Termination of Employment Contracts in Indonesia

Grounds for Termination

Termination of Employment: The Manpower Law provides that an Employment Contract will terminate upon the occurrence of any of the following events:

• the worker passes away;
• the employment contract term expires;
• the agreed work has been completed;
• a final and binding court decision and/or decision from an industrial relations dispute settlement institution is issued; or
• the occurrence of certain conditions specified in the Employment Contract, CR, or CLA.

(Article 61 paragraph 1 of the Manpower Law).

The above grounds apply to both PKWT and PKWT employees.

Please note that Manpower Law provides a specific allowed ground for terminating PKWTT employees, as follows:

• corporate actions (e.g., mergers, consolidations, acquisitions, or spin-offs) where the employee refuses to continue employment;
• efficiency measures due to financial losses, whether or not accompanied by business closure;
• continuous losses for two consecutive years;
• force majeure;
• suspension of debt payment obligations;
• bankruptcy;
• termination initiated by the employee due to employer’s conduct;
• decision by an industrial relations dispute settlement institution;
• employee resignation;
• employee’s absence from work for five consecutive days despite being duly summoned twice in writing;
• violations of the Employment Contract, CR, or CLA;
• detention for six months or more due to alleged criminal activity;
• prolonged illness or disability due to a workplace accident preventing the employee from working after the stipulated period;
• retirement; and
• death of the employee.

(Article 154A Manpower Law)

Although these termination grounds are legally permitted, employers are still required to exhaust all efforts to avoid termination. Any actions for termination must first be informed by the employer to the employee, or with their labour union if the employee is a union member (Article 151 of the Manpower Law).

Prohibited Grounds for Termination of Employment: Under Article 153 paragraph 1 of the Manpower Law, employers cannot terminate an employment on the following grounds:

• the employee is unable to work due to illness, as certified by a doctor, for a period not exceeding 12 consecutive months;
• the employee is unable to work due to fulfilling state obligations in accordance with statutory provisions;
• the employee is performing religious duties;
• marriage;
• pregnancy, childbirth, miscarriage, or breastfeeding;
• having family or marital ties with another employee within the same company;
• establishing, becoming a member, or serving as an official of a labour union, or engaging in union activities outside working hours, or during working hours with the employer’s consent or as regulated under the Employment Contract, CR, or CLA;
• filing a criminal complaint against the employer;
• differences in ideology, religion, political orientation, ethnicity, skin colour, social group, gender, physical condition, or marital status; and
• permanent disability, illness due to a workplace accident, or occupational disease with an undetermined recovery period according to a medical certificate.

Any termination carried out on the above grounds is null and void by law, and the employer must reemploy the employee (Article 153 paragraph 2 of the Manpower Law).

Collective Dismissals

In principle, there is no distinction between mass termination and individual termination in Indonesia. But in practice, mass termination occurs due to the employer’s business circumstances, including:

• merger, consolidation, acquisition, or spin-off by the employer (where employees do not agree to continue their employment), or if the employer is unwilling to retain the employees;
• efficiency measures implemented by the company, whether or not they are followed by business closure due to losses or loss prevention;
• the employer permanently closes its business due to continuous losses over a two-year period;
• the employer permanently closes its business due to force majeure;
• the employer is under a Suspension of Payment status; and
• the employer is declared bankrupt.

(Article 36 points a to f of Government Regulation No. 35 of 2021).

The provisions and rights associated with termination under Indonesian Employment Law must be abided to per individual employee terminated, and are not reduced by the business circumstances above.

Is Severance Pay Required?

Severance pay applies only to PKWTT employee. If the employer terminates PKWTT, they are required to provide the employee with severance pay, long service pay, and other applicable compensation. The breakdown of the severance package is as follows:

(“Severance Package”)

(Article 40 of GR 35/2021).

Employees under a PKWT are not entitled to Severance Package above, but are eligible to receive compensation upon the expiration of the PKWT term. Additionally, if either party terminates the PKWT before its expiry, the terminating party must give indemnity fees to the other party in an amount equivalent to the employee’s wages for the remaining period of the agreement (Article 61A and Article 62 of the Manpower Law).

Separation Agreements

Is a Separation Agreement required or considered best practice?

The short answer is yes. If an employer terminates an employment agreement, the employer must issue a written notice of termination to the employee no later than 14 days before the effective termination date (or 7 days if the employee is still under probation). The notice must include the reason for termination, as well as details of compensation and other entitlements arising from the termination. Once the employee receives the notice and does not object to the termination, the employer must report the termination to the Manpower Office (Article 37 dan 38 of GR 35/2021) (“Notice of Termination”).

In practice, if the employee accepts the termination, this is usually formalized in a Termination Acceptance Letter and/or Mutual Agreement between the employer and the employee.  Subsequently, the letter or agreement must be registered with the relevant Manpower Office. If the employee rejects the Notice of Termination, the employee must submit a written rejection with reasons no later than 7 working days after receiving the notice. In case of disagreement, the dispute shall first be resolved through the industrial relations dispute mechanism.

