LEGAL UPDATES corona-plain-big-v1 Indonesian Employment Law and COVID-19: Reduced Salaries, Unpaid Leave and Termination

Fahrul S. YusufPartner, SSEK Legal Consultants

As a result of the serious economic disruptions from COVID-19, many employers in Indonesia may be forced to reduce costs for the foreseeable future.

What options are available to employers under Indonesian employment law?

Salary Cuts and Unpaid Leave

Employers that want to avoid terminations as much as possible can pursue the option of reaching an agreement with employees on salary cuts and/or unpaid leave arrangements.

Key points to consider include:

  • If employees freely agree to the employer’s proposal to salary cuts and/or unpaid leave, that agreement should be recorded in writing.
  • If there is a union at the company then the employer must consult with and secure the approval of the union for any agreed salary cuts and/or unpaid leave.
  • If employees decline to agree to salary cuts and/or unpaid leave, the employer can seek to encourage agreement by implying that employees who do not agree to the proposed changes could potentially be made redundant, subject to a mutual termination agreement (“MTA”) or, if disputed, approval from the labor court.
  • It is important to secure the consent from each employee for proposed salary cuts and/or unpaid leave. Without that consent, employees remain entitled to their benefits under their current employment agreement.
  • Note that the agreement with employees must be signed in the Indonesian language. A dual-language form of the agreement can be drafted but the prevailing language must be Indonesian. If the agreement is not signed in the Indonesian language, there is a risk that it could be considered null and void if disputed in the courts.

Employee Terminations

There are a number of different scenarios employers might consider in response to COVID-19. These include the complete closure of the business because it is no longer financially viable and the redundancy of all the employees, or laying off only a portion of the workforce.

Some of the key considerations for these scenarios include the following:

  • Under the Indonesian Manpower Law, terminations for efficiency basically can be done only when there is a closure of the business (including partial closure or a reduction of overall business activities), either preceded with or without losses for two consecutive years (this is relevant for determining termination entitlements).
  • Whether a force majeure event would be an acceptable reason for employee terminations with minimal severance payment.
  • If the business is not being shuttered, employee terminations can still be done but only with the express written agreement of employees by way of a mutual termination agreement (“MTA”).
  • Note that without an MTA the proposed terminations will be deemed as being disputed and can only be settled through the labor court, a process that can take six months or more, during which the employees’ salaries must be paid.
  • Note that Indonesia does not recognize the concept of notice of termination. Unless an MTA is reached, the lengthy and costly termination process for permanent employees is as follows:
    • The parties (the employer and employees, or if applicable, a labor union) are required to meet in an attempt to reach an amicable termination settlement, a process known as bipartite negotiation. If a settlement is reached, an MTA should be executed and registered at the relevant labor court;
    • If negotiations fail, either the company or the employee may file the dispute with the relevant manpower affairs office. The manpower office will ask both parties whether the dispute should be resolved through conciliation with private conciliators or mediation with a mediator from the manpower office.
    • If the non-binding written recommendation of the conciliator or mediator is rejected, the matter must be brought by either party to the relevant labor court to approve the termination and the benefits payable in connection with the termination.  If the labor court decision is appealed the case then goes to the Supreme Court.
  • Statutory Severance Requirements: 
  • For contract/fixed-term employees: The balance of the contract must be paid to fixed-term employees terminated before the end of their fixed-term employment agreement.
  • For permanent employees:
    • A permanent employee’s entitlement in connection with termination of employment depends on their years of service and the circumstances of the separation.  The categories of possible separation entitlements under Article 156 of the Manpower Law consist of (a) severance pay of up to nine months’ wages, (b) service pay of up to 10 months’ wages, and (c) other compensation (ie, for unused annual leave, any applicable relocation costs or expenses, compensation for housing, medical and hospitalization, and other separation benefits as may be agreed).
  • Under the Indonesian Manpower Law, in the event of terminations as a result of the company closing down due to two consecutive years of continuous losses or due to force majeure, terminated permanent employees are entitled to single severance pay, single service pay, and compensation
  • In the event of terminations for downsizing due to efficiency reasons (ie, not due to financial losses or force majeure), terminated permanent employees are entitled to double severance pay, single service pay and compensation. 
  • Note that an ex gratia payment of two to three months’ salary on top of the permanent employee’s mandatory severance entitlements may be necessary to ensure the employee signs an MTA to avoid the costly labor court process.

For more information, please contact Fahrul S. Yusuf at fahrulyusuf@ssek.com

This publication is intended for informational purposes only and does not constitute legal advice. Any reliance on the material contained herein is at the user’s own risk. You should contact a lawyer in your jurisdiction if you require legal advice. All SSEK publications are copyrighted and may not be reproduced without the express written consent of SSEK.