Understanding Severance Pay in Indonesia

Have you recently begun looking into the process of outsourcing back-office teams in Indonesia? As a prospective employer, it’s helpful to understand labor laws regarding employee termination and, more importantly, severance pay in Indonesia. 

Foreign employers often underestimate the importance of the topic of employee termination and the preparation that it requires to avoid potential legal liability. This article will walk you through some of the most common setbacks you may face and provide some key insights for ensuring compliance with severance regulations in Indonesia.

What are the current regulations governing severance pay in Indonesia?

What is severance pay in Indonesia and when is it applicable?

Severance pay in Indonesia, known locally as Uang Pesangon (UP)  is a form of compensation that is to be paid out to a former employee upon termination of their employment. In Indonesia, Severance pay is a mandatory benefit that must be offered to employees in the case of employer-initiated termination or in certain circumstances such as an employee retiring. 

The specific amount of severance pay is determined based on the length of service, type of contract, and last applicable salary rate:

• Fixed-term contract employees (PKWT):
  Only applicable for termination prior end of the contract period.
  • For employment of ≥12 months, severance is equivalent to 1 month’s salary.
  • For employment of <12 months, severance is prorated.
  • Only applicable for justified causes for termination of employment.
  • Payout ranges from 1 month’s salary to 9 month’s salary, depending on the length of service.

  Additional severance packages for long-term employees

  Employees who have been employed within a company for more than three years are also entitled to long service payment, referred to as Uang Penghargaan Masa Kerja (UPMK). The UPMK payment starts at 2 months’ pay and rises by an additional month for every additional block of 3 years of service.

  Employees in Indonesia are also entitled to compensation for all accrued rights upon termination of employment, also known as Uang Penggantian Hak (UPH). As a foreign employer, you must therefore consider the following entitlements when calculating UPH pay:

  1. Unused annual leave accrued by the employee up to the date of termination
  2. Pending unreimbursed travel expenses/transportation costs
  3. Any additional payments included in the contract or collective agreement

  Although not mandatory, it is also common for employers to offer separation pay packages in the event of certain employee-initiated termination of employment. These payments must be agreed to during the hiring process and clearly stated either in the employment contract or in your company’s collective agreement.

  Navigating employee termination as a foreign employer

  Common termination scenarios and the effect on severance pay in Indonesia

  As a prospective employer, you will inevitably be required to terminate certain employment contracts. It is best practice to stay up to date on some of the more common scenarios that can lead to this type of decision and how they factor into severance pay entitlement laws in Indonesia:

  Reason for termination	Severance pay
  Company merger/ acquisition/ restructuring	Full amount
  Retirement	1.75% of standard rate
  Force Majeure (Unforeseen circumstances) not resulting in closure	0.75% of standard rate
  Force Majeure resulting in bankruptcy or closure	0.5% of standard rate
  Employee Misconduct	Reduced or waived (depends on severity)
  Resignation	No

  RecruitGo can help you navigate the complexities of calculating severance pay in Indonesia through our Managed Payroll service. This allows you to outsource payroll for your remote workers to our local experts who understand current regulations and will ensure compliance for your employee management in Indonesia. 

  Identifying invalid termination situations

  It is common for former employees in Indonesia to sue employers for perceived wrongful termination, due to the strict regulations and labor laws that protect them. You must therefore avoid terminating employees for reasons that are not considered valid per Indonesian law:

  • Performing religious worship
  • Absence due to a diagnosed illness (up to 12 months)
  • Pregnancy/maternity
  • Fulfilling state obligations
  • Participating in labor unions
  • Marriage
  • Reporting Employer crimes or misconduct
  • Discrimination based on belief, religion, political orientation, ethnicity, color, race, sex, physical condition, or marital status

  RecruitGo’s local advisors can help you determine whether or not you have just cause for terminating an employment contract before the fact to ensure that you remain compliant with Indonesian law. We also recommend taking a look at our related article on leading innovative practices for improving employee retention in emerging markets.

  How an Employer of Record can facilitate determining severance pay allowance in Indonesia

  As your Employer of Record (EOR), RecruitGo acts as the legal employer of your overseas remote teams. This allows you to easily manage your employees through our App by entering worked hours, and salary details, and managing leave requests. We can also help you set up remote hubs for a more hands-on approach to remote team management.

  Our team will handle local payroll, offer advice on the handling of cases of employee termination, and calculate severance pay and allowances. RecruitGo will also act as your representative if scenarios of wrongful termination litigation arise to ensure that your interests and reputation are protected.

  If you are interested in hiring remote employees in the Indonesian market or would like to partner with our local experts for payroll management, contact us via the form below today!