Indonesia employment compliance mistakes can be easy to make. Avoid these pitfalls with this guide
As Southeast Asia’s largest economy, Indonesia presents enormous growth potential for international companies looking to expand their footprint in the region. With over 270 million people, abundant natural resources, and a booming digital economy, the archipelago is drawing attention from businesses across industries—from tech and manufacturing to mining and consumer goods.
However, Indonesia’s evolving regulatory environment and unique business culture mean that compliance is often more complex than companies anticipate. Missteps in labor law, social security, permits, or corporate governance can lead to operational setbacks, legal liabilities, and reputational damage.
Here are the top five Indonesia employment compliance mistakes companies make when expanding into the country—and how your business can avoid them.
Read our Indonesia country guide
1. Misclassifying Workers as Independent Contractors
One of the most common—and costly—mistakes foreign companies make in Indonesia is the misclassification of workers as independent contractors when, in fact, the nature of the working relationship is more akin to employment. Businesses often prefer contractor arrangements because they appear more flexible and less burdensome from a compliance standpoint. However, Indonesian labor law places substance over form. Even if someone is labeled a contractor in a written agreement, the actual working conditions—such as control over work hours, exclusivity, or long-term engagement—may indicate an employer-employee relationship.
If authorities determine that a contractor should have been classified as an employee, the consequences can be costly. Companies may be required to retroactively provide statutory benefits, such as paid leave, severance pay, and social security contributions, and may also face administrative penalties or legal disputes. To mitigate this risk, companies should conduct a careful legal analysis of each role they intend to fill and ensure that contracts reflect the true nature of the engagement. In cases of uncertainty, engaging an Employer of Record (EOR) can help maintain compliance while still enabling operational flexibility.
Read more: Avoiding Employee vs Contractor Misclassification: How Employer of Record Services Can Help
2. Failing to Keep Pace with Rapid Labor Law Changes
Indonesia’s labor framework has undergone significant reforms in recent years, particularly under the Omnibus Law on Job Creation (passed in 2020) and the subsequent Constitutional Court rulings. These reforms aimed to boost investment by simplifying regulations, but they also introduced a degree of legal uncertainty and complexity.
Key changes include:
- New rules on fixed-term contracts (PKWT) and severance
- Relaxation of overtime and rest day provisions
- Modified rules for layoffs and compensation
- Expanded role of employee unions and collective bargaining
Adding to the complexity, several provisions of the Omnibus Law have been challenged in court, resulting in revisions, delays, and contradictory interpretations. In a pivotal ruling on 31 October 2024, Indonesia’s Constitutional Court struck down several key provisions of the Job Creation Law (Omnibus Law), delivering a major win for trade unions and workers who have opposed the legislation since its introduction in 2020. The decision compels the government to draft a new employment law within two years, a move that could significantly reshape Indonesia’s labor regulations and payroll framework. For businesses, this means that HR policies and employment contracts must be reviewed regularly to ensure compliance with the latest rulings.
Businesses that rely on outdated employment templates or fail to align with current legislative frameworks risk serious compliance breaches. For example, misapplying old severance formulas or failing to honor new union-related procedures could result in labor disputes or financial penalties. To stay compliant, companies must proactively monitor legal updates from the Ministry of Manpower and other relevant agencies, interpret court rulings, and continuously revise their HR documentation and processes. Collaborating with local legal experts or trusted EOR providers is crucial to navigating these dynamic legal conditions and avoiding costly mistakes.
Read more: Indonesia Payroll Guide: Compliance and Best Practices
3. Underestimating BPJS Obligations
BPJS (Badan Penyelenggara Jaminan Sosial) is Indonesia’s national social security system, comprised of:
- BPJS Kesehatan (Health Insurance)
- BPJS Ketenagakerjaan (Employment Benefits, including work accident, old-age savings, and pension programs)
Enrollment in both schemes is mandatory for all employers with local employees—regardless of company size. However, some foreign businesses mistakenly assume that these contributions are optional or applicable only to large corporations.
Failure to register employees with BPJS or to make timely contributions can trigger significant consequences, including fines, operational audits, loss of government-issued business licenses, ineligibility for tenders or public contracts, legal claims from employees, and reputational damage. Moreover, improper calculation of contributions, such as underreporting salaries or missing specific benefit categories, can expose businesses to retroactive liabilities. To avoid these issues, companies must ensure that all employees are registered promptly upon hiring and that payroll systems are calibrated to calculate and remit contributions accurately. If outsourcing HR functions, it is vital to confirm that third-party providers are fully compliant with BPJS regulations.
4. Mismanaging Expatriate Work Permits and Visas
Many foreign companies aim to bring in expatriate talent to launch or oversee operations in Indonesia. However, the process of obtaining legal work authorization is often more complex than anticipated. Indonesia has a regulated system for hiring foreign employees. Before employing expatriates, companies must obtain:
- RPTKA (Foreign Manpower Placement Plan) approval
- IMTA (Work Permit)
- KITAS (Limited Stay Visa and residency permit)
These permits are issued by the Ministry of Manpower and Immigration authorities, and the process includes demonstrating that the foreign worker possesses unique skills not readily available in the local labor market.
Some companies make the mistake of hiring expatriates on tourist or business visas, assuming they can regularize the paperwork later. Others underestimate the documentation required or fail to comply with mandatory training and knowledge transfer obligations for Indonesian counterparts. These oversights can lead to fines, deportations, or even the suspension of the company’s right to hire foreign workers.
To remain compliant, companies must allocate sufficient time and resources to navigate the immigration process. Working with an experienced local advisor ensures that paperwork is filed correctly and that all procedural requirements are met. Additionally, businesses should stay aware of sector-specific restrictions and government expectations around localization and capacity-building for local employees.
5. Overlooking Cultural and Industrial Norms in HR Policies
Compliance isn’t only about following laws—it’s also about aligning with local business practices, expectations, and cultural norms. Companies that apply a “copy-paste” approach to global HR policies often struggle with employee relations, union engagement, and staff retention.
For example:
- In some industries, 13th-month salaries (Tunjangan Hari Raya or THR) and other customary bonuses are expected—even if not mandated by contract.
- Indonesian workers may place strong emphasis on hierarchy, religious observance, and familial obligations.
- In unionized sectors like manufacturing or energy, companies are expected to engage proactively with labor unions and follow internal dispute resolution mechanisms.
Ignoring these soft elements of compliance can erode employee trust and attract unwanted attention from labor inspectors or local media.
To build a resilient workforce and maintain regulatory compliance, companies must localize employment agreements, benefits structures, and workplace policies. Investing in cultural training for foreign managers and fostering an inclusive environment that respects Indonesian values will not only support compliance but also enhance employee retention and satisfaction. In unionized settings, establish constructive dialogue and clear grievance procedures to maintain workplace harmony.
Read more: Managing Human Capital Risks: A Guide
Final Thoughts on Indonesia Employment Compliance Mistakes
Indonesia is a market rich with potential, but success here demands more than ambition. It requires an intimate understanding of local compliance requirements, cultural context, and labor dynamics. Making these Indonesia employment compliance mistakes can be costly—and in many cases, avoidable with the right support.
As your company looks to enter or grow in Indonesia, consider partnering with a local legal advisor, HR consultant, or EOR like Eos Global Expansion to help navigate the complexities of compliance. With the right foundation, you’ll be better positioned to build a resilient, successful operation in one of Asia’s most promising economies.
Contact Eos Global Expansion today. Check our services here or book a free consultation now.
Image by Daniel Wagino from Pixabay
