Hire and pay employees in Indonesia quickly and compliantly

Complying with labor and employment laws in Indonesia

Navigating Indonesia's labor and employment laws can feel overwhelming. The nation’s rules are distinct from those in neighboring countries, especially regarding leave laws and termination procedures. To maintain compliance, employers must understand the local Manpower Law, also known as Law No. 13 of 2003, which covers a range of employment topics, such as employment contracts, wages, hours, working conditions, and occupational health and safety, among other laws and regulations.Make hiring and compliance easier by teaming up with Rippling EOR. A reliable EOR partner can offer expert HR support tailored to Indonesia’s employment laws.

Employment contracts in Indonesia

In Indonesia, a written employment agreement is necessary for indefinite-term and fixed-term contracts. The written agreement must outline the key conditions and details of employment to ensure clarity and legal certainty, which can be helpful for resolving employment disputes down the line. This information generally includes:

• Employee’s name and address

• Start date

• Job title

• Job description and responsibilities

• Salary

• Benefits

• Working hours

• Contract duration

For permanent contracts, employers should also specify the probation period, which can last up to three months. Fixed-term contracts, on the other hand, do not allow probation periods.

Labor unions in Indonesia

Unionization isn’t common in Indonesia. Only around 4% of Indonesian workers are union members, and most of these workers are concentrated in the service and manufacturing industries. Still, Indonesia has strong protections when it comes to union membership. According to the Trade Union Act and the Manpower Law, workers have the freedom to join or not join a union and may not be discriminated against for doing or not doing so. 

Indonesian trade unions are categorized into three main categories based on the type of organization. These include workers’ unions (company level), union federations (groups of multiple unions), and union confederations (alliances of federations). Some of the most notable unions include the Central All-Indonesian Workers Organization (SOBSI), the Indonesian Workers Welfare Union (SBSI), and the Federation of Indonesian Labor Struggle Unions (FSPBI). These unions are part of either the Confederation of Indonesian Workers Union (KSPI) or the National Workers Union (SPN).

Mitigating permanent establishment risk in Indonesia

According to the Indonesian Tax Law, a permanent establishment (PE) is created when a foreign company conducts business activities in Indonesia that generate income. The establishment of a PE obligates the company to comply with the corporate tax requirements in Indonesia and can result in potential Indonesian corporate tax liabilities.

A PE can encompass various types of business operations, including office spaces, facilities, equipment, or machinery that these companies use. More specifically, the following are considered taxable permanent establishments under Indonesian law:

• Management office

• Representative office

• Office building

• Warehouse

• Branch

• Workshop

• Factory

• Electronic devices or automated equipment that are leased or owned for online business transactions

For companies pursuing global expansion, managing PE risk in Indonesia is important. Businesses can take proactive steps to minimize any potential tax liabilities by:

• Limiting their presence: Restrict the scope and timeframe of employee activities on-site.

• Establishing a local entity: If you intend to remain in Indonesia for the long haul, consider establishing a separate legal entity to manage your operations.

• Seeking legal support: Consult a legal or tax expert early on to gain clarity about Indonesia’s PE framework and tax treaties.

• Documenting all activities: Record employees’ work locations and roles to show that their activities don’t establish a fixed place of business.

Probationary period in Indonesia

Probationary periods are legal in Indonesia but may only be included in permanent employment contracts, not fixed-term ones. Indonesian labor law allows employers to implement a probation period of up to three months. You must specify the duration of this period in writing upon hiring a new employee and cannot extend it past three months. If an employer violates this restriction, the employee will automatically gain permanent employment status.

Local laws in Indonesia

Indonesia has a complex regulatory landscape that’s been shaped by three primary acts and laws: the Manpower Act of 2003, the Industrial Relations Dispute Settlement of 2004, and the Labor Union Law of 2000—note that some of these laws were modified by the Omnibus Law of Job Creation no. 6 of 2023. If it’s your first time hiring in Indonesia, mastering the ins and outs of these laws can feel overwhelming. Here are some key points to keep top of mind as you venture into Indonesia’s labor market: 

• Minimum wage: Indonesia does not have a set national minimum wage. Instead, minimum wage laws are implemented regionally. Each region factors in economic conditions and local cost of living when determining its minimum wage. 

• Working hours: A standard workweek in Indonesia is 40 hours, which can be split into eight hours a day for five days or seven hours a day for six days. Overtime is limited to 18 hours per week or four hours per day. 

• Retirement age: The retirement age in Indonesia is currently 58 years old for men and women, but it is set to rise by one year every three years until it reaches 65 in 2043.

