Re-evaluating the Benefits of Contract-Based Employment, or Lack Thereof
Under Indonesian employment law, employment may be established in the form of contract-based employment (perjanjian kerja waktu tertentu/PKWT) or permanent employment (perjanjian kerja waktu tidak tertentu/PKWTT). For years, many employers have shown certain preference to the contract-based employment over permanent employment, citing the lighter obligations imposed to the employer in the event of termination of contract-based employment compared to the termination benefits payable by the employers in the event of termination of permanent employment as the main benefits.
With the enactment of Law Number 11 of 2020 on Job Creation (“Job Creation Law”) there certainly has been substantial amendment to the Law Number 13 of 2003 on Employment (“Employment Law”) (Employment Law as amended by the Job Creation Law shall hereinafter be referred to as the “Amended Employment Law”). Amended Employment Law was further elaborated under the Government Regulation Number 35 of 2021 on Contract-Based Employment, Outsourcing, Working Time and Resting Period, and Employment Termination (“GR 35/2021”) which serves as the implementing regulation of the Amended Employment Law.
It stood to reason that employers shall also re-evaluate if the establishment of contract-based employment is still beneficial or if the new employment regime offers more benefits to permanent employment instead. Please do refer to our previous newsletter for elaboration on Amended Employment Law and GR 35/2021.
General Provisions
Pursuant to the Amended Employment Law and GR 35/2021, contract-based employment shall be established pursuant to a temporary employment agreement (perjanjian kerja waktu tertentu/PKWT) made by and entered into between an employer and an employee, based on certain period of time or the completion of certain work. Contract-based employment must not be established for work which are of permanent nature.
Contract-based employment which are based on certain period of time may only be established for maximum of 5 (five) years, for (i) works which completion are estimated to be within short period of time; (ii) works which are seasonal in nature; or (iii) works which are related to new products, new activities or ancillary products on trials. Whilst, contract-based employment which are based on completion of certain work may be established only for works performed and completed at once, or for works which are temporary in nature.
On the other hand, permanent employment shall be established pursuant to an employment agreement for an indefinite period (perjanjian kerja waktu tidak tertentu/PKWTT) made by and entered into between an employer and an employee. One of the main benefits of establishing permanent employment is that the employers are allowed to subject the employee under probationary period for maximum of three (3) months.
Employment Termination
Indonesian employment law in general recognizes that employers and employees alike shall avoid employment termination to the extent possible, regardless such employment was established in the form of contract-based employment or permanent employment. Amended Employment Law and GR 35/2021 set out provisions applicable to employers and employees respectively in the event of employment termination which can be elaborated as follows:
| Contract-Based Employment | Permanent Employment | |
| Reasons for Termination | death of employee;expiration of employment agreement;completion of certain works;issuance of a valid and binding court decision and/or industrial relation dispute decision; oroccurrence of certain condition or event which may result in employment termination pursuant to the employment agreement, company regulation, or collective work agreement. | company undergoes merger, acquisition, consolidation or spin-off wherein the employees or the employers refuse to continue the employment;company undertake efficiency due to company loss;liquidation of company due to suffering losses for two (2) consecutive years;liquidation of company due to force majeure events;company is declared to be under suspension of debt payment obligations (penundaan kewajiban pembayaran utang);company is declared to be under bankruptcy;request for employment termination submitted by the employees due to employers committing certain actions as provided under Article 154A letter g of Amended Employment Law;termination by employers based on issuance of industrial relation dispute decision stating that the employers did not conduct certain actions as previously alleged by the employees;resignation submitted by the employees;employees being absent from work for five (5) days or more, consecutively, without providing any written notification supplemented by valid evidence;employees violated certain provisions under work agreement, company regulation, or collective work agreement;employees being unable to carry out their work due to being under arrest by authority for allegation of criminal act;employees suffering from long term sickness or disabilities and unable to carry out work for more than 12 months;employees entering retirement; ordeath of employees. |
| Termination Procedure | The employers are required to notify the employees, notification of which may be rejected by the employees. Notification of employment termination is not required if such termination occurred due to voluntary resignation, expiration of working period in accordance with temporary work agreement, the employee having reached retirement period, or death of employee. Should the termination resulted in dispute between the employer and the employee, the disputed parties are expected to undergo dispute settlement procedure in accordance with law on industrial relation dispute settlement. | |
| Termination Benefits | Termination benefits of contract-based employment consisted of:Compensation paymentContract-based employee who has worked for minimum of one month consecutively is entitled to receive compensation payment upon the termination of contract-based employment.Damages paymentAny party who unilaterally terminate a contract-based employment before the end of employment period is liable to pay damages to the other party amounting to the total salaries of such employee calculated until the end of employment period as stipulated under the employment agreement. | Termination benefits of permanent employment consisted of:Severance payment (uang pesangon);Reward payment (uang penghargaan masa kerja);Compensation payment (uang penggantian hak) as applicable pursuant to employment agreement; andTermination payment (uang pisah), if any, pursuant to employment agreement. The calculation of termination benefits depends on the working period of such employee and the reasons for termination, as provided in detail under GR 35/2021. |
Re-evaluation to the Benefits of Contract-Based Employment
For years, employers have shown preference to establishing employment in the form of contract-based employment over the permanent employment. Amended Employment Law however has introduced some changes which are significant and warrants re-evaluation to the basis referred to by the employers in considering the preferred form of employment as follows:
- Termination Procedure
Under the previous Employment Law, any termination over the permanent employment may only be conducted based on stipulation issued by industrial relation dispute settlement institutions. Whilst over the years in practice termination of permanent employees are mostly resolved by way of amicable settlement between the employers and the employees, employers remain reluctant to establish permanent employment in consideration of the long winding termination procedure imposed to permanent employment.
