Skip to main content
Article | Global News Briefs

Indonesia: New provisions on severance and unemployment insurance

Health and Benefits|Total Rewards|Retirement
N/A

By Santhi Devi Rosedewayani | May 28, 2021

Employers should ensure their policies meet new requirements now in effect under the Omnibus Law on Job Creation, including for end-of-service benefits.

Employer Action Code: Act

Implementing regulations for the 2020 Omnibus Law on Job Creation provide guidance on severance entitlements under the 2003  Manpower Law and introduce a new unemployment insurance regime under social security. Background on the development of the Omnibus Law is available in the Global News Brief from April 2020 on the measures initially proposed. Some of the more controversial proposals, such as a reduction in the maximum long-service payment, were removed from the bill prior to its passage. The Omnibus Law took effect November 2, 2020; most of the implementing regulations took effect February 2, 2021.

Key details

Under the Omnibus Law and Government Regulation (GR) No. 35, entitlements to mandatory employer-paid severance and long-service pay are retained, but the multiplying factors for both, which vary by the reason for separation from employment, have changed in some cases. The law abolishes “service” compensation (which had been set at 15% of severance and long-service pay, for housing, medical and health care allowances) as a component of mandatory termination payments. Note: Workers employed on an indefinite basis are generally entitled to severance and long-service pay on termination of employment, but eligibility for long-service pay is subject to a minimum of three years of service. Severance ranges from one to nine months’ pay depending on length of service, while long-service pay ranges between two and 10 months’ pay.

Changes to the regulations
Termination of employment due to: Amount payable Previously
Normal retirement 1.75 x severance + 1 x long-service pay 2 x severance + 1 x long-service pay
Death 2 x severance + 1 x long-service pay No change
Disability 2 x severance + 1 x long-service pay 2 x severance + 2 x long-service pay
Voluntary resignation Based on work rules or collective agreement No change
Acquisition, merger, spin-off, business closure or reorganization 1 x severance + 1 x long-service pay 2 x severance + 1 x long-service pay
Force majeure event not resulting in business closure 0.75 x severance + 1 x long-service pay 2 x severance + 1 x long-service pay
Bankruptcy, business closure, reorganization or suspension of operations due to losses and/or debts or transfer of undertakings where employees are unwilling to accept transfer 0.5 x severance + 1 x long-service pay 1 or 2 x severance + 1 x long-service pay

Amounts payable for severance and long-service pay can now be offset by the employer-financed portion of retirement benefits of a company retirement plan. Prior law permitted this only in the case of normal retirement.

GR No. 35 also amended the provisions on fixed-term employment agreements, increasing the maximum term of employment under one or more fixed-term contracts from three to five years. In addition, individuals engaged under fixed-term employment of a month or more are entitled to compensation at the end of the agreement (regardless of whether or not the agreement is extended) equal to one month’s wages (defined as base pay plus any fixed allowances) for every 12 months of service, prorated where service increments are less than 12 months. The entitlement is retroactive to November 2, 2020, for contracts that were already in effect. The mandate does not apply to fixed-term contracts of foreign workers. Other notable features of GR No. 35 include increasing limits on daily and weekly overtime (from three hours per day and 14 per week to four hours per day and 18 per week) and stipulating additional grounds for termination of employment on a collective basis (e.g., under a spin-off of operations) or individual basis (e.g., for gross misconduct). The regulation also outlines new procedures for dismissal, eliminating the requirement to obtain prior approval of the labor courts to effect termination, and establishing a required notice period of 14 days. Employees can still challenge dismissals by written response within seven days of receiving notice, followed by normal dispute resolution or mediation, and litigation if no agreement is reached.

Other notable regulations include GR No. 34 on foreign workers, GR No. 36 on minimum wages and GR No. 37, which implements the first unemployment insurance program (Jaminan Kehilangan Pekerjaan – JKP) under social security (Badan Penyelenggara Jaminan Sosial – BPJS). All employees enrolled in BPJS have been automatically enrolled in the JKP program. Funding is based on a monthly contribution of 0.46% of pay up to 5 million Indonesian rupiahs per month, divided between a government contribution of 0.22% and employer contribution of 0.24%, diverted from employer BPJS contributions (so there is no increase in employer cost for the program). Foreign workers and Indonesian citizens age 54 or older are excluded from coverage. Benefits are payable for up to six months at 45% of covered pay for the first three months and then 25% for the next three months. To be eligible, claimants must be involuntarily unemployed and have at least 12 months of insured employment over the prior 24 months and at least six consecutive months of social security contributions. GR No. 34, unlike the other regulations, is effective April 1, 2021, and, among other things, requires that employers insure foreign workers for workers compensation (at a minimum) for the first six months of residence, when coverage under BPJS is optional for foreign workers, and repatriate foreign workers at the end of their assignments.

Implications

Employers should review their policies and practices in light of the changes introduced by the Omnibus Law and its implementing regulations. Companies should also revise their procedures to reflect the changes to the end-of-service benefits payable and consider the cost and accounting effects.

Related Solutions

Contact Us