• Family leave: Indonesian employees can receive paid leave for family circumstances. The amount of leave depends on the event. For instance, an employee can take three days off for their own wedding, two days for their child’s wedding, two days for bereavement after a spouse’s or parent’s death, and one day for bereavement following a household family member’s death.

Worker classification and misclassification in Indonesia: Contractors vs. employees

Like most countries, Indonesia distinguishes independent contractors from full-time employees. Because the rights and responsibilities of each working relationship differ, it’s crucial for employers to classify their workers properly. Indonesian courts consider several factors when examining the relationship between a worker and an employer, including authority, legal protections, tax responsibilities, and payment frequency. Below are some indicators to help employers understand the differences.

Worker classification in Indonesia: Key differences between contractors and employees

Consequences of misclassification in Indonesia

Worker misclassification comes with serious consequences in Indonesia. This can include repaying back taxes, employee benefits, and social security contributions. On top of that, employers may face steep fines and potential jail time. Failing to pay the correct amount of social security to BPJS Manpower and BPJS Health can result in up to eight years of imprisonment or a fine of up to 1 billion Indonesian rupiah. Similarly, tax crime penalties can result in up to six years of imprisonment plus a 400% penalty on the unpaid amount. Employers may also face legal action from misclassified employees themselves.

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Wages and payroll in Indonesia

Indonesia has unique wage laws, with differing regulations at the provincial, regional, and city levels. Employees in Indonesia are entitled to minimum wage, overtime payment, and a mandatory annual "Tunjangan Hari Raya" (THR) bonus. Below, you’ll find key details about Indonesia’s wage and payroll regulations.

Minimum wage in Indonesia

Indonesia does not have a national minimum wage. Each province sets its own wage based on economic factors, with Jakarta having a higher minimum wage than most rural areas. Only employees who have worked for less than one year receive minimum wage. Everyone else must be paid above the minimum wage floor in their respective region. The current minimum wages are as follows:

Payroll frequency in Indonesia

In Indonesia, the typical payroll frequency is monthly. Employees generally receive their salary on the last working day of each month.

13th month pay in Indonesia

Indonesian employees are entitled to a 13th month bonus, known as "Tunjangan Hari Raya" (THR). Employers pay THR annually before religious holidays, such as Eid al-Fitr. This bonus is equivalent to one month’s pay for employees who have worked for at least one year. If an employee has worked for less than one year, their THR is prorated based on how many months they’ve worked.

Run payroll compliantly in Indonesia

Navigating payroll and compliance challenges while employing workers internationally can be a hassle. Partnering with an EOR in Indonesia simplifies the process by handling essential tasks like managing deductions, adhering to wage regulations, and ensuring timely payments. With Rippling EOR, you can hire and compensate global talent more efficiently than ever before.

Employer and employee taxes in Indonesia

Indonesian employers must comply with payroll tax laws, which include withholding JKK and JP contributions from employees’ salaries. But following the maze of regulations can be challenging. Here are the top things to know about employer and employee taxes in Indonesia.

Employer taxes in Indonesia

Here are the mandatory employer payroll contributions in Indonesia: 

Employers must also pay corporate tax (22% of net income) and may be subject to value-added tax (VAT) at a rate of 11%. 

Employee taxes in Indonesia

Employers in Indonesia must deduct income taxes from employees’ paychecks and pay them to the Directorate General of Taxes on their employees’ behalf. The effective tax rate ranges from 5-35% annually, depending on the employee’s marital status and income. Any income lower than IDR 5.4 million per month is non-taxable, and any income higher than IDR 1.419 billion is subject to the monthly highest tax rate of 34%. If an employee’s income falls between those brackets, the employee’s marital status plays a major role in determining the deduction rate.

Employers must also deduct standard contributions like JHT, JP, and BPJS Kesehatan from employees’ paychecks. Here are the deduction rates:

Penalties for not paying taxes in Indonesia

Indonesia recently implemented stricter tax penalties for noncompliance. Companies can incur penalties for late payment or submission, incorrect filing, and more. Fees vary based on the type of tax and offense:

• Late tax payment: 2% monthly fee for a maximum of 24 months

• Late reporting and underpayment: IDR 100,000 to 1,000,000 fine, depending on the tax type

• Incomplete or missing VAT: 2% surcharge

• Incorrect tax submission or non-submission: Three to 12 months in jail or a 200% fine on the unpaid tax

• Fraud, embezzlement, or improper bookkeeping of imports and exports: Six months in jail or a 200%-600% fine on the missed payments

Eliminate tax compliance worries by partnering with an EOR, which can handle your global compliance obligations, such as ensuring accurate and timely tax payments across various jurisdictions.

