On 5 October 2020, the Indonesian Government together with Indonesia’s parliament passed the so-called ‘Omnibus Law on Job Creation’ (Undang-Undang Cipta Kerja) (“Omnibus Law”), which according to the Indonesian Government is a solution to tackle overlapping and contradictory existing legislation that often causes confusion and delays to businesses in implementing their investment plans. The Omnibus Law is intended to serve as a ‘super-integrated’ regulation to harmonize inconsistencies between numerous existing regulations across the country, both at the central and regional levels and to cut the bureaucratic red tape in order to constantly enhance transparency in Indonesia.
During this unprecedented time in Indonesia, where regulations and policies are rapidly and dynamically changing from time to time, we realize there is a compelling need for our clients to have a strong local legal counsel in their corner to keep them updated and provide them with reliable analysis as well as risk assessment amid these far-reaching changes. For this reason, we are fully committed to continuously monitor the implementation of the Omnibus Law and provide a critical analysis of its possible impact on our clients’ investments in Indonesia.
As an umbrella law, the Omnibus Law introduces various amendments, revocations and supplements to reportedly approximately 80 existing laws, with specific details and guidelines to be further provided for in the relevant implementing regulations, except for sectoral laws and regulations regarding (i) non-bank financial institutions services (e.g., multi-finance companies, insurance companies), (ii) electronic information and transactions, (iii) capital markets, and (iv) security interests.
As the Omnibus Law specifically mandates that various implementing regulations be issued and various existing regulations be adjusted or amended within 3 months after its enactment date, we will continue to update these analysis series on any forthcoming amended laws and implementing regulations once they are issued and come into effect.
In this first series of our analysis, we would like to specifically highlight the provisions relating to (a) general investment, (b) manpower, and (v) building, construction and housing.
- General Investment
- In an effort to stimulate investment and offers more flexibilities, the Omnibus Law significantly amends the prevailing investment-related regulations, among others, by reducing the list of business sectors fully closed for investment from previously 20 to only 6 business sectors. Consequently, the following business sectors are now open for investment: production of alcoholic beverages, operation of land transportation terminals, provision of air navigation services and operation of monitoring stations for radio-frequency spectrum and satellite orbits. However, please note that the following 6 business sectors remain closed for investment: (i) cultivation and production of class 1 narcotics, (ii) casino and betting, (iii) fishery of any protected species listed in Appendix I to the Convention on International Trade in Endangered Species of Wild Fauna and Flora (CITES), (iv) utilization and collection of certain corals, (v) industry of chemical weapons and (vi) industry of chemical materials and substances that may harm the ozone layer.
- To further implement the above, the Central Government is reportedly planning to replace the existing ‘Negative List’ by a new list, called the ‘Positive List’, focusing on a broader range of business activities that are open for private investment. This change of attitude is expected to attract more investors to boost both economic and investment growth in Indonesia.
- The Omnibus Law also offers increased flexibility over manpower-related rules and regulations, leading to greater ease in hiring foreign workers, less rigid period for definite-term employment agreements, expanded scope of outsourcing work, and extension of overtime hours, all as explained below:
- Greater Ease in Hiring Foreign Workers
- The Omnibus Law provides greater convenience for companies in hiring foreign workers by exempting companies from the requirement to prepare a Foreign Worker Utilization Plan (Rencana Penggunaan Tenaga Kerja Asing, or RPTKA) in emergency situations, or in the case of vocational activities, technology-based start-up businesses, business visits, and research. Furthermore, it also removes the requirement to appoint Indonesian associates (co-workers/pendamping) for expatriate workers hired for certain positions. Although there should be more specific stipulations to be laid down in the implementing Government Regulation, e optimistically the implementing regulation will simplify the procedure and relax the requirements for hiring expatriates.
- New Concept of Definite-Term Employment
- The Omnibus Law has removed the strict requirement of 2years+1year validity of definite-term employment agreements, now allowing the work period to be mutually agreed upon between the employer and employee under the employment contract. However, it should be noted that the Omnibus Law expressly stipulates that a definite employment agreement is limited only to certain types of work that are temporary in nature, or otherwise the definite-term employment agreement will, by law, automatically convert into an indefinite-term employment agreement.
- Furthermore, to provide additional protection for employees under a definite-term agreement, the Omnibus Law mandates that the employer give compensation to the fixed-term employees at the end of their specified work period and consider the employee’s length of service in determining the amount of the compensation. However, the implementation of this new concept will be further regulated in the implementing Government Regulation.
- Expanded Scope of Outsourcing Work
- The previous limitation set by Law No. 13 of 2003 (“Labour Law”), which allowed companies to outsource only non-core supporting activities, is now omitted under the Omnibus Law. This omission leads to an interpretation that the scope of outsourcing work is now expanded without limitation. Like other new provisions of the Omnibus Law, the implementation of this new provision will be further regulated in the implementing Government Regulation. When this new provision is implemented, it is expected to give more cost efficient scheme to the employer’s side when hiring employees.
- Extended Overtime Hours
- Companies are now allowed to set overtime hours to 4 hours per day and 18 hours per week compared to the previous limit of 3 hours per day and 14 hours per week.
- Minimum Wages
- The Omnibus Law omits the general sectoral minimum wage provisions, and consequently the minimum wage provisions should now only refer to the provincial rules issued by the relevant Governor. At the same time, the Omnibus Law also authorizes Governors to stipulate the minimum wages at the regency/municipality level in their respective provinces, which in any event must be higher than the relevant provincial minimum wages.