However, the employer may terminate the employee for urgent misconduct as stipulated in the employment contract, CR, or CLA, without prior notice or the need to execute a mutual agreement. Such urgent misconduct may include, among others, cases where the employee:

• commits fraud, theft, or embezzlement of company assets;
• provides false information that causes loss to the company;
• is intoxicated, consumes, or distributes narcotics, psychotropics, or addictive substances at the workplace;
• commits immoral acts or gambling in the workplace;
• assaults, mistreats, threatens, or intimidates co-workers or the employer;
• incites co-workers or the employer to commit unlawful acts;
• intentionally or negligently damages or endangers company property, resulting in loss;
• intentionally or negligently endangers co-workers or the employer in the workplace;
• discloses company secrets unless for state purposes; or
• commits any act in the workplace subject to imprisonment of 5 years or more.

(Article 52 paragraph 2 of GR 35/2021).

These examples generally constitute acts with potential criminal implications. However, the list is illustrative, and employers retain the discretion to determine other forms of urgent misconduct under their internal policies.

What are the standard provisions of a Separation Agreement?

In issuing the Notice of Termination, the minimum contents are as follows:

• The notice must be made in writing by the employer and delivered to the employee and/or labour union no later than 14 working days before the intended effective termination date;
• It must state a valid reason for termination;
• It must include the employee’s identity, position, division, and employment agreement;
• It must contain a proposed severance package calculated in accordance with the Manpower Law and GR 35/2021, including the payment date;
• It must contain a clear statement requiring the employee to provide a written response of acceptance or rejection within a specified period or no later than 7 days before the effective termination date;
• It must be written in Bahasa Indonesia and/or in a bilingual format (Bahasa Indonesia and English);
• It must be signed by an authorized company representative, such as a director with labour management authority (who must be an Indonesian citizen); and
• It must be dated and affixed with the company’s official stamp.

After the Termination Notice is delivered, the affected employee must respond within the prescribed timeframe. The Termination Acceptance Letter must:

• be properly signed, dated, and indicate the city where it was signed;
• clearly state acceptance of the proposed termination terms;
• include the employee’s identity, position, division, and employment agreement; and
• be addressed to the authorized company representative.

(Directorate General of Advocacy for Industrial Relations and Workers Social Security Letter No. 4/303/HI.00.03./III/2022 Tahun 2022 on Notification and Reporting Documents on Termination of Employee (“DGoAIR Letter 4/2022”))

Once the Termination Acceptance Letter is received, the employer must submit the Termination Notice, Termination Acceptance Letter, mutual agreement (if any), and a cover letter reporting the termination to the local Manpower Office. Upon receipt of the complete documentation, the Manpower Office will issue a Receipt of Termination Report.

Does the age of the employee make a difference?

As previously explained, one of the grounds for termination of employment is the employee’s retirement. However, retirement does not require any special provisions that distinguish it from other termination grounds. Pursuant to Article 56 of GR 35/2021, an employee who reaches the retirement age is entitled to:

• Severance Pay amounting to 1,75 times the standard Severance Package;
• Service Pay equivalent to 1 (one) time the standard Severance Package; and
• Compensation in accordance with the Severance Package.

For illustration, if an employee earns a monthly wage of IDR 15,000,000 (including the base salary and allowances) and has 22 years of service, the severance pay would amount to 9 months’ wage multiplied by 1.75, resulting in IDR 236,250,000, while the service pay would be 8 months’ wage multiplied by 1, resulting in IDR 120,000,000. Accordingly, the total retirement compensation payable to the employee would be IDR 356,250,000, comprising both severance pay and service pay.

Are there additional provisions to consider?

There are additional provisions to be considered if the termination report is used to apply for benefits under the Job Loss Security program. In such cases, the termination report must be submitted to the local manpower office at the city level corresponding to (i) the location where the employee works, (ii) the location where the employment contract was signed, or (iii) the company’s domicile (Point 6 of the DGoAIR Letter 4/2022). In short, the employer must ensure the termination report is filed with the correct local manpower office to avoid delays or rejection of the report, which may affect the employee’s eligibility to receive Job Loss Security benefits.

Remedies for Employee Seeking to Challenge Wrongful Termination

If an employee rejects the termination letter, they must submit their reasons for rejection within 7 working days. Disagreement on a matter in the termination letter shall be first resolved through bipartite negotiations and tripartite mediation (with the manpower officer as mediator). If no agreement is reached, the parties shall proceed to the industrial relations dispute resolution mechanism in accordance with IRC Law.

IRC Law regulates that industrial relations disputes in Indonesia are resolved through a three-tier mechanism, as follows:

• bipartite negotiations between the employer and the employee or labour union;
• mediation at the local manpower office (tripartite process); and
• judicial proceedings before the Industrial Relations Court, which has special jurisdiction to examine and adjudicate industrial relations disputes.

Parties may file a cassation appeal to the Supreme Court against a decision of the Industrial Relations Court. If no cassation is filed, or once the Supreme Court issues its ruling, the decision becomes final and legally binding on both parties.

Whistleblower Laws

In Indonesia, there are no specific regulations that expressly govern whistleblowers in the field of employment. In practice, whistleblowing mechanisms are typically regulated through a company’s internal policies.