Indonesia Employment Law: What You Must Know As An Employer

Indonesia’s employment framework is built on UU Ketenagakerjaan No. 13/2003 (Manpower Law), which has governed employment relationships for over two decades. In recent years, however, the government introduced major reforms through UU Cipta Kerja No. 6/2023 (Omnibus Law) and its implementing regulations, particularly Government Regulation No. 35 of 2021 (PP 35/2021).

This guide explains the core pillars of Indonesia’s labor laws. We’ll address key regulatory changes, how to structure your employment terms correctly, and how you can hire and pay your local team compliantly.

What are UU Ketenagakerjaan and the Omnibus Law?

You must navigate two primary legislative pillars to hire compliantly in Indonesia. The Manpower Law (UU No. 13/2003) established the fundamental rights of all workers. More recently, the Omnibus Law (UU No. 6/2023) and its implementing regulation, PP 35/2021, updated these rules to modernize the labor market and attract international investment.

These regulations dictate everything from how you draft a contract to how much you owe an employee upon departure. For foreign employers, the key takeaway is that Indonesian law is strictly protective. Even if an employee signs a contract waiving certain rights, statutory protections under the Manpower Law always take precedence in a local court.

Key Amendments Under the Omnibus Law and PP 35/2021

The current Omnibus framework introduced several core changes designed to make the Indonesian market more accessible for international businesses. These amendments may directly impact your operational costs and your local HR strategy:

• Expanded Contract Limits: Fixed-term contracts (PKWT) can now last up to five years in total per PP 35/2021. This provides more breathing room for long-term projects.
• New Termination Payouts for Contract Staff: Fixed-term staff are entitled to Uang Kompensasi (End-of-Contract Compensation) based on their actual tenure when their contract ends or is renewed.
• Revised Severance Multipliers: UU No. 6/2023 standardized severance calculation formulas across various termination scenarios, such as business restructuring or efficiency moves.
• Increased Overtime Limits: The maximum allowable overtime was increased from 3 hours per day to 4 hours, and from 14 hours per week to 18 hours.
• Job Loss Security (JKP): A new social security component called Jaminan Kehilangan Pekerjaan (JKP) provides cash benefits and training to retrenched workers.

Types of Employment Contracts in Indonesia

There are mainly two types of employment contracts: PKWT (Perjanjian Kerja Waktu Tertentu) and PKWTT (Perjanjian Kerja Waktu Tidak Tertentu). These translate to fixed-term and permanent contracts respectively.

A common misconception among foreign firms is that these are interchangeable. However, the law mandates that the nature of the work dictate the contract type, rather than an employer’s preferences. What this means in practice:

Read our Guide to Employment Contracts for more detailed insights on legal requirements for employment contracts in Indonesia. We also explore Termination Processes and Compensation Costs for each contract type in the sections below.

Key Provisions for Payroll and Benefits in Indonesia

Beyond contract types, you must comply with a range of statutory requirements governing payroll administration and employee benefits as an employer. These provisions, primarily derived from Government Regulation No. 36/2021 on Wages, establish the mandatory calculation base for the social security, taxes, and bonuses listed in the sections below.

Social Contributions for Employees (BPJS)

Law No. 24/2011 requires you to enroll every hire in the national social security program (BPJS). This system provides essential coverage for both Indonesian nationals and eligible foreign workers against health risks, accidents, and financial instability in old age.

Monthly contributions are mandatory. You must submit these to the BPJS office by the 10th for health insurance and the 15th for employment insurance of the following month. While the cost is split between the company and the employee, the employer remains responsible for calculating, deducting, and remitting the total amount.

Here is the general breakdown of contributions:

Note: JKP is funded through a central government subsidy (0.28%) and a recomposition of existing JKK (0.22%) and JKM (0.10%) premiums. It does not increase the employer’s total contribution overhead.

To estimate accurate take-home pay and employer costs for your team, use our Indonesia Income Tax & Payroll Calculator to generate a detailed breakdown based on gross salary.

Tax Withholding and Reporting Requirement (PPH 21)

Managing tax compliance requires you to act as a withholding agent for your employees’ personal income tax (PPh 21). Under the Income Tax Law (Law No. 36/2008) and the HPP Law (Law No. 7/2021), you are responsible for deducting tax on all compensation, including bonuses and benefits.

To simplify monthly administration, Government Regulation No. 58 of 2023 (PP 58/2023) introduced the Effective Tax Rate (TER) system. Instead of complex monthly calculations, you apply a flat percentage based on gross income and the employee’s tax-exempt status (PTKP). This scheme applies from January to November, but you must perform a “True-Up” reconciliation in December using the progressive rates listed below. 

