Indonesian Law | Hukum Indonesia - Blog: Employment Termination Issues in Indonesia

Monday, August 29, 2016

Employment Termination Issues in Indonesia

A. LEGAL BASIS

  • Law no. 13 of 2003 on Manpower (the “Manpower Law”).
  • Law no. 2 of 2004 on Industrial Relationship Dispute Settlement (the “Labour Dispute Settlement Law”).
  • Termination-at-will is not recognised in Indonesia.
  • The concept of providing a fixed number of months notice of termination or pay in lieu of notice is not applicable in Indonesia.
  • The employers must first obtain approval from Industrial Relation Court (the “Labour Court”) if they are going to terminate their employee. On the other hand, there are no legal restrictions regarding termination by mutual consent.

B. GROUNDS FOR TERMINATION OF EMPLOYMENT

Manpower Law provides at least 12 reasons for the termination of employment, as follows:
  1. Employee's death (Art. 61 & 166 of Manpower Law); 
  2. Grave wrongdoings, i.e. fraud, stealing or embezzling the company’s money or goods, giving false or falsified testimony that causes damages to the company, etc (Art. 158 of Manpower Law). However, please note that the Indonesian Constitutional court has declared that termination of employment due to grave wrongdoings deemed to be unconstitutional, on the basis that the guilt of an employee should be decided upon by a court of law and not by the employer. Accordingly, it is recommended that any employer obtains legal advice prior to terminating an employee on grounds of grave wrongdoings; 
  3. Violation of company regulations, employment agreement and collective labour agreement (Art. 161 of Manpower Law). As required by the Manpower Law, an application to dismiss an employee based on Art. 161 of the Manpower Law should be made only after at least 3 consecutive warning letters have been given to the employee. Unless otherwise prescribed in the collective labour agreement, company regulations or the employment agreement, each warning letter is valid for no longer than 6 months. The warning letters are meant to discipline and give the employee a chance to correct their mistake/violation; 
  4. Voluntary resignation (Art. 162 of Manpower Law); 
  5. Change of company’s status, merger, consolidation and change of ownership (Art. 163 of Manpower Law); 
  6. Company’s closure for financial reasons or force majeure {Art. 164 (1) & (2) of Manpower Law}; 
  7. Efficiency / Redundancy measures (Art. 164 (3) of Manpower Law). Please note that the Indonesian Constitutional court has declared that the company must be closed down permanently before the termination can be conducted by reason of efficiency / redundancy measures; 
  8. Employer’s bankruptcy (Art. 165 of Manpower Law); 
  9. Employee’s absence for 5 (five) consecutive days without notice (Art. 168 of Manpower Law); 
  10. Employer’s inappropriate actions (Article 169 of Manpower Law); 
  11. Employee’s continuing illness for more than 12 months (Art. 153 & 172 of Manpower Law);
  12. Employee reaches retirement age (Art. 167 of Manpower Law).

C. PROCEDURES FOR TERMINATION

Under the Labour Dispute Settlement Law, general procedures for employee termination are as follows:

Bipartite Negotiations: Before dismissing an employee, the first important step is to hold "bipartite" negotiations between the employer and the employee. The bipartite negotiation must be conducted within 30 calendar days after the negotiation started. Any outcome of the bipartite negotiations should be recorded in Minutes of Meeting signed by both parties.

Mediation/Conciliation: If the bipartite negotiation process between the parties fails to reach any agreement, one or both parties can report their dispute to the local manpower office at regency level (Kabupaten/Kota):
  • The mediation/conciliation hearings should take place within 30 business days after receipt of the application.
  • The mediator/conciliator will issue a recommendation to settle the dispute to both parties. If both parties agree to the aforesaid recommendation, the parties then should sign a mutual agreement. The mutual agreement must then be registered at the Labour Court.
  • The recommendation is not binding. 
  • Any party who disagrees with the recommendation may submit the dispute to the Labour Court.

Labour Court Proceedings: The proceedings should not exceed 50 working days from the first hearing. Any lawsuit filed at the competent Labour Court must be accompanied by minutes of mediation or conciliation process. Supreme Court: Any party who disagrees with the Labour Court’s verdict may file a cassation appeal to the Supreme Court.

