Firing in Indonesia: Legal Considerations and Best Practices

Introduction

Firing in Indonesia due to the extensive employee protections outlined in Indonesia’s Manpower Law No. 13 of 2003. Employers need clear and justifiable reasons for termination, such as gross misconduct, redundancy, or poor performance. Proper documentation and compliance with legal requirements are essential to minimise risks during the termination process.

Statistics show that 6,640 industrial relations disputes were recorded from January to September 2023, with 71.15% involving employment termination disagreements. This emphasises the need for employers to fully comprehend and comply with legal requirements to avoid costly disputes and ensure a smooth termination process.

Additionally, despite the growth of Indonesia’s digital economy, there have been numerous layoffs. In the initial weeks of 2024, nearly 25,000 tech workers were laid off, with seven tech companies announcing layoffs in just the first six days of June. Companies that lack proper documentation of employee performance and structured termination procedures are likely to face disputes and legal challenges.

One effective approach to mitigate these challenges is engaging in thorough bilateral negotiations and providing legally mandated severance packages. Failing to adhere to the required notice period and severance pay when closing operations can lead to significant consequences, including intervention from the Ministry of Manpower and substantial compensation for affected employees.

This guide offers valuable insights into the legal considerations and best practices for firing in Indonesia, ensuring compliance and minimising potential disputes.

Permissible Grounds for Termination

The Manpower Law No. 13 of 2003 specifies several permissible grounds for terminating an employee. Each ground requires specific procedures and documentation to ensure compliance and avoid disputes:

Voluntary Resignation

When an employee decides to leave the company voluntarily, it’s essential for employers to ensure the resignation is genuinely voluntary and not due to any form of pressure or coercion. Employers should:

1. Confirm Voluntariness: Conduct an exit interview to confirm that the resignation is truly voluntary. Document the conversation, ensuring the employee confirms they are leaving of their own accord.
2. Investigate Claims of Coercion: If an employee claims they were forced to resign due to intolerable working conditions, promptly investigate the claim. This involves reviewing workplace conditions, speaking to other employees, and examining any relevant documentation.
3. Maintain a Positive Work Environment: Strive to create and maintain a positive work environment to prevent constructive dismissal claims. Address any workplace issues promptly and fairly.
4. Document the Resignation: Keep a signed resignation letter from the employee, clearly stating their decision to resign and the effective date. This helps protect the employer from future disputes regarding the nature of the resignation.

Expiry of Employment Contract

The employment relationship naturally concludes when an employment contract reaches its predetermined end date. However, employers must handle this process carefully to avoid complications. Employers should:

1. Monitor Contract Terms: Keep track of contract end dates and notify employees well in advance of their contract’s expiration. This allows both parties to prepare accordingly.
2. Assess Contract Renewals: If fixed-term contracts have been repeatedly renewed, evaluate whether the nature of the employment has effectively become indefinite. This may require providing severance payments similar to those for permanent employees.
3. Communicate Clearly: Communicate with the employee about the contract’s end date and any potential renewal considerations. Document these communications to ensure transparency.
4. Provide Severance if Necessary: If the contract’s expiry is considered a termination, ensure the employee receives any severance pay and benefits they are entitled to under the law.

Retirement

Employees who reach retirement age, as stipulated in their contract or company policy, can be lawfully terminated. However, this must be handled with sensitivity and proper planning. Employers should:

1. Plan Ahead: Develop a retirement policy clearly outlining the retirement age and related procedures. Communicate this policy to employees well in advance.
2. Provide Adequate Notice: Give ample notice to employees approaching retirement age, allowing them to prepare for the transition. This shows respect and helps avoid abrupt terminations.
3. Offer Retirement Benefits: Ensure that all promised retirement benefits, such as pensions or other financial incentives, are provided. This helps maintain a positive relationship and avoids legal disputes.
4. Support Transition: Offer resources such as financial planning advice or retirement workshops to assist retiring employees with the transition. This demonstrates the company’s commitment to their long-term well-being.
5. Document the Process: Keep thorough records of all communications and actions related to the retirement process to ensure transparency and compliance with legal requirements.

