Indonesia: Top 5 Mistakes When Drafting Indonesian Employment Contract

We often hear employers tell us that there is nothing wrong with their employment contract templates or that one contract is as good as another. As a result, they sometimes see limited value in getting them reviewed by employment lawyer.

Unfortunately, however, we repeatedly see poorly drafted or outdated contracts which include costly mistakes that are often discovered too late, usually when the employers and/or the employees have entered a dispute process.

We have, therefore, highlighted below five basic and common mistakes, which employers might need to check when drafting Indonesian employment contract:

1. Not having any (written) employment contract

The very first mistake that we often found, unfortunately, is the absence of the (written) employment contract itself.

"We are a small business with only a couple of employees, we don't really need an employment contract, it will only scare them."—we hear this quite often. Strictly speaking, it is correct that an employer doesn't really need any written employment contract. In theory, so long as there is consent, made based on good faith, and fulfills the requirements of a contract under the Indonesian Civil Code, a contract, even a verbal one, is valid under the law, including an employment contract. And of course, it will scare the employees if the provided agreements are 20-pages long copying what's already written under the employment law.

However, we strongly advise any company to always have a written contract for their employees. And it does not need to be a 20-pages document spelling out every single detail of the employment relationship. However, a brief contract, which at minimum, addresses the key terms of the relationship, including the employee's benefits, the obligations and duties, and the termination condition, are enough. Employers will never know when they will hire an employee who turns out to be under-performance (or does not fulfill your initial expectation), and without any employment contract which outlines their job description, the employer will have to go through a lengthy termination process and pay the termination package to replace them.

2. Trying to decrease the employees' basic rights and protection

The truth is, employees are protected by Law No. 13 of 2003 on Manpower as amended by Law No. 11 of 2020 on Job Creation, including all its implementing regulations and local regulations, with or without a contract. Any employer cannot provide less than the minimum protections under the law, and the employees cannot be denied the rights they have under the labor law. For example, an employee cannot agree in an employment contract to work for less than the applicable minimum wage of the region, or a female employee cannot be given less than 3 (three) months of maternity leave or be denied the miscarriage leave.

3. Not providing different agreements for the permanent employee (PKWTT), fixed-term contract employees (PKWT), and employees on internship

Strictly speaking, the employment law provides different conditions, rules, and benefits for the employees in different types of employment. In general, under Indonesian employment law, there are three types of employment contracts, mainly: Indefinite Period Employment Agreement/Perjanjian Kerja Waktu Tidak Tertentu (PKWTT), Definite Period Employment Contract/Perjanjian Kerja Waktu Tertentu(PKWT), and Internship. The employment contract that an employer creates must recognize the employee's status and must comply with laws regarding how such employee is to be treated. For example, in PKWT, the employer also needs to be careful in regulating the employee's duties, since the law strictly regulates that the employees under PKWT (fixed-term contract employees) shall not carry on the duty which is permanent in nature.

4. Applying the same standard form of agreement for every employee

In an employment contract, the employer needs to consider the employee who specifically will sign the agreement, from the employee's position within the business, seniority, industry experience, duties, and contact with clients. These factors impact the types of clauses that should be included in an employment contract. Failing to establish an agreement with the employee who will sign it means that the employer may not adequately establish the employee's obligations and duties to the employer's business.

5. Establishing post-employment obligations that go way too far

Every employer has the right to protect its business by limiting what an employee can do in terms of taking their clients or working with their competitors. The employer's right to protect its business, however, must balance with the employee's right to work, especially in Indonesia, where the right to make a living is provided under the Constitution 1945. Extensive restraints over the employee's post-employment obligation will not be enforceable and the employer needs the non-compete clauses in the agreement to be drafted carefully to ensure they fall within what is legally permissible.

Originally published June 17, 2023. Updated Mar 2, 2024

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.