Indonesian Employment Law Update: New Provision on Termination and Severance Payment

Indonesian Employment Law Update: New Provision on Termination and Severance Payment

In order to improve the quality of the workforce and competitiveness due to the dynamics of globalization and the rapid development of information technology, changes have occurred in the social and economic order, including the manpower sector. These changes pose a strategic challenge that ultimately demands the productivity and competitiveness of human resources. Hence, as one of the implementing regulations Law No. 11 Year 2020 on Job Creation, on 2 February 2021 the government issued Government Regulation Number 35 of 2021 on Work Agreement for a Specified Period of Time, Outsourcing, Working Hours, Working Relations and Rest Periods, and Termination (“GR 35/2021”). The issuance of these regulations amends several articles in Law no. 13 of 2003 on Manpower (“Manpower Law”), which regulates (i) Work Agreement for a Specified Period of Time (“Perjanjian Kerja Waktu TertentuPKWT”); (ii) Compensation; (iii) Outsourcing; (iv) Termination; and (v) Severance pay, period of Service Pay, and Replacement rights.

Related to the outsourcing provision, pursuant to Article 18 paragraph (1) GR 35/2021, the government requires outsourcing companies to recruit outsourced workers through one of two work contracts, namely a PKWT or an Indefinite Time Work Agreement (“Perjanjian Kerja Waktu Tidak Tertentu – PKWTT”). This is different from the previous regulation, as Article 66 of the Manpower Law stated that the work agreement for outsourcing might only use PKWT and shall be made in writing. Related to the implementation of PKWT, pursuant to Article 8 GR 35/2021, it regulates the maximum limit of 5 (five) years. In the event that the PKWT is about to end and the work has not been completed, an extension can still be made for a period agreed between the employer and the worker, provided that it does not exceed a period of 5 (five) years. It is also different from the previous regulation, as Article 59 Paragraph (4) of the Manpower Law states that the maximum term of the PKWT contract is three years, with details specified as two years of both the PKWT contract and the maximum addition.

Pursuant to Article 15 GR 35/2021, it is also required for employers to provide compensation money for workers or laborers with PKWT status that is given when the PKWT period ends. The amount of compensation money is regulated in Article 16, namely:

  1. PKWT workers who have worked for 12 (twelve) months continuously are given an amount of 1 (one) month’s wage;
  2. PKWT workers who have worked for 1 (one) month or more but less than 12 (twelve) months are given a proportionally calculated amount of: period of service/12 x 1 (one) month’s wage; and
  3. PKWT workers who have worked for more than 12 (twelve) months are given a proportionally calculated amount of: period of service / 12 x 1 (one) month’s wage.

Furthermore, Pursuant to Article 36 GR 35/2021 related to terminations, it is stated that a termination can occur due to a number of reasons, among them are (i) the company is undergoing a merger, consolidation, acquisition or separation of companies and the workers/laborers are not willing to continue the working relations, (ii) the company is doing efficiency measures due to experiencing a loss, (iii) the company closes due to sustained losses for two years, (iv) the company closes due to force majeure, (v) the company is in a state of postponement of debt payment obligations, and (vi) bankruptcy.

In the event of a termination, pursuant to Article 40 paragraph (1), it is emphasized that employers are obliged to pay severance pay and/or period of service pay, and compensation payment. However, there are special provisions related to payment of severance pay in certain circumstances. Article 41 paragraph (2) further stipulates that in the event that companies are conducting merger, consolidation, acquisition or separation of companies and the workers or laborers are not willing to continue the working relations, the worker or laborer is entitled to the following conditions:

  1. Severance pays of 0.5 times;
  2. Long Service Pay of one time; and
  3. Replacement Rights.

The above conditions will also apply for the following actions if; (i) terminations for reasons of efficiency due to experiencing losses, (ii) the company closes due to sustained losses for two years, (iii) the company closes due to force majeure, (iv) the company is in a state of postponement of debt payment obligations; and (v) bankruptcy. Other than the provisions mentioned above, workers or laborers are still entitled to receiving full payments. In the case of an employer conducting a termination but does not pay the severance pay, this can lead to a dispute over rights, which can lead to a lawsuit in an industrial relations court.

Therefore, with the issuance of GR 35/2021, it is expected that this regulation will be adaptable in responding to the challenges and dynamics of labor, especially on strategic issues regarding labor relations. Moreover, this regulation also aims to protect rights and welfare in order for the development of the manpower sector to create jobs as this regulation scopes both periods, which are at the time of work and at the end of the working relationship.

By: Nadindra Arina

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