Pursuant to the Amended Employment Law however, this is no longer the case. Any termination of permanent employment may be carried out by the employers only by providing notification to the employees regarding such termination. Employers are only required to refer such termination to industrial relation dispute settlement institutions if the employee raised objection over such termination notification. In principle, under the Amended Employment Law, there is no notable difference regarding the procedure for employment termination for both contract-based employment as well as permanent employment.
- Termination Benefits
Amended Employment Law imposed the obligation to the employers to pay compensation to the employees in the event of termination of contract-based employment, including if the termination is caused by resignation from the employee or if such termination is caused by expiration of working period as stipulated under the employment agreement, even if the employment is later renewed under another contract-based employment or under permanent employment. Therefore, under any circumstances, under the prevailing laws and regulations, the employers are liable to pay compensation to the contract-based employees. Based on GR 35/2021, compensation payment shall be calculated as [working period/12 x 1 month salary].
In addition, if the employers decided to terminate the employment of contract-based employee before the expiration of working period as stipulated under the employment agreement, the employers will be liable to pay damages on top of compensation payment. The damages payment payable by the employers amounts to the total salary of the employees until the end of working period as stipulated under the employment agreement. On the other hand, the termination benefits of permanent employment largely depends on the working period of such employees and the reasons for termination as well as provisions of termination benefits under the employment agreement. In some cases such as termination due to resignation submitted by the employee, the termination benefits may even amount to zero.
Please refer to the simulation as provided below for a more straightforward explanation on the comparison of termination benefits between contract-based employment and permanent employment. This simulation is prepared by referring to the most commonly occurring termination scenarios.
- Simulation for Contract-Based Employment
| Employee Name: Mr. XYZ |
| Salary: Rp10,000,000.- (ten million Rupiah) per month. |
| Working Period based on Contract-Based Employment Agreement: 12 months |
Termination Scenario | Termination Benefits/ Termination Obligations | |
| Mr. XYZ | Company | |
| Mr. XYZ submitted his resignation after working for 5 months | Damages payment:(working period based on employment agreement – actual working period) x 1 month salary= (12 – 5) x 10,000,000= 7 x 10,000,000= Rp70,000,000.- | Compensation payment:(working period / 12 ) x 1 month salary= (5 / 12) x 10,000,000= Rp4,166,666.67.- |
| Company decided to terminate Mr. XYZ after 5 months | – | a. Damages payment:(working period based on employment agreement – actual working period) x 1 month salary= (12 – 5) x 10,000,000= 7 x 10,000,000= Rp70,000,000 b. Compensation payment:(working period / 12 ) x 1 month salary= (5 / 12) x 10,000,000= Rp4,166,666.67. Total: Rp74,166,666.67.- |
| The working period of Mr. XYZ as stipulated under the employment agreement has expired | Compensation payment:(working period / 12 ) x 1 month salary= (12 / 12) x 10,000,000= Rp10,000,000.- |
- Simulation for Permanent Employment
| Employee Name: Mr. XYZ |
| Salary: Rp10,000,000.- (ten million Rupiah) per month. |
| Working Period as of Termination of Permanent Employment: 5 months |
| Reason for Termination | Termination Benefits Payable by Company |
| Resignation submitted by Mr. XYZ | Compensation payment (if any, as stipulated under the relevant employment agreement); and Termination payment (if any, as stipulated under the relevant employment agreement). |
| Termination due to violation of provisionsunder the employment agreement | Severance payment:0.5 x (severance payment for workers who worked for less than 1 year)= 0.5 x 1 month salary= 0.5 x 10,000,000= Rp5,000,000.- Reward paymentMr. XYZ are not entitled to any reward payment as Mr. XYZ has not worked for minimum of 3 years. Compensation payment, if any, as stipulated under the relevant agreement. Total: Rp5,000,000.- |
| Termination due to violation of certain provisions (which are urgent in nature) as stipulated under the employment agreement | Compensation payment (if any, as stipulated under the relevant employment agreement); and Termination payment (if any, as stipulated under the relevant employment agreement). |