Hiring in Indonesia: Strategies for Successful Talent Acquisition

Introduction

Indonesia, with its dynamic and growing economy, presents an attractive opportunity for employers and business owners looking to expand their operations. As the largest economy in Southeast Asia, Indonesia boasts a GDP of approximately USD326.52 billion in Q1 2024, with a robust annual growth rate of around 5%. The country currently has a workforce of more than 142 million individuals as of February 2024, ranking it as the world’s fourth largest labour force. This rich talent pool, characterised by a young and dynamic population, offers significant business potential across various sectors.

However, navigating the local labour market can be complex. Indonesia’s regulatory landscape includes stringent employment laws and diverse regional wage variations, which can pose challenges for companies unfamiliar with the local context. Additionally, cultural nuances and the competitive nature of the job market require a strategic approach to effectively attract and retain top talent.

This article provides comprehensive strategies for successful hiring in Indonesia. It delves into the unique aspects of the local market, such as regional distribution and minimum wages, and outlines the regulatory environment that businesses must navigate.

Understanding the Labour Market

Regional Distribution and Minimum Wages

Indonesia’s labour market is diverse, with significant variations in wage levels and labour availability across different regions. For instance, Jakarta, as the capital city, has a higher minimum wage than other regions like Yogyakarta or Bali. Employers must know these regional differences when planning their hiring strategies to ensure competitive compensation packages.

Here is a table showcasing the differences in minimum wages for various regions in Indonesia:

Data source: SatuData – Upah Minimum Provinsi (UMP) Tahun 2024

Explanation of Table

• Jakarta: As the capital and largest city, Jakarta offers the highest minimum wage due to the high cost of living and the concentration of economic activities.
• West Java: This region has a wide range of minimum wages, reflecting the economic diversity within the province, from industrial areas like Bekasi to less developed regions.
• Central Java and East Java: These regions have lower minimum wages, indicating a lower cost of living and different economic conditions compared to Jakarta.
• Bali: Known for its tourism industry, Bali has a moderate minimum wage, reflecting its service-oriented economy.
• Yogyakarta: This cultural and educational hub has one of the lower minimum wages, reflecting its lower cost of living and economic structure.
• Banten: Similar to West Java, Banten’s minimum wage varies significantly across different districts, influenced by the proximity to Jakarta and varying industrial activities.
• East Kalimantan and West Papua: These regions have higher minimum wages due to their strategic economic importance, including natural resources and remote location.

Employers must consider these regional variations when devising compensation strategies to attract and retain talent effectively in Indonesia.

Disclaimer: To get the latest information on minimum wages in Indonesia, always refer to official government sites such as SatuData.

Competitive Labour Market

Indonesia boasts a young and dynamic workforce, making it a competitive labour market, especially in sectors like technology, manufacturing, and services. The country’s median age is around 30 years, indicating a predominantly young working population. This demographic advantage positions Indonesia as an attractive destination for businesses looking to tap into a vibrant and adaptable talent pool.

Workforce Distribution by Sector

Agriculture

Agriculture remains a crucial sector in Indonesia, employing approximately 39.45 million workers, which constitutes around 29% of the total workforce. Despite the sector’s significant employment share, it contributes about 13% to the national GDP. The agricultural sector includes activities such as farming, fishing, and forestry, which are essential for food security and rural development.

Technology

Indonesia’s technology sector has been experiencing rapid growth, driven by increasing internet penetration and the proliferation of startups. The creative economy in Indonesia, which is a part of the digital economy, is projected to experience substantial growth and continue to lower the unemployment rate. In 2023, it contributed up to 8% to Indonesia’s GDP, solidifying its position as one of the nation’s one of the most successful sectors. Forecasts indicate that by 2030, Indonesia will see an increase of 300,000 technology-related positions, including roles like web developers and IT experts. These professionals will need to adapt their skills to automation, which will impact around 1% of all jobs.

Manufacturing

The manufacturing sector is one of the cornerstones of the Indonesian economy, contributing around 20% to the national GDP. Major industries include automotive, textiles, and electronics. Approximately 20 million workers are in manufacturing, highlighting its importance in providing employment and driving economic growth.