Any under-withholding must be settled by the 10th of the following month, with reports filed by the 20th to avoid administrative penalties. You are also required to provide an annual tax withholding slip (1721-A1) to each employee by the end of January of the following year.

Mandatory Leave and Paid Time Off

Articles 79 and 82 of the Manpower Law grant employees several types of paid leave. Eligibility begins on the first day of employment, except for annual leave, which requires a vesting period.

• Annual Leave: 12 days minimum after 12 months of continuous service.
• Maternity Leave: 3 months of paid leave. Note that the Maternal and Child Welfare (KIA) Law may extend this to 6 months if medical complications are documented.
• Sick Leave: Employees must receive 100% of their salary for the first 4 months of certified illness. The rate reduces to 75% for the next 4 months, and 50% for the subsequent 4 months.
• Personal Leave: The law mandates fully paid time off for family events, such as

• Marriage of the employee: 3 days.
• Marriage of the employee’s child: 2 days.
• Circumcision or baptism of the employee’s child: 2 days.
• Death of a spouse, parent, in-law, or child: 2 days.

Recommended reading: Employee Benefits in Indonesia (Guide for Employers).

Tunjangan Hari Raya Bonus (THR)

THR is defined under Ministerial Regulation No. 6/2016 (Permenaker 6/2016) as a mandatory non-wage income that employers must provide to employees ahead of a religious holiday. This makes it a statutory right, not a discretionary bonus.

To maintain compliance with these regulations, employers should observe the following operational provisions:

• Broad Eligibility: All workers—whether on permanent (PKWTT) or fixed-term (PKWT) contracts—qualify for the allowance once they have completed at least one month of service.
• Service-Based Calculation: Staff with 12 or more months of tenure are entitled to a full month’s salary, while those with 1–11 months receive a prorated amount.
• Strict Payment Deadline: You must disburse the allowance in full no later than seven days before the employee’s respective religious holiday.
• Automatic Penalties: Delayed payments trigger a 5% fine on the total amount due. This must be paid directly to the employee without exemption from the original obligation.

For a deeper look into the operational nuances and calculation formulas for this mandatory bonus, read our guide on THR in Indonesia.

Working Hours and Overtime Pay

In Indonesia, the standard work week is capped at 40 hours, but the daily limit depends on your company’s operational schedule.

• 6-Day Work Week: 7 hours per day.
• 5-Day Work Week: 8 hours per day.

As per PP 35/2021, overtime is strictly regulated to protect employee welfare. You must obtain a written or digital agreement from the employee for any overtime work. Total overtime is capped at 4 hours per day and 18 hours per week (does not apply to work performed on public holidays). This follows a progressive multiplier:

1. First hour: 1.5x the regular hourly wage.
2. Subsequent hours: 2x the regular hourly wage.

Payroll Cycle and Payment Practices in Indonesia

Indonesia follows a monthly payroll cycle, typically disbursed between the 25th and the last working day of the month. Under PP 35/2021, you are legally required to provide a payslip detailing the base salary, allowances, overtime, and deductions for tax and social security.

All domestic salary payments to Indonesian residents must be made in Indonesian Rupiah (IDR), as mandated by Bank Indonesia Regulation No. 17/11/PBI/2015. Even if the contract specifies a foreign currency, the actual disbursement must be converted to IDR. Additionally, you must also keep accurate payroll records for at least 30 years to serve as evidence in potential labor audits or disputes.

Exit and Termination Procedures for Fixed-Term and Permanent Employees

Understanding your legal obligations during an exit is crucial to avoiding reclassification risks or indemnity penalties. Since costs depend entirely on the contract type, you must categorize the exit correctly under the provisions of PP 35/2021.

Managing Terminations for Fixed-Term Staff (PKWT)

If a PKWT ends on its predetermined date, you do not need to issue a formal notice. However, you must pay the mandatory End-of-Contract Compensation (Uang Kompensasi) to Indonesian staff. The formula is based on actual months served. For exactly 12 months, this equals one full month’s salary. For any other duration, the payout is prorated using the formula: (Months Served / 12) × 1 Month’s Salary.

Bear in mind that terminating a PKWT before it expires triggers much stricter requirements. You must provide 14 working days’ notice and prove a “Just Cause” for the exit. Under Article 62 of the Manpower Law, the party terminating early must also pay the other party an indemnity equivalent to the salary for the remaining months left on the contract.

Example Calculation 1: Jane’s Contract Expires

Jane was hired on a 12-month PKWT with a monthly salary of IDR 12,000,000. She completes the full term, and the company decides not to renew her contract. Here’s a breakdown of the calculations for the compensation pay that follows:

• Tenure: 12 months.
• End-of-Contract Compensation: (12 / 12) × IDR 12,000,000 = IDR 12,000,000.
• Rights Compensation (UPH): Unused leave is cashed out at a daily rate (Monthly Salary / 25 or 30 working days). For instance, Jane accrued 12 days of leave for a standard 5-day work week. Compensation is calculated with (IDR 12,000,000 / 25) × 12 = IDR 5,760,000.
• Total Payout: Jane receives IDR 17,760,000.

