take effect as of 1 April 2021).

When hiring foreign workers, the companies must also provide Indonesian counterparts (locally known as ‘pendamping’) to work alongside the expatriates. The main objective is to allow transfers of knowledge from the foreign workers to their Indonesian counterparts. Companies can be exempted from this requirement if the expatriate workers are hired for certain positions, such as, director position, and the head of an Indonesian representative office. This would create less complications for companies that are hiring foreign workers for the exempted positions.

As an overall observation, it seems the government tries to relax several administrative requirements for foreign workers hiring as well as for foreign visitors – in order to provide more conducive environment for foreign investors.

If you have further inquiries in regard to this newsletter, please reach out to us at info@wplaws.com or any of our lawyers.

[1] This regulation is regarding fixed term employment agreement, outsourcing, work time and time off, and termination of employment.

[2] This is not a formal term used by the regulations but is merely for the purposes of distinguishing it from the other type of compensation.

[3] (i) the employee has been in detention due to his/her criminal case and thus, is absent from work, (ii) the court finds the employee guilty of the alleged crime, and (iii) the conviction is issued before the lapse of 6 months after the employee’s absence from work.

[4] This regulation is regarding utilization of foreign workers.