Services

The services sector is the largest contributor to Indonesia’s GDP, accounting for over 40%. This sector encompasses a wide range of industries, including finance, retail, tourism, and hospitality. About 50% of the workforce is employed in various service-oriented roles, reflecting the sector’s critical role in the economy.

Attracting and Retaining Top Talent

In Indonesia’s competitive labour market, companies must go beyond offering attractive salaries to attract and retain top talent. This involves implementing multifaceted strategies that address the evolving needs and expectations of the workforce. Key strategies include:

Career Development Opportunities

Providing clear career progression paths and continuous learning opportunities is essential to attract and retain top talent. Employees today are increasingly looking for roles that offer professional growth and development. According to a LinkedIn survey, 94% of employees would stay at a company longer if it invested in their career development. According to a research by PwC, 49% of the 1,043 Indonesian respondents are concerned about not receiving adequate training in digital and technology skills from their employer.

Upskilling Programs

Companies can leverage courses from platforms such as Amazon Web Services (AWS) to upskill their employees. AWS offers over 150 free, on-demand digital training courses in Bahasa Indonesia, covering a wide range of topics including cloud essentials, security, machine learning, data analytics, and the Internet of Things. By integrating these readily available training programs, companies can ensure their workforce remains competitive and well-equipped to handle industry challenges.

Flexible Working Conditions

Offering flexible working arrangements has become an attractive feature for top talent, particularly with the increase in remote work, especially following the COVID-19 pandemic.

According to research conducted by PwC, as the Indonesian economy bounces back from the pandemic, employers have anticipated a return to in-person work to some extent. Currently, 18% of respondents work remotely full-time, while only 5% work in-person full-time. A majority, accounting for 77% of respondents, have embraced a hybrid working model. The research also indicates that 75% of respondents still prefer hybrid, with 74% expecting their company to provide this option.

Companies like Zoom have implemented flexible work policies that allow employees to work from home or choose hybrid working models. This flexibility helps attract talent from a broader geographic area and caters to employees’ preferences for a better work-life balance.

Flexible working conditions are also crucial for maintaining a healthy work-life balance, which is highly valued by employees. The option to work remotely can reduce commute times, allow employees more personal time, and increase overall job satisfaction (Robert Walters).

Positive Work Culture

Creating an inclusive and engaging work environment is crucial for attracting and retaining top talent. A positive work culture fosters employee satisfaction, loyalty, and productivity.

• Team-Building Activities: Regular team-building activities help in fostering a sense of community and collaboration among employees. For example, Unilever Indonesia frequently organises team-building events and social activities to strengthen team cohesion and improve employee morale.
• Mental Health Support: Providing mental health support is becoming increasingly important. Companies like BCA (Bank Central Asia) offer mental health resources and programs to support their employees’ well-being. This can include access to counselling services, mental health days, and stress management workshops.
• Focus on Work-Life Balance: Employers who prioritise work-life balance see higher employee satisfaction and retention rates. Initiatives such as flexible working hours, wellness programs, and family-friendly policies contribute to a supportive work environment.

Regulatory Environment

Employment Contracts

Employment contracts for hiring in Indonesia must comply with Government Regulation No. 35 of 2021 (GR 35/2021), which outlines the requirements for permanent and temporary contracts. This compliance is essential for both local and foreign workers and plays a crucial role in clarifying rights, obligations, and legal protections, especially in employment termination.

Types of Employment Contracts in Indonesia

1. Fixed-Term Employment Agreement (PKWT): Used for time-bound projects and must be in writing. These contracts are valid for up to five years and can be extended for an additional five years. PKWTs must be registered with the manpower office; compensation is mandated after the working period.
2. Indefinite Time Employment Agreement (PKWTT): Establishes a permanent employment relationship, which can be made verbally or in writing. The employer must issue a written appointment letter if an oral agreement is reached. PKWTTs do not require registration and allow a probationary period of up to three months.

Ensuring Legal Compliance

A written employment contract provides legal certainty and clarity regarding the rights and obligations of both parties. It helps in mitigating disputes and ensuring adherence to contractual provisions.