Example Calculation 2: John’s contract is terminated early

John signed a 12-month PKWT with a monthly salary of IDR 10,000,000. After 7 months, the company terminates the contract due to project cancellation. The calculation for John’s compensation, therefore, entails:

• Tenure Served: 7 full months.
• Prorated End-of-Contract Compensation: (7 / 12) × IDR 10,000,000 = IDR 5,833,333.
• Early Termination Penalty: Under Article 62 of the Manpower Law, you must cover the remaining 5 months (IDR 50,000,000) as an indemnity.
• Rights Compensation (UPH): For example, John accrued 7 days of leave for a standard -day work week: (IDR 10,000,000 / 25) × 7 = IDR 2,800,000.
• Total Payout: John receives IDR 58,633,333.

Managing Terminations for Permanent Staff (PKWTT)

Terminating permanent staff is complex and expensive. Unless gross misconduct is involved, you must provide 14 working days’ notice and follow a formal Warning System (SP1, SP2, and SP3) for performance issues. Each warning letter is valid for six months.

When finalized, the payout consists of:

• Severance Pay (UP): Based on years of service, up to 9 months’ salary.
• Service Period Recognition (UPMK): An additional reward for long tenure (starts after 3 years).
• Rights Compensation (UPH): Payment for unused annual leave.

Our guide on Understanding Severance Pay in Indonesia explores more detailed calculations and compliant packages for employers. 

How RecruitGo Simplifies Your Indonesian Payroll and Hiring

Indonesian labor laws are complex and subject to frequent updates. This is why most foreign companies benefit from a local HR team who are on the ground and well-versed in Indonesian employment regulations.

RecruitGo is an  Employer of Record (EOR) service provider that offers an alternative to setting up a company and building your own HR team from scratch. By partnering with our EOR entity, you can bypass the prohibitive delays of company incorporation and immediately leverage our local experts.

We’ll manage all statutory administrative obligations, including payroll, tax registrations, and mandatory filings. This comprehensive support allows you to focus entirely on your core business operations.

Schedule a no-obligation discovery call with our local team today to discuss your plans in Indonesia and learn more about our support.

Frequently Asked Questions About Indonesian Employment Laws

Bank Indonesia Regulation No. 17/11/PBI/2015 mandates that you must use Indonesian Rupiah (IDR) for all domestic transactions, including salary payments to residents. While you can agree on a salary in a foreign currency within the employment contract, the actual payment must be converted and disbursed in IDR.

Legally, you can only hire in Indonesia through a local entity. However, most companies engage an Employer of Record (EOR) such as RecruitGo, to start onboarding immediately and bypass extensive company incorporation delays.

As your EOR, we serve as the legal employer, managing all statutory payroll obligations and local compliance while you maintain direct oversight of your team’s daily work. It’s an especially advantageous route for remote setups, small teams, and businesses looking to validate the market before a full-scale entry.

Foreigners working under local contracts are protected by the Manpower Law (No. 13/2003). However, they have different entitlements compared to local staff:

– Contract Status: Foreigners are restricted to fixed-term contracts (PKWT) and cannot hold permanent status (PKWTT).
– Compensation Exclusion: Under Article 15 (5) of PP 35/2021, foreign workers are not entitled to End-of-Contract Compensation (Uang Kompensasi).
– Early Termination Rights: Foreign workers are still entitled to the Indemnity Penalty under Article 62 if their contract is terminated early by the employer.

If you continue the employment relationship beyond five years, the employee may be converted under a permanent contract (PKWTT). This is governed by Article 8 of Government Regulation No. 35 of 2021 and strictly enforced by the Ministry of Manpower (MoM). It triggers all permanent employee protections, including mandatory severance and service recognition payouts upon termination.

Minimum wages are set annually at the provincial or regency level, governed by Government Regulation No. 51 of 2023. Rates vary significantly across the country. Jakarta historically maintains the highest minimum wage, while regions in Central Java often have lower statutory minimums.
For 2026, the key minimum wage (UMP) rates in major regions include (approx. USD values at $1 for IDR 16,900):

– DKI Jakarta: IDR 5,729,876 (approx. $339)
– Banten: IDR 3,100,881 (approx. $183)
– West Java: IDR 2,317,601 (approx. $137)
– Central Java: IDR 2,327,386 (approx. $138)
– East Java: IDR 2,446,880 (approx. $145)
– Bali: IDR 3,207,459 (approx. $190)