- Employment Termination
- To balance the employer’s rights and those of the employee in the event of termination of employment relationship, the Omnibus Law introduces the following new rules and requirements:
- Employment relationship can now be terminated on the following grounds: (a) company’s spin-off; (b) Suspension of Debt Payment Obligation (Penundaan Kewajiban Pembayaran Utang, or PKPU); and (c) employee’s request due to employer’s action that causes a loss to the employee (e.g., violation of law, non-payment of wages, assignment of dangerous work not agreed under the employment agreement).
- A requirement for the employer to disclose the reasons for the employment termination to the relevant employee and/or the labour union if the termination is due to causes other than voluntary resignation, expiration of the definite-term employment agreement, retirement, or death.
- Severance Package Formula
- The Omnibus Law mandates that the severance package consist of: (a) severance pay (uang pesangon), and/or (b) long service pay (uang penghargaan masa kerja), and (c) compensation (if applicable). Compared to the previous regime, the Omnibus Law removes the compensation in the form of housing as well as medication and care as the components of the compensation in lieu of entitlements. Moreover, the Omnibus Law also removes the previously separate severance package formula for different reasons of employment termination, leading to an interpretation that the same severance package formula now applies to any employment termination, regardless of its grounds. However, the implementation of this new severance package formula will be further regulated in the implementing Government Regulation.
- The Omnibus Law has also omitted the previous double (2X) severance pay formula in the case of termination due to the company’s merger or consolidation or dissolution and termination of employment by reason of efficienc
- Omission of Sabbatical/Extended Leave for Employees
- The Labour Law previously set a mandatory sabbatical/extended leave (istirahat panjang) of at least 2 months on the seventh and eighth years (each for a 1-month period) for employees with a working period of 6 consecutive years at the same company, which entitlement will be repeated every 6-year working period. The Omnibus Law omits this mandatory extended leave, allowing this matter to be mutually agreed in the employment agreement, or regulated in the company regulation or collective labour agreement.
- Unpaid Wages in case of Employer’s Bankruptcy
- In case of bankruptcy, the Omnibus Law mandates that all unpaid wages take precedence over all claims of the company’s creditors, and any other outstanding rights be prioritized over those of all unsecured creditors.
- Additional Social Security Program upon Employment Termination
- In addition to the existing social security programs, the Omnibus Law introduces a new social security program for employment termination. This program, administered by Labour BPJS and the Central Government, provides training, cash (equivalent to 6 months’ salary, at maximum), and access to job vacancy information to participants paying the premium. This program will be further regulated in the implementing Government Regulation.
- Building, Construction, and Housing
- Building Construction Permit and Planning
- The Omnibus Law introduces a new building permit, called “Persetujuan Bangunan Gedung” (“PBG”). However, it remains to be seen whether the PBG will replace the current building permit (i.e. Izin Mendirikan Bangunan, or IMB) or whether it constitutes a new type of permit serving different purposes. At our interpretation, we would say it seems to be the former.
- The Omnibus Law omits numerous building administrative and technical requirements, including building design, building allocation and intensity requirements, to the effect that buildings now only need to comply with the building technical standards, which will be further provided for in the implementing Government Regulation. This seems to be a positive procedural simplification by the Omnibus Law, although further details of its implementation are still pending the issuance of a Government Regulation.
In contrast to the previous regulation, which required each building plan to be approved by the regional Government, the Omnibus Law offers more flexibility in that a building plan now only needs to be consulted with and verified by the relevant government authority (unless the specific building requires a separate testing and approval from the relevant government authority) and that such consultation and verification are not necessary if the building plan has been prepared according to the building design prototypes specified by the Central Government. Once implemented, this simplified procedure should significantly reduce the bureaucratic red tape in obtaining the governmental approval for the building plan.
- Construction and Housing
- Another significant change made by the Omnibus Law is the omission of a tender requirement in the procurement of a construction service provider for any construction financed by the state budget. Nevertheless, such tender requirement continues to apply if the construction project is concerned with public interest and if the contractor is an affiliated construction company.
- In addition, the Omnibus Law also omits the requirement to obtain a Location Permit, which in practice is often time-consuming, and replaces it with a Suitability Approval for Spatial Use Activities (Kesesuaian Kegiatan Pemanfaatan Ruang), which would serve as an “all-in-one” approval for land utilization including land acquisition for housing. However, further details of its implementation are still pending the issuance of a Government Regulation.
- The Omnibus Law has also relaxed the requirement to obtain the Construction Company Certificate (Sertifikat Badan Usaha, or “SBU”) by omitting various technical and administrative requirements, including the minimum contents of the SBU, and simplifying the SBU application procedure. Its implementation, however, is subject to further stipulations in the relevant implementing Government Regulation to be issued.
- In relation to the obligation imposed on developers to maintain and develop simple houses (rumah sederhana) when developing a housing area consisting of more than 15 luxury houses (rumah mewah) and/or middle-class houses (rumah menengah), the Omnibus Law now offers two options for developers to fulfil such obligation, namely by way of either (i) developing public flats (rumah susun umum) or (ii) allocating funds for the development of public housing, to be entrusted with and managed by a specific government institution established specifically for the purpose of accelerating public housing procurement. Further details of its implementation will be regulated in a separate Government Regulation, which may also set certain standards for the development of the housing and social facilities.
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