Employee benefits in Indonesia

Offering attractive employee benefits in Indonesia is key to enticing and retaining top talent. Certain benefits, such as contributions to BPJS (the national social security system), are required by law. Beyond these, employers can stand out by providing additional perks like private health insurance, supplemental retirement plans, and meal allowances. Here’s an overview of both mandatory and commonly offered optional benefits in Indonesia.

Mandatory benefits in Indonesia

Indonesia has several mandatory benefits that employers must offer to employees, including:

• Health insurance (BPJS Kesehatan): While employers are responsible for enrolling employees in health insurance, both parties must pay contributions. Employers pay 4%, and employees pay 1% of their salary.

• Work accident insurance (JKK): JKK covers employees' work-related injuries and illnesses. Employers solely cover this benefit, and the contribution rate is 0.24%.

• Pension (JP): Indonesia’s pension scheme offers guaranteed income to retirees. Employees contribute 1% of their salary, and employers contribute 2%. 

• Old age benefits (JHT): Both employers and employees pay into JHT at a rate of 3.7% and 2%, respectively. This benefit guarantees protection for retirees and laid-off employees.

Optional benefits in Indonesia

Offering optional and fringe benefits can improve your chances of attracting a high-quality talent pool and retaining top performers. Here are some of the common supplementary benefits employers offer in Indonesia:

• Supplemental health insurance: Companies often provide additional health insurance for employees with dependents and those seeking comprehensive medical coverage.

• Private pension plan: In addition to the state-mandated pension, employers may also offer private retirement plans to supplement employees’ pensions.

• Meal allowance: Some employers choose to offer subsidized meals or allowances for on-site employees, which are especially valuable for employees working long hours.

• Transportation stipend: A transportation stipend can help employees pay for commuting costs, including fuel and car payments. Subsidizing public transportation is another way to ease the commute and reduce congestion in urban areas like Jakarta.

• Flexible work: Embracing remote work or flexible schedules is a popular approach to draw in and retain high-performing employees.

Working hours, overtime, and leave in Indonesia

In Indonesia, regulations on working hours, overtime, and leave entitlements are primarily established at the national level under the Manpower Act. While these laws provide a foundation, sector-specific regulations or company agreements may change certain standards. Familiarity with these rules is crucial for maintaining compliance.

Standard working hours in Indonesia

According to the Manpower Law of 2003, a standard workweek in Indonesia is 40 hours. Employees can work either eight hours per day for five days or seven hours per day for six days.

Overtime laws in Indonesia

Indonesia has strict overtime regulations. Employers may request that employees work more than 40 hours in a given week, but they must issue a written order detailing the need for those hours, and employees must respond with written consent to work overtime. 

Typically, an employee may only work up to four hours of overtime daily and 18 hours weekly. For the first hour of additional work, employees receive 1.5 times their regular rate of pay. For any hours beyond that, they receive double their hourly rate. Overtime pay rates are even higher for public holidays and rest days (up to quadruple the normal pay rate).

Rest period and break laws in Indonesia

The Manpower Law also outlines rest periods and break regulations for Indonesian employees. It states that employees are entitled to a rest period of at least 30 minutes for every four hours of work. They must also receive weekly rest days: one day after a six-day workweek and two days after a five-day workweek.

Leave laws in Indonesia

Indonesian employees are entitled to the following types of leave:

• Annual leave: After completing one year of service, Indonesian employees are entitled to at least 12 days of paid leave. They must take at least six of those days consecutively, and any unused leave expires in six months.

• Maternity leave: The Manpower Law entitles expecting mothers to three months of paid time off. This includes 1.5 months of leave prior to birth and 1.5 months after. A 2024 law called the Mother and Child Bill enhances the leave entitlement. According to this law, pregnant employees may be able to extend their leave by three months (of which the fourth month is fully paid and the remaining months are paid at 75%) in certain circumstances.

• Paternity leave: Fathers are entitled to two days of paternity leave. Under the Mother and Child Bill, they may extend that leave by three days.

• Sick leave: Before employees can take sick leave, they must present a doctor’s certificate. The first four months of leave are paid at 100% of regular wages, and pay drops by 25% for every subsequent four-month period.

• Long service leave: If an employee works for the same employer for six years, they can receive an additional month of paid leave in their seventh and eighth year.

• Public holidays: Indonesia’s religious diversity is reflected in its holidays. There are three secular national holidays, which include New Year’s Day and Labour Day, plus a variety of Christian, Islamic, Hindu, and Buddhist holidays, for a total of 22 days throughout the year.

