Employment Contracts in Indonesia: PKWT vs PKWTT Explained

If you're hiring in Indonesia, the first decision you'll make on every offer is which type of employment contract to issue. There are two: PKWT (fixed-term) and PKWTT (permanent). The contract you choose determines your obligations during employment, what you pay when it ends, and your exposure if a regulator or employee challenges the classification later.

This guide explains the difference between PKWT vs PKWTT and what your obligations are as an employer. 

Side-by-Side Comparison Between PKWT vs PKWTT

PKWT and PKWTT are two types of employment contracts recognized under the Indonesian Employment Law. Here’s how they are different:

• PKWT (Perjanjian Kerja Waktu Tertentu): a fixed-term employment agreement for work that is temporary, project-based, or seasonal.
• PKWTT (Perjanjian Kerja Waktu Tidak Tertentu): a permanent employment agreement for ongoing work with no defined end date. 

These two types of contracts are grounded within the Manpower Law (Law No. 13/2003) and further expanded by the Job Creation Law (Law No. 11/2020) and Government Regulation No. 35/2021. These laws cover everything from contract duration and probation to severance pay and termination procedures.

PKWT vs PKWTT is determined by the nature of the work of your employee. As the employer, you are responsible for classifying your staff correctly. If regulators determine ambiguity, the law will always be in favour of the employee in case of disputes. 

Understanding PKWT (Fixed-Term Contract) in Indonesia

When Should You Use a PKWT?

PKWT is designed for roles that have a natural end. Under Article 59 of the Manpower Law and Government Regulation No. 35/2021, a PKWT is only valid when the work falls into one of these four categories:

1. Project-Based Work With a Clear Endpoint: ideal for hiring someone to manage a specific project or deliverable. The key test is whether the role naturally disappears once the project is done. For example a project manager brought in to oversee the rollout of a new ERP system, has a clear scope with a defined finish line.
2. Seasonal or Cyclical Work: Work tied to specific seasons or recurring business cycles qualifies for PKWT. Great for hiring according to demand but disappears once the season ends. 
3. Work Related to New Products or Trial Activities: If a company is genuinely piloting something new, employees brought in specifically for that trial phase can be
4. Non-Permanent or One-Off Work: this applies to employees where the work is tied to a specific engagement that will conclude in the future. Some examples include vent production crews hired for a specific conference, film crews hired for a single shoot, or technical specialists brought in for a one-time installation. 

Key Requirements for PKWT Contracts

If you've determined a role legitimately qualifies for PKWT, there are strict formal requirements you must follow:

• Must be in writing and in Bahasa Indonesia: A verbal PKWT is not valid. The contract must be documented in Indonesian. You can create a bilingual version for the benefit of foreign parties, but the Indonesian text is the legally binding one. A PKWT signed only in English may be treated as invalid which defaults the relationship to PKWTT status.
• The total duration cannot exceed five years: Under Government Regulation No. 35/2021, a PKWT (including all extensions and renewals) cannot run for more than five years. This is a hard cap. An employee hired for two years whose contract is extended twice for 18 months each hits the five-year ceiling. Any further extension after that automatically converts the relationship to PKWTT.
• No probation period is permitted: A PKWT cannot include a probation clause. If one is inserted, it is automatically void. The employee has full employment rights from day one.
• Must be registered with the Manpower Office: PKWT contracts must be registered with the local Dinas Ketenagakerjaan (Manpower Office). Registration must be within three working days if registering through the WLKP system, or seven working days if done offline. Failure to register can result in administrative sanctions.

Compensation (Uang Kompensasi) for PKWT

One of the most impactful changes introduced by the Job Creation Law is the mandatory payment of compensation to PKWT employees when their contract ends. Regardless of the reason, whether the contract expires naturally, is terminated early by the employer, or ends because the employee resigns, compensation is owed.

The formula is straightforward:

Compensation = (Months Worked ÷ 12) × One Month's Salary

"Salary" here means base salary plus fixed allowances. Variable pay and irregular bonuses are excluded.

For example, an employee on a 24-month PKWT earning IDR 10,000,000 (~USD 573) per month receives IDR 20,000,000 (~USD 1,150) when the contract ends. An employee who works 8 months at IDR 6,000,000 (~USD 344) receives IDR 4,000,000 (~USD 229).

