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Indonesia – Employer of Record

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Country Introduction – Indonesia

Capital – Jakarta
Currency – Indonesian Rupiah IDR
GDP – 1.186 trillion USD (2021)
People/Nationality – Indonesian
Language – Indonesian, also known as Bahasa Indonesia
Major Religion – Islam
Population – 278,263,061 (as of October 27, 2023)

Indonesia is a diverse and vast archipelago located in Southeast Asia and is one of the world’s largest and most populous countries. Its economy is classified as an emerging market and is the largest economy in Southeast Asia. It has a mixed economy with agriculture, manufacturing, and services sectors contributing significantly to its GDP. It is a member of the G20 group of major economies and has a rapidly growing middle class. Indonesia has a robust Gross Domestic Product (GDP) that places it among the world’s largest economies. The GDP growth has been relatively stable in recent years.

Indonesia is a major exporter of natural resources, palm oil, rubber, textiles, and various other products. Its main trading partners include China, Japan, the United States, and neighbouring countries in Southeast Asia. The country has been attracting foreign direct investment in sectors such as manufacturing, infrastructure, and services.

It is rich in natural resources, including coal, petroleum, natural gas, palm oil, rubber, and various minerals, which play a vital role in its economy. Manufacturing industries, such as automotive, electronics, and textiles, contribute significantly to Indonesia’s economy. The services sector, including finance, tourism, and telecommunications, have experienced rapid growth.

Indonesia’s economic growth in the future is expected to be bolstered by its youthful population and expanding middle class. Ongoing investments in infrastructure, education, and technology are anticipated to further improve the country’s economic outlook.

Contract of Employment

In Indonesia, it is not mandatory to have a written employment contract for all types of employment relationships. However, having a written contract is highly advisable and beneficial for both employers and employees. A written employment contract helps in clarifying the terms and conditions of employment, which can prevent misunderstandings and disputes in the future. It provides a clear record of the agreed-upon terms, such as salary, working hours, job responsibilities, benefits, and termination procedures.

Even though a written contract is not legally required in all cases, certain types of employment relationships, especially those involving foreign workers or specific job positions, may require written agreements as part of the immigration and work permit application process.

The following are the types of employment contracts in Indonesia:

– Fixed-Term Employment Agreement (PKWT)
– Indefinite Time Employment Agreement (PKWTT)

Probation Period

The probation period is usually specified in the employment contract and commonly lasts for 1 to 3 months, although the duration can vary based on the employer’s policies and the nature of the job.

Termination

In Indonesia, the termination period for employees is typically outlined in the employment contract or in the prevailing labour laws and regulations. If the contract does not specify the notice period, the Indonesian labour laws provide default notice periods based on the employee’s length of service:

– Less than 1 year of service: A notice period of 7 days is generally required.
– 1 to 5 years of service: A notice period of 30 days is typically required.
– More than 5 years of service: A notice period of 60 days is commonly required.

Working Hours

40 hours per week, which is the standard full-time work schedule.

Overtime

According to Indonesian labor law, the maximum number of overtime hours that an employee can work in a week is 14 hours. This means that employees cannot work more than 14 hours of overtime in addition to their regular 40-hour workweek. Overtime work is usually compensated at a higher rate than regular hours. The typical overtime rate in Indonesia is 1.5 times the regular hourly wage.

 13^th Month Pay

In Indonesia, there is no mandatory provision for a 13th-month pay as part of the standard employment regulations. However, some companies in Indonesia, especially those with multinational or foreign ownership, may choose to offer a bonus or additional month’s salary as a 13th-month pay to their employees as a discretionary benefit. This practice is not required by law but is sometimes implemented by employers to motivate and reward employees.

Annual Leave

Employees are generally entitled to annual leave after completing one year of continuous service with the same employer. The duration of annual leave can vary based on the employee’s length of service. While specific regulations can vary, here’s a common breakdown:

– 1 to 5 years of service: Employees with 1 to 5 years of service might be entitled to 12 days of annual leave per year.
– More than 5 years of service: Employees with more than 5 years of service might be entitled to 15 or more days of annual leave per year.

Sick leave

Employees can take sick leave if they provide a medical certificate specifying the duration of their illness. During the initial four months of illness, employees receive full pay. This rate reduces to 75% for the subsequent four months and further decreases to 50% for the subsequent another four months.

Maternity and Paternity Leave

Female employees are generally entitled to 3 months (or 12 weeks) of maternity leave.

This period includes both prenatal and postnatal leave.

There are no specific national regulations in Indonesia regarding paternity leave. This means that there is no mandated paternity leave period outlined in the Indonesian labor laws. However, some employers may offer paternity leave as part of their company policies or employment benefits. The provision of paternity leave, including its duration and whether it is paid or unpaid, varies from one employer to another.

