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Article | Global News Briefs

Indonesia: Job creation bill proposes significant labor reforms

Future of Work|Health and Benefits|Retirement

By Santhi Devi Rosedewayani | April 30, 2020

The draft bill would reduce regulatory requirements to encourage business investment, increase economic growth and expand job opportunities.

Employer Action Code: Monitor

The ambitious draft Omnibus Bill on Job Creation, which was recently submitted to the House of Representatives for discussion, aims to encourage business investment, increase economic growth and expand job opportunities by relaxing and simplifying regulatory requirements. Among the far-ranging provisions included in the bill’s more than 1,000 pages are significant changes in labor law. The government’s aggressive goal of ending deliberations on the bill by June 2020 will most likely be extended as a result of the COVID-19 pandemic.

Key details

Labor-related provisions include the following:

  • Statutory amounts payable on termination of employment (for permanent employees) would be simplified and reduced. Currently, severance comprises multiple components: severance; long-service pay; and “service” compensation, which includes pay in lieu of unused annual leave, returning home costs (if any), medicine and housing compensation (if provided) equal to 15% of severance or long-service pay, and other compensation set by company work rules and collective bargaining agreements. Which components are payable on separation is complicated and may be linked to length of service and/or the reasons for termination/separation; in some cases, such as for collective dismissals, amounts payable may be doubled. The bill would abolish “service” compensation and reduce the maximum amount of long-service pay from 10 to eight months’ pay but would require compensation to be paid on the expiration of the term of a fixed-term contract.
  • New regulations on severance and long-service pay would also apply for dismissals related to mergers and acquisitions, bankruptcy and operational restructuring.
  • An unemployment insurance program would be created under social security funded by employer or employee contributions.
  • An employer payment of a one-time bonus of between one and five times monthly base pay for all employees would be mandatory (intended to appease workers for the loss of “service” compensation). Micro- and small employers would be exempt.
  • The work-permit requirement for foreign workers in certain roles (e.g., researchers, employees of start-ups) would be eliminated.
  • New measures to facilitate more flexible employment would be introduced, including expansion of the types of work that may be performed by outsourced workers, the use of flexible working time, new regulations on normal working time and overtime, and easing regulations on the termination of employment.
  • A new formula for determining the regional monthly minimum wage rates would be developed. Regional governments would also be allowed to set local minimum wage rates for labor-intensive industries. Micro- and small businesses would be exempt from minimum wage requirements.

Employer implications

The changes would have cash and accounting impacts for employers (including on defined benefit accounting for end-of-service payments). The combination of the level of compensation payable on termination and earlier court rulings that struck down the main provisions of the Manpower Law on dismissal has made termination of employment inordinately expensive and complicated, hindering job creation and investment. Prior governments that proposed amending the law to reduce amounts payable all met with vocal resistance from labor unions, which derailed any such attempts. By packaging these reforms within an omnibus investment bill intended to address impediments to growth and development across the economy, the administration is aiming to obtain general legislative approval to address these issues, leaving the details to be addressed by later regulations and decrees. Employers should monitor the progress of the bill and the development of related regulations given the number of elements that will be determined at a later date.


Santhi Devi Rosedewayani

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