D. COMPONENTS OF TERMINATION ENTITLEMENTS PACKAGE

The guidelines to calculate severance pay, long service pay and compensation rights pay according to the Manpower Law are as follows:

Severance Pay - Art. 156 (2) of Manpower Law:

Amount of Years Working
 Amount of Severance Pay
Less than one year
 one month salary
One year or more, but less than two years
 two months salary
Two years or more, but less than three years
 three months salary
Three years of more, but less than four years
 four months salary
Four years or more, but less than five years
 five months salary
Five years or more, but less than six years
 six months salary
Six years or more, but less than seven years
 seven months salary
Seven years or more, but less than eight years
 eight months salary
More than eight years
 nine months salary

Long Service Pay - Art. 156 (3) of Manpower Law:

Amount of Years Working
 Amount of Long Service  Pay
Three years or more, but less than six years
 two months salary
Six years or more, but less than nine years
 three months salary
Nine years or more, but less than 12 years
 four months salary
12 years of more, but less than 15 years 
 five months salary
15 years or more, but less than 18 years
 six months salary
18 years or more, but less than 21 years
 seven months salary
21 years or more, but less than 24 years
 eight months salary
24 years or more
 ten months salary

Compensation Rights Pay - Art. 156 (4) of Manpower Law
Compensation for annual leave not yet taken or not yet expired; repatriation cost; compensation for housing, medical and hospitalisation (which is stipulated in the amount of 15% of severance pay and/or long service pay to which the employee is entitled).

Separation Pay
The amount of separation pay shall be determined and regulated in the employment agreement, company regulation or collective labour agreement.

E. EXAMPLES OF TERMINATION ENTITLEMENTS PACKAGE

Please note only permanent employee is entitled to the termination entitlements package. The following table shows termination entitlements package under the Manpower Law, however, we strongly recommend the employer seek legal advice before terminating an employee to avoid violation to the Manpower Law.

Ground for Termination                
Entitlements Package
Employee's death
(2 X Severance Pay) + Long Service Pay + Compensation Rights Pay (Art. 166 of Manpower Law)
Voluntary resignation
Compensation Rights Pay {Art. 162 (1) of Manpower Law}
Violation of company regulations, employment agreement and collective labour agreement
Severance Pay + Long Service Pay + Compensation Rights Pay {Art. 161 (3) of Manpower Law}
Criminal indictment against employee - termination may be conducted after 6 months detainment or termination may be conducted when the guilty verdict is passed before 6 months detainment
Long Service Pay + Compensation Rights Pay {Art. 160 (7) of Manpower Law}
Change of company’s status, merger, consolidation and change of ownership – the employee terminates
Severance Pay + Long Service Pay + Compensation Rights Pay {Art. 163 (1) of Manpower Law}
Change of company’s status, merger, consolidation and change of ownership – the employer terminates
(2 X Severance Pay) + Long Service Pay + Compensation Rights Pay {Art. 163 (2) of Manpower Law}
Efficiency/redundancy
(2 X Severance Pay) + Long Service Pay + Compensation Rights Pay {Art. 164 (3) of Manpower Law}
Employer closed due to continuous losses or force majeure
Severance Pay + Long Service Pay + Compensation Rights Pay {Art. 164 (1) of Manpower Law}
Employer’s bankruptcy
Severance Pay + Long Service Pay + Compensation Rights Pay (Art. 165 of Manpower Law)
Absent of employee for 5 days consecutively
Separation Pay + Compensation Rights Pay {Art. 168 (3) of Manpower Law}
Long-term illness of employee
(2 X Severance Pay) + (2 x Long Service Pay) + Compensation Rights Pay (Art. 172 of Manpower Law)
Employer’s actions {the Labour Court holds the employer guilty of violating Art. 169 (1) of Manpower Law}
(2 X Severance Pay) + Long Service Pay + Compensation Rights Pay {Art. 169 (2) of Manpower Law}
Employer’s actions {the Labour Court holds the employer not guilty of violating Art. 169 (1) of Manpower Law}
Compensation Rights Pay {Art. 169 (3) of Manpower Law}
Employee’s retirement (the employer includes the employee in a pension plan)
Compensation Rights Pay {Art. 167 (1) of Manpower Law}
Employee’s retirement (the employer does not include the employee in a pension plan)
(2 X Severance Pay) + Long Service Pay + Compensation Rights Pay {Art. 167 (5) of Manpower Law}

F. IMPORTANCE OF MITIGATING EXPOSURE FOR EMPLOYER

The Indonesian Manpower Law provides a clear mandatory minimum entitlements package for virtually every possible type of employment termination, therefore, it is important for the employer to mitigate their exposure to the termination liability.


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