Restrictive Covenants in Indonesia

Definition and Types of Restrictive Covenants

Restrictive covenants refer to any clause in an employment contract that may bind an individual to certain restrictions, making them unable to conduct certain actions during or after their employment period. Please note that Indonesian Law is silent on the types of restrictive covenants in employment agreements and contracts. In practice, restrictive covenants that maintain confidentiality are regularly implemented and applicable if both parties (employer and employee) agree to the terms. Indonesia generally follows a “freedom of contract” principle, where any clause is legal and binding as long as it is explicitly agreed to upon signing, provided that they are not contrary to the law.

Types of Restrictive Covenants

Non-compete clauses

Non-compete clauses are, implicitly, illegal under Indonesian Employment Law, as every employee is regarded as having the right to equal opportunity of employment to choose, obtain, or change jobs, and earn a decent income within or outside of Indonesia (Article 31 of Manpower Law). Therefore, non-compete clauses directly oppose this clause, as they restrict the freedom and mobility of an ex-employee to obtain employment opportunities upon after being terminated by their previous company.

Non-solicitation of customers

Non-solicitation of customers prohibits ex-employees from soliciting customers of their ex-employers after their termination. The definition of such behaviour and its duration should be defined clearly in the employment contract, as Indonesian Employment Law is silent on their implementation.

Non-solicitation of employees

Non-solicitation of employees follows the same terms defined above, but are usually used in more specific contexts, such as towards ex-employees at managerial positions that may attempt to “poach” talents from their previous workplace.

Enforcement of Restrictive Covenants – Process and Remedies

Because Indonesian Law is silent on restrictive covenants, any attempts to enforce restrictive covenants and obtain remedies due to any breaches are restricted to penalty clauses specified in the employment contract. Because Indonesia’s Employment Law and the IRC do not recognize breaches of restrictive covenants as rights that can be claimed by an employer, any attempted enforcement must be through filing a civil lawsuit through the Indonesian Civil Court for breach of contract. This is also in consideration that the restrictive covenants are usually regulated in a mutual agreement or termination acceptance letter upon the termination of employment, instead of in the employment contract, CR, or CLA.

Use and Limitations of Garden Leave

Garden leave refers to a practice where an employee is instructed to refrain from working while still earning their salary, usually given upon the employee’s resignation or termination. Indonesian Manpower Law is silent on garden leave provisions, and such matters must be clearly stated in the employment contract. In practice, preceding any garden leave procedure, the employer submits a Notice of Termination to the employee, at least, 14 days before the effective termination date (or 7 days if the employee is still in probation) (Article 37 of GR 35/2021). Due to the above consideration, any garden leaves an employee may enjoy should be preceded by a Notice of Termination.