If a contract is extended, compensation is typically paid at the end of each contract period rather than accumulated to the very end. So an employee on a two-year PKWT extended for another two years would receive compensation at the two-year mark, then again at the four-year mark.

Understanding PKWTT (Permanent Contract) in Indonesia

When Should You Use a PKWTT ?

PKWTT is the default for any role that forms part of your ongoing business operations. This includes most typical full-time positions. This includes marketing managers, accountants, HR staff, software engineers managing live systems, customer service representatives, and so on. These roles exist as long as the business operates. They are not tied to a specific project or season.

PKWTT also applies when you want to offer a proper trial period before confirming employment. Under Indonesian law, PKWTT contracts allow up to three months of probation, during which you can assess fit and performance. 

Key Requirements for PKWTT Contracts

PKWTT contracts are more flexible in form but carry heavier obligations when employment ends.

• Written or verbal (written is strongly advised): A PKWTT can technically be established through written or verbal contracts. However, it is advisable to have a written contract for proper documentation. If a verbal PKWTT does exist, the employer is still required to issue a written appointment letter covering the employee's name, start date, job type, and salary.
• Probation up to 3 months: This must be stated explicitly in writing and cannot be applied retroactively. During probation, the employee must still receive at least the applicable minimum wage and all statutory benefits, including BPJS enrollment. 
• No Manpower Office registration required: Unlike PKWT, PKWTT contracts don't need to be registered. However, you still have an obligation to register the employee with BPJS within 30 days of their start date. This applies to all employees regardless of contract type.

Severance (Uang Pesangon) for PKWTT

When a PKWTT employee is terminated by the employer (not through voluntary resignation), the employer must pay severance and long-service pay. The amounts depend on how long the employee has worked and the reason for termination.

The base severance formula provides one month's salary for each year of service, capped at nine months for employees with eight or more years. Long-service pay adds further amounts for longer-tenured staff, starting from two months' salary at three years of service up to ten months' salary at 24 or more years.

The reason for termination applies a multiplier to the base amounts. A termination due to company restructuring, for example, typically carries a 1x multiplier. Certain other termination reasons may trigger higher multiples.

For example, an employee with 10 years of service terminated due to restructuring, earning IDR 15,000,000 per month, could receive 13 months' salary (approximately IDR 195,000,000) in termination payments.

If a PKWTT employee resigns voluntarily, they are generally not entitled to severance. They may receive a smaller separation allowance depending on company policy.

What Happens If You Misclassify the Contract?

Using PKWT for a role that legally requires PKWTT is one of the most common compliance failures businesses make when hiring in Indonesia. These consequences often surface when the employment relationship ends and your employee has every reason to file a claim. 

If an employee or the Manpower Office successfully challenges a PKWT as invalid, the contract is automatically converted to PKWTT  retroactively, from day one. The employee is treated as having been permanently employed all along.

Once conversion happens, the employer is exposed to:

• Retroactive severance obligations, calculated from the original start date of employment
• Back payment of benefits the employee should have received under PKWTT
• Administrative sanctions from the Manpower Office
• Potential litigation through the Industrial Relations Court, which is costly and slow

Automatic conversion also triggers if a PKWT exceeds the five-year maximum, if the contract was not written in Indonesian, or if other formal requirements weren't met.

How RecruitGo Helps You Get This Right

For most foreign businesses hiring in Indonesia, the cleanest way to handle the PKWT vs PKWTT decision is to skip it entirely. As your Employer of Record (EOR), RecruitGo becomes the legal employer of your Indonesian staff, which means we handle the contract classification, registration, BPJS contributions, and end-of-contract obligations.

What this looks like in practice:

• We review each hire and recommend the appropriate contract type based on the actual nature of the work
• We draft compliant employment contracts in Bahasa Indonesia and English
• We register PKWT contracts with the Manpower Office within the required window
• We handle BPJS registration and monthly contributions
• We process payroll, including the right tax withholding for Indonesian employees
• When employment ends, we calculate and pay compensation or severance correctly

You manage your Indonesian staff's work directly. We handle the legal employment layer in the background. For most companies hiring 1-15 employees in Indonesia, this is faster and cheaper than setting up a local PT PMA and managing employment compliance internally.

Talk to our team if you're planning to hire in Indonesia and want to discuss whether direct hiring through your own entity or EOR is the right fit for your situation.