Gross Misconduct

Gross misconduct includes severe violations such as theft, fraud, or violence. Employers must:

1. Gather Solid Evidence: Ensure you have clear, indisputable evidence, such as video recordings, documents, or eyewitness testimonies.
2. Conduct a Thorough Investigation: Conduct a detailed investigation to ascertain the facts. This should be well-documented and impartial.
3. Follow Due Process: Allow employees to explain or defend their actions during a formal hearing. This step is crucial for maintaining fairness and transparency.
4. Make a Decision Based on Facts: After considering all evidence and the employee’s defence, make an informed decision regarding the termination.

Incompetence or Poor Performance

Terminating an employee for poor performance requires careful and documented efforts. Employers should:

1. Document Performance Issues: Maintain detailed records of performance reviews, including specific instances where the employee did not meet expectations.
2. Provide Training and Support: Offer training programs or additional support to help the employee improve. This demonstrates that you have given them opportunities to rectify their performance.
3. Issue Warning Letters: If performance does not improve, issue formal warning letters outlining the specific issues and the required improvements.
4. Implement Improvement Plans: Create a performance improvement plan (PIP) with achievable goals and a timeline. Monitor and document the employee’s progress.
5. Make a Final Decision: If the employee still fails to meet the standards despite these efforts, proceed with termination, ensuring all documentation is in order to support your decision.

Redundancy

Redundancy occurs due to economic reasons, technological changes, or organisational restructuring. Employers must:

1. Demonstrate Genuine Need: Clearly show that the redundancy is necessary due to economic downturn, technological advancements, or structural changes within the organisation.
2. Engage in Bipartite Negotiations: Initiate discussions with the employee or their representatives to explain the situation and explore alternatives.
3. Offer Fair Severance Packages: Provide the legally mandated severance pay and additional support, such as job placement assistance or training for new skills.
4. Support Affected Employees: Help employees find new employment, either through job placement services or by offering references and recommendations.
5. Document the Process: Keep thorough records of all communications, negotiations, and the rationale behind the redundancy to ensure transparency and compliance with legal requirements.

Read more: Understanding the Employee Life Cycle: A Guide for Business Owners

Severance Pay and Compensation

Indonesian law mandates that terminated employees receive severance pay, long service pay, and compensation pay. These payments vary based on the duration of employment and the reason for termination. Employers must calculate these payments accurately to avoid legal disputes.

Severance Pay

Severance pay is a financial payment provided to employees when their employment is terminated. The amount of severance pay in Indonesia is determined by the length of service and the type of termination. The Manpower Law No. 13 of 2003 specifies the following formula for calculating severance pay:

• Less than 1 year: 1 month’s salary
• 1 to 2 years: 2 months’ salary
• 2 to 3 years: 3 months’ salary
• 3 to 4 years: 4 months’ salary
• 4 to 5 years: 5 months’ salary
• 5 to 6 years: 6 months’ salary
• 6 to 7 years: 7 months’ salary
• 7 to 8 years: 8 months’ salary
• 8 or more years: 9 months’ salary

Long Service Pay

Long service pay, also known as gratuity, is an additional payment given to employees who have served the company for a long duration. The calculation for long service pay is based on the employee’s length of service and is provided as follows:

• 3 to 6 years: 2 months’ salary
• 6 to 9 years: 3 months’ salary
• 9 to 12 years: 4 months’ salary
• 12 to 15 years: 5 months’ salary
• 15 to 18 years: 6 months’ salary
• 18 to 21 years: 7 months’ salary
• 21 to 24 years: 8 months’ salary
• More than 24 years: 10 months’ salary

Compensation Pay

Compensation pay covers various other benefits that employees are entitled to upon termination. This includes unused annual leave, relocation expenses, and housing allowances. The specific components of compensation pay can vary, but they generally include:

• Unused Annual Leave: Payment for any accrued but unused annual leave.
• Housing Allowance: If the employment contract includes a housing allowance, the pro-rated amount up to the termination date must be paid.
• Relocation Expenses: If applicable, costs related to relocating the employee back to their home country or city.