VAT / GST

The Indonesian VAT law permits the government to adjust the VAT rate between 5% and 15%. As of April 1, 2022, VAT at a rate of 11% is applicable on most goods and services sold within Indonesia, with some exceptions. Exported goods have a zero-rated VAT, while imported goods are subject to an 11% VAT starting from the same date. Zero-rated VAT is also applied to exported services, with certain limitations set by the Ministry of Finance (MoF).

Income Tax

Individual tax rates are as follows:

Employer / Employee Contributions

In Indonesia, both employers and employees are required to make contributions to social security programs and pension funds. These contributions are mandatory and are regulated by the Indonesian government. Here are the key contributions made by employers and employees in Indonesia:

Social Security Programs:

Employment Social Security (BPJS Ketenagakerjaan): Employers are required to contribute to BPJS Ketenagakerjaan, which covers work-related accidents, occupational diseases, and pension benefits. The contribution rate is based on a percentage of the employee’s salary. Employees also contribute a smaller percentage of their salary to this program.

Health Insurance (BPJS Kesehatan): Employers are obligated to contribute to BPJS Kesehatan, the national health insurance program. Like BPJS Ketenagakerjaan, both employers and employees make contributions to this program, with the rates determined based on the employee’s salary.

Pension Funds:

Employment Pension Programs: Employers are required to contribute to pension funds for their employees. The contribution rate is usually based on a percentage of the employee’s salary. These contributions are directed towards retirement benefits for employees.

It’s important to note that contribution rates and specific rules can change, so employers and employees should stay updated with the latest regulations issued by the Indonesian government or consult with the relevant social security and pension authorities for the most current information on contribution rates and requirements. Failure to comply with these contribution requirements can result in penalties or legal consequences for employers.

Public Holidays

The exact dates of these holidays can vary each year based on the lunar calendar.

January 1 – New Year’s Day
Chinese New Year
Nyepi (Balinese Hindu New Year)
Good Friday
Isra and Mi’raj
May 1 – Labour Day
Vesak (Waisak)
Ascension of Jesus Christ
Eid Fitr
Eid Adha
August 17 – Independence Day
Islamic New Year
Maulid Nabi Muhammad (Birthday of the Prophet Muhammad)

Additionally, there are regional holidays and observances that vary between different provinces and regions in Indonesia.

Severance Pay

The amount of severance pays an employee is entitled to depend on various factors, including the length of service, the employee’s salary, and the reason for termination. The length of service often determines the amount of severance pay. The longer an employee has worked for a company, the higher the severance pay they are entitled to receive.

Severance pay is usually calculated based on the number of years the employee has worked for the company and their last salary. The formula for calculating severance pay can vary, but it often involves multiplying the number of years of service by a certain factor of the last salary received by the employee.

Work and Residence Permits (Expatriates)

In Indonesia, expatriates planning to work and live in the country must secure the necessary work and residence permits, with the application process overseen by the Indonesian Ministry of Manpower and Immigration. Here are the essential details concerning work and residence permits for expatriates in Indonesia:

– Work Permit (IMTA – Izin Mempekerjakan Tenaga Kerja Asing): Before an expatriate can work in Indonesia, their prospective employer must apply for a work permit, also known as IMTA. The employer needs to demonstrate that the expatriate’s skills are needed and not readily available among the local workforces. The work permit is usually valid for a specific period and for a particular job position.

– Limited Stay Visa (VITAS – Visa Tinggal Terbatas): Once the work permit is approved, the expatriate can apply for a Limited Stay Visa (VITAS) at the Indonesian embassy or consulate in their home country. This visa allows them to enter Indonesia for the purpose of working.

– Temporary Stay Permit (ITAS – Izin Tinggal Terbatas): After entering Indonesia with a VITAS, the expatriate needs to apply for a Temporary Stay Permit (ITAS) at the local immigration office. The ITAS is usually valid for one year and can be extended annually based on the validity of the work permit.

– Multiple Exit and Re-entry Permit (MERP): Expatriates holding an ITAS are required to obtain a Multiple Exit and Re-entry Permit (MERP) if they plan to leave and re-enter Indonesia during the validity period of their ITAS.

– Registration: Expatriates must also register with the local police (STM – Surat Tanda Melapor) within a certain period after arrival in Indonesia.

It is crucial to understand that the procedures and prerequisites for obtaining work and residence permits can be intricate and may change over time. Employers and expatriates are highly recommended to collaborate with legal professionals or specialized immigration service providers to guarantee compliance with the most recent regulations and secure the essential permits for legal work and residence in Indonesia.

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