Work permits in Indonesia

Before your new team member can begin working in Indonesia, it’s essential to confirm they have the legal right to do so. Non-citizens and non-permanent residents typically require the appropriate work permit or visa to work legally in the country.

Indonesia has a unique work permit system, requiring employers to apply for a number of visas before a foreign employee can work in the country.

Who needs a work visa in Indonesia?

Any foreign national who intends to work in Indonesia for an extended time period must obtain a work visa. Most workers need a KITAS permit, which allows for a limited stay of up to 12 months—this permit can be converted to a permanent residence permit down the line as long as the employee meets certain requirements.

In order to apply for a visa, the worker needs sponsorship from a local Indonesian company. The employer kicks off the process by submitting an application to the Indonesian Ministry of Manpower. This application requests permission to use foreign labor. Upon approval, the employer receives an RPTKA (foreign worker placement plan), allowing them to apply for a work permit.

How long does it take to get a work visa in Indonesia?

Obtaining a temporary stay permit (KITAS) can take up to two months. This includes the various application stages: obtaining IMTA (or Notification), VITAS, and ITAS/KITAS. The processing time may vary, but you can limit potential delays by being diligent during the application process.

Types of work visas in Indonesia

Foreign nationals must obtain a KITAS permit in order to live and work in Indonesia. Some may also be eligible for the KITAP, a long-stay permit that can be renewed indefinitely. Here are the steps to obtaining a KITAS or KITAP:

1. IMTA (Notification): Once a company obtains permission, known as the RPTKA, to hire foreign nationals, it may apply for an individual work permit (IMTA). Due to recent changes, the IMTA is now referred to as Notification. This permit allows an employer to employ a foreign worker legally in Indonesia.

2. VITAS: A VITAS allows individuals to enter Indonesia for several purposes, including work, investment, research, reunification, etc. The employer applies for the VITAS after receiving Notification. This visa is valid for 90 days and allows foreign employees to come to Indonesia. 

3. ITAS/KITAS: Within 30 days of arriving, the employee must convert their VITAS into an ITAS permit. The ITAS is a temporary stay and work permit, and the KITAS is the physical or electronic document foreign nationals must carry to signify their residence status. The KITAS is valid for six to 12 months, depending on the type and length of the employment contract.

4. KITAP: Employees with KITAS may be eligible for KITAP (a long-stay permit) if they have extended their KITAS multiple times and meet the eligibility criteria. KITAP is valid for up to five years at a time. As long as there are no changes to the employee’s status, KITAP gets extended automatically.

Termination and redundancy in Indonesia

Termination is typically far from the minds of employers when hiring employees in a new country. But understanding termination and redundancy laws is crucial for employers planning to operate in Indonesia. Failing to comply with these regulations can land you in hot water once it’s time to part ways with an employee.

Does at-will employment exist in Indonesia?

At-will employment refers to a type of employment relationship in which either the employer or the employee can terminate the agreement at any time, for any lawful reason, or even without reason, as long as it does not violate specific laws (such as those against discrimination). This concept is common in countries like the United States but is not recognized in Indonesia.

Employers in Indonesia may only terminate an employee with a valid legal reason, such as poor performance or redundancy, and terminations must follow protocols set by Indonesian labor law. This includes providing adequate notice to the employee before ending the working relationship.

Notice periods in Indonesia

The standard notice period in Indonesia is 30 days, though the legal mandate is 14 working days before the termination date. This period applies in both cases where employees or employers initiate the termination.

Severance pay in Indonesia

Severance pay is mandatory for employer-initiated terminations in Indonesia. The amount of severance pay an employee can receive depends on the length of their service and, in some cases, the reason for termination. Generally, employees receive one month’s salary for each year of employment, with a maximum of nine months’ pay after eight years. Employees who are terminated before the end of their first are still entitled to a minimum of one month’s salary.  Some employees may be entitled to long service pay, in addition to severance, if they have worked for an employer for at least three years. The long service rates are as follows:

How to terminate employees compliantly in Indonesia

Overseeing a global team and navigating diverse termination regulations can be challenging. Employers must grasp and adhere to varying just-cause standards, notice periods, probation rules, and severance pay requirements across regions and countries.Simplify employee terminations with the help of an employer of record (EOR). An EOR like Rippling handles global compliance, ensuring employee onboarding and offboarding fall in line with local laws. Without termination requirements on your mind, you can focus on your core business goals.

Disclaimer: Rippling and its affiliates do not provide tax, legal, or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice. You should consult your own tax, legal, and accounting advisors before engaging in any related activities or transactions.