Employment contracts are a crucial part of hiring and managing employees in Indonesia. Whether you are a foreign company expanding into the Indonesian market or a local business looking to ensure compliance with labor laws, understanding the different types of employment contracts and legal requirements is essential.
Indonesia’s Manpower Law (Law No. 13 of 2003) and Omnibus Law (Law No. 11 of 2020) govern employment relationships, ensuring employee rights and employer obligations are well-defined.
Choosing the right type of contract helps businesses manage workforce flexibility, control risks, and ensure legal compliance.
Types of Employment Contracts in Indonesia
In Indonesia, there are mainly 2 types of contracts: A fixed-term contract also known as PKWT (Perjanjian Kerja Waktu Tertentu) which is used to hire employees for a specified period, and a permanent contract (PKWTT). But how do these two differ? Let’s take a look.
Fixed-term Contracts (PKWT)
Fixed-term contracts (PKWT) in Indonesia are typically based on a period of validity. As per Indonesian regulations, these contracts have a maximum duration of 5 years. However, they can be extended multiple times if the work is not yet completed. The catch? The total period of the PKWT and its extensions can’t exceed 5 years, as stipulated in Article 8 pp 35/2021 of the labor law.
Fixed-term contracts are only allowed for specific type of employments. Otherwise the employment automatically becomes a permanent contract (PKWTT).
Permanent Contracts (PKWTT)
Compared to fixed-term contracts, permanent contracts are not limited by time. These types of contracts are continuous and may be more suitable for long-term projects or roles with no determined end date.
Therefore, if you plan on hiring someone for a specific period or as a part of a short project. However, if your goal is to have an employee for the long term, it is advisable to hire them as employees instead of a contractor to avoid misclassification.
| Description | Permanent Employment | Fixed-term Employment |
|---|---|---|
| Probation | Maximum of 3 months | A probationary period is not allowed |
| Extension | N/A | Allowed if both parties agree. |
| Cultural Relevance in Indonesia | Seen as having a higher potential by the employees. | Seen as temporary solution, contractor is likely to look for permanent employment in other companies. |
| Severance pay | Required | N/A |
| Compensation pay | – | If employer terminates the contract, they need to pay out the remaining of the contract. |
| Separation pay | Required | N/A |
| Encashment of Unused Annual Leave | Required | Required |
| Contract registered in the Ministry of Labor | Required | Required |
| Agreement | Written agreement | In writing or verbal |
| Benefits and perks | Benefits and perks such as employee loans, fixed bonuses, car ownership, and educational funds are typically granted to permanent employees in most companies. This is because they are viewed as integral parts of the core team managing the business. | In a majority of businesses, benefits, and perks are often limited for fixed-term employees, given that they are typically hired to provide supplementary support to the main operations of the business. |
| Termination (from the employer side) | Long and complicated. if the employer and employees can not agree on the cause of termination and total final pay. The process can involve the Industrial Relations Court which is expensive | As per agreement. |
Legal Requirements for Employment Contracts in Indonesia
Employment contracts in Indonesia must comply with local labor laws and regulations. All employment agreements must be written in Bahasa Indonesia, or a bilingual contract must be provided for foreign employees.
Mandatory Inclusions in Employment Contracts:
- Employer & Employee Details :Full names, addresses, and identification details.
- Job Role & Responsibilities: A clear description of the employee’s position, duties, and reporting structure.
- Salary & Benefits: Agreed wage, payment frequency, allowances, bonuses, and benefits.
- Working Hours – Standard 40-hour workweek, plus overtime conditions.
- Leave Entitlements – Annual leave, sick leave, and other paid leave policies.
- Termination Terms – Conditions under which employment can be terminated and severance pay eligibility.
Failure to comply with these legal requirements can result in fines, contract invalidation, or legal disputes.
How an Employer of Record (EOR) Can Simplify Hiring in Indonesia
Employment contracts in Indonesia must align with labor regulations, tax requirements, and social security obligations. Choosing the right contract type (PKWT or PKWTT) ensures compliance and minimizes risks when hiring employees.
For foreign companies expanding into Indonesia, managing local employment contracts and compliance can be complex. An Employer of Record (EOR) in Indonesia such as Recruitgo can help by:
- Drafting compliant employment contracts in accordance with Indonesian labor laws.
- Handling payroll processing, BPJS contributions, and tax compliance.
- Managing employee benefits, leave policies, and HR administration.
- Ensuring seamless hiring for foreign companies without requiring a local entity.
If your company is hiring in Indonesia, our team can assist with drafting employment contracts, payroll management, and compliance with BPJS regulations.
To discuss your hiring needs, get in touch with us today.
FAQs about employment contracts in Indonesia
Under Indonesian law, written contracts are required for fixed-term employment (PKWT). If no written contract is provided, the employment is automatically classified as a permanent contract (PKWTT), meaning the employee gains severance pay rights and additional job security.
A PKWT contract can last up to 5 years, including extensions, as per the Omnibus Law. Employers must ensure the contract is registered with the Ministry of Manpower; otherwise, it may not be legally enforceable.
Severance pay is only mandatory for permanent employees (PKWTT) upon termination, except in cases of misconduct. Fixed-term employees (PKWT) are not entitled to severance pay but may receive compensation if the contract ends early.
An EOR can handle legal employment contracts, payroll management, BPJS registration, and ensure compliance with Indonesian labor laws. This is especially useful for foreign businesses that want to hire employees in Indonesia without setting up a local entity.
