Indonesia Soewito Suhardiman Eddymurthy Kardono (SSEK) Law Firm

Employment Contract / Alternatives

• The Manpower Law recognizes two principal types of employment contracts: the Indefinite-Term/Permanent Employment Agreement (Perjanjian Kerja Waktu Tidak Tertentu or "PKWTT") and the Fixed-Term Employment Agreement (Perjanjian Kerja Waktu Tertentu or "PKWT"). The core distinction between these contract types lies in their duration, the nature of the employment, and the legal consequences upon termination.
• A PKWTT, is a permanent employment agreement not limited in duration or type of work. It may include a probationary period of up to three months and can be executed in either written or oral form. For a PKWTT, a formal written agreement is not mandatory; a simple letter of appointment is sufficient to establish the employment relationship.
• In contrast, a PKWT is a fixed-term employment agreement intended for work that is temporary in nature, either limited by time or tied to the completion of a project. The maximum duration of a PKWT is five years, including any p ermissible extensions

Probation Period

• Only an employee under a PKWTT contract may be placed on probation, with a maximum period of three months. This period cannot be extended or repeated. During the probationary period, the employer must pay a wage above the applicable minimum wage. The employer may terminate the employment relationship before the end of the three-month period without following the standard termination procedures prescribed by law, provided that at least 7 days' notice is given.
• A probationary period is valid only if it is specified in writing in the employment agreement at the time of hiring. If the employment agreement is made verbally, the terms of the probationary period must be communicated to the employee and included in the letter of appointment. If not stated, the probationary period is considered non-existent.
• An employee under a PKWT contract may not be placed on probation. If they are, the probationary period is considered null and void by law, and the time served will be counted toward the overall period of employment.

Fixed-term Employment

• A PKWT is intended for work that is limited either by a specified duration or by the completion of a particular task.
• Time-based work includes:
  • One-off or temporary work;
  • Work that can be completed within a short period; and
  • Seasonal work
• Project-based work includes:
  • Work related to a new product, new activity, or a product that is still in the experimental or trial stage; and
  • Work whose type, nature, or activities are not permanent.
• Under no circumstances may a PKWT be used for permanent roles.
• A time-based PKWT may be entered into for a maximum duration of five years, inclusive of any legally permitted extensions. Should the project extend beyond the original timeframe, the PKWT may be extended, provided that the total duration remains within the statutory limit.
• Furthermore, PKWTs must be executed in writing, using the Indonesian language and Latin script. If a contract is bilingual and disputes over interpretation arise, the Indonesian version takes precedence. A PKWT must include at least the following information:
  • Name, address and type of business of the company;
  • Name, gender, age and address of the employee;
  • Position or type of work;
  • Place of work;
  • Amount of salary and method of payment;
  • Employment conditions containing employer and employee's rights and obligations;
  • Commencement date and term of effectiveness of employment agreement;
  • Place and date the employment agreement was made; and
  • Signatures of the parties to the employment agreement.
• The employment relationship under a PKWT automatically terminates either at the end of the agreed term or upon completion of the designated task. Early termination and voluntary resignation are also permissible under a PKWT. Upon termination, the employer is legally obligated to provide compensation in accordance with the relevant labour regulations.

Working Time / Scheduling

• Indonesia's Manpower Law and GR 35/2021 set the standard maximum working hours at 40 hours per week. These hours may be structured in one of two ways:
  • Seven hours per day for six working days per week, or
  • Eight hours per day for five working days per week.
• However, certain sectors may be exempt from these limits, allowing for alternative working hour arrangements based on the specific operational needs of the industry. In practice, most private companies adopt the five-day workweek model, in alignment with the work schedules of civil servants and employees of state-owned enterprises.
• Regardless of the working hours arrangement, employees are entitled to a minimum rest period of 30 minutes after four consecutive hours of work. Employers are also required to provide reasonable accommodations for religious observances, including daily prayers for Muslim employees. In addition to daily rest periods, employees are entitled to one full day of weekly rest after six consecutive working days and are not obligated to work on official public holidays. However, employers may require employees to work on public holidays if the nature of the work demands continuous operations, or if there is a mutual agreement between the employer and the employee. In such cases, the employer is obligated to pay overtime wages.
• Employees are restricted to 40 hours of work per week; however, employees may perform overtime work for a maximum of four hours per day and eighteen hours per week and must be compensated in accordance with statutory overtime pay provisions. Overtime is payable at a rate of one and a half times the hourly wage for the first hour and twice the hourly wage for each subsequent hour. GR 35/2021 also specifies a separate formula for overtime pay for work done during rest days or on public holidays. Overtime pay is calculated based on the employee's monthly wage, with the hourly wage determined as one 173rd (1/173) of the monthly wage. It should be noted, however, that certain categories of employees are not entitled to receive overtime pay.

Minimum Salary

• Under Indonesian labour law, every worker is entitled to a standard of living that upholds human dignity. In pursuit of this fundamental right, the government mandates the establishment of a minimum wage.
• The minimum wage is defined as the lowest allowable monthly wage payable by employers, as determined by the Governor of each province. The Governor must set a provincial minimum wage and may additionally set a regency or municipal minimum wage. The calculation of the minimum wage must take into account key economic variables, including economic growth, inflation rates, and a specified index, as further regulated under Minister of Manpower Regulation Number 16 of 2024.

Statutory Levies

• Indonesian labour law does not recognize or regulate salary surcharges
• Under Article 21 of Law Number 7 of 1983 on Income Tax, as amended by Law Number 10 of 1994, Law Number 17 of 2000, Law Number 36 of 2008, Law No. 7 of 1991, Law No. 7 of 2021, and Government Regulation in Lieu of Law Number 2 of 2022 (collectively referred to as, "Income Tax Law"), employers are obliged to deduct income tax due from the employee's remuneration at the source and pass the sums withheld to the tax authorities. Income tax rates are progressive, as specified in Article 17 of the Income Tax Law.
• In addition to income tax, employers are also required to pay a percentage of the employee's monthly salary to social security contributions, which consist of two main programs: Employee Social Security ("BPJS Ketenagakerjaan") and Healthcare Insurance ("BPJS Kesehatan").
• BPJS Ketenagakerjaan provides financial protection to employees in cases of work accidents, old age, death, and retirement. The contributions are as follows:
  • Work accident protection: 0.24%–0.75% of the employee's monthly salary, paid by the employer, depending on the level of occupational risk.
  • Old-age protection: 3.7% of the employee's monthly salary paid by the employer, and 2% paid by the employee.
  • Death benefits: 0.3% of the employee's monthly salary, paid by the employer.
  • Pension plan: 2% of the employee's monthly salary paid by the employer and 1% of the monthly salary by the employee.
• BPJS Kesehatan contributions are 4% of the employee's monthly salary paid by the employer and 1% by the employee.

Originally published by The Law Firm Network.

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