Pro-Rata Pay Calculation

Pro-rata pay is calculated when an employee has not completed a full month of service during their last month. To calculate pro-rata pay:

1. Determine Daily Rate: Divide the employee’s monthly salary by the number of working days in the month.Daily Rate = Monthly Salary / Number of Working Days
2. Calculate Pro-Rata Pay: Multiply the daily rate by the number of days worked in the final month.Pro-Rata Pay = Daily Rate × Days Worked

For example, if an employee’s monthly salary is IDR 5,000,000 and there are 22 working days in the month, the daily rate would be:

Daily Rate = IDR5,000,000 / 22 = DR227,273

If the employee worked for 15 days in their final month, the pro-rata pay would be:

Pro-Rata Pay=IDR227,273 × 15 = IDR3,409,095

Source: Asean Briefing

Terminating Foreign Employees in Indonesia

Terminating foreign employees in Indonesia involves additional considerations beyond those for local employees. Employers must comply with both Indonesian labour laws and immigration regulations to avoid legal complications.

Rights of Terminated Foreign Workers

The rights of foreign workers upon termination differ from those of Indonesian workers. According to Article 15 of Government Regulation (GR) No. 35/2021:

1. Compensation for PKWT Employees:
   • Exemption for Foreign Workers: Foreign workers employed under a Fixed-Term Employment Agreement (PKWT) are not entitled to the compensation typically given to Indonesian workers under the same conditions.
   • Payment upon Termination: Indonesian workers receive compensation at the end of the PKWT period or its extension, but this does not apply to foreign workers.
   • Article 62 of the Manpower Law: If either party terminates a PKWT before its expiration, the terminating party must pay compensation equal to the worker’s wages for the remaining agreement period.
2. Severance Pay for PKWTT Employees:
   • Foreign employees under an Indefinite-Term Employment Agreement (PKWTT) are entitled to severance pay similar to Indonesian workers. However, if foreign workers are employed under PKWT, they are not eligible for severance pay but compensation if the contract is terminated prematurely.

Termination Scenarios for Foreign Workers

1. Work Permit and Visa Compliance: Foreign employees typically work under specific work permits (IMTA) and limited stay visas (KITAS). Upon termination, employers must:
   • Notify Authorities: Inform the Ministry of Manpower and the Immigration Office about the formal termination of the work permit and visa formally.
   • Coordinate Departure: Assist with the logistics of the foreign employee’s departure, ensuring they have a valid exit permit (Exit Permit Only or EPO).
2. Repatriation Costs: Employers are often responsible for repatriation costs, including travel expenses for the foreign employee to return to their home country. These should be clearly outlined in the employment contract to prevent disputes.

Legal Obligations for Terminating Foreign Employees

• Return to Home Country: Employers must return foreign workers to their home country after their work agreements expire.
• Report Terminations: Employers must report to the Minister of Manpower or a designated official about the expiration or early termination of foreign worker employment agreements.

Relevant Legal Basis

• Law No. 13 of 2003 on Manpower: This law provides the foundational regulations for employment, including the rights and obligations of workers and employers.
• Regulation of the Government in Lieu of Law No. 2 of 2022 on Job Creation: This regulation, enacted into law under Law No. 6 of 2023, includes provisions on employment agreements and termination.
• GR No. 34 of 2021 on the Recruitment of Foreign Workers: Outlines the requirements and processes for employing foreign workers in Indonesia.
• GR No. 35 of 2021: Covers temporary employment agreements, outsourcing, working hours, breaks, and termination of employment relationships.

Conclusion

To mitigate risks and ensure compliance, employers must adopt best practices for termination processes. This includes conducting regular performance reviews to identify issues early, providing training and support to help employees meet performance standards, and maintaining clear and transparent communication throughout the termination process.

Legal consultation is also crucial to navigate the complexities of Indonesian labour law. By following these best practices, employers can effectively manage terminations while minimising the risk of disputes and penalties. Implementing these strategies can help businesses navigate the complexities of employment termination in Indonesia, ensuring compliance and smooth operations in the local market.

For more detailed information on navigating employment laws in Indonesia, visit our website at Eos Global Expansion.

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Photo by Fikri Rasyid on Unsplash