1. Mutual Agreement and Legal Capacity: Contracts must be agreed upon by both parties and align with public order and decency.
2. Company Regulations: Employment contracts can refer to approved company regulations.
3. Ministry Registration: PKWT contracts must be registered with the Ministry of Manpower within three days of signing.

Key Clauses for Compliance

• Job Descriptions: Clearly define the employee’s role and responsibilities. For example, a marketing manager’s contract should detail tasks such as developing marketing strategies and managing campaigns.
• Compensation: Specify salary and benefits such as health insurance, bonuses, and allowances. For instance, a software engineer’s contract might state a monthly salary of IDR 10,000,000 plus benefits.
• Working Hours: Comply with regulations, typically set at 40 hours per week. An administrative assistant’s contract should mention standard working hours and provisions for overtime pay.
• Termination Conditions: Outline terms for contract termination, including notice periods and severance pay. A temporary worker’s contract might state that either party can terminate with one month’s notice and include severance pay details.

Special Considerations for Foreign Workers

As stipulated by the Manpower Law, foreign workers in Indonesia must be on temporary contracts. These contracts must specify the nature of the work and cannot extend beyond the permitted time frame. Specific positions for expatriates are also regulated, and it is crucial to check with local authorities regarding permissible job roles for foreigners.

Best Practices for Drafting Employment Contracts

• Formal Offer Letter: Send a formal offer letter outlining essential terms such as remuneration, KPIs, starting date, probation period, job description, working hours, and days off.
• Bilingual Contracts: For foreign employees, provide contracts in both the local language and the employee’s native language.
• Document Copies: Ensure both parties retain signed copies of the contract, including one with the other party’s signature on the stamp duty.

Termination Process and Compensation

Terminating an employment contract in Indonesia is regulated by strict guidelines. Employers must provide written notification outlining reasons, payments, and entitlements at least 14 days before termination. Employees are entitled to severance payments, long service pay, and compensation of rights based on their length of service.

When terminating an employment contract, both the employer and the employee must clearly understand their rights, obligations, and the procedures involved. Proper procedures include:

• Negotiations: Attempt to negotiate with the employee or their labor union.
• Follow Company Regulations: Adhere to steps outlined in the company regulations.
• Warning Letters: Issue three consecutive warning letters before proceeding with termination.
• Compensation: Calculate and pay any remaining compensation owed to the employee.

Source: Kemnaker and Investment Legal Advisory

Employment Benefits Packages for Hiring in Indonesia

Indonesia mandates social insurance contributions, which include health insurance, employment insurance, and pensions. Understanding these components and ensuring timely contributions is critical for compliance and employee satisfaction.

Salary

When discussing salary, it’s important to clarify whether it is net or gross. Net payment means that the employer covers the employee’s Income Tax (PPH 21) and social and health insurance (BPJS) contributions. Most Indonesian candidates, particularly juniors, prefer to state their expected salaries as net.

Festive Holiday Leave

Indonesia has a significant number of holidays, including national, religious, international, and commemorative days. These “tanggal merah” or “red dates” are public holidays when banks, schools, government offices, and most businesses are closed. Companies need to prepare for these festive days, either closing their operations or compensating employees extra for working on holidays. Indonesian Manpower Law also mandates a religious holiday allowance, known as Tunjangan Hari Raya (THR), equivalent to one month’s salary, effectively providing employees with 13 salaries per year.

Healthcare and Social Security Program (BPJS) and other social security schemes

Employers in Indonesia must provide basic healthcare and social security to all full-time employees. The Badan Penyelenggara Jaminan Sosial (BPJS) program offers medical and old-age coverage to all Indonesians. This program consists of two parts: BPJS Kesehatan (health insurance) and BPJS Ketenagakerjaan (social security). Employers are responsible for registering their employees for both.

• BPJS Kesehatan Contribution: Employers contribute 4% and employees contribute 1% of the maximum gross salary of 12,000,000 IDR. This covers the employee, their spouse, and three children, with additional family members covered at 1% per person per month.
• BPJS Ketenagakerjaan (social security):

Further reading: Indonesia Statutory Updates for 2024

Non-Mandatory Employee Compensation Benefits

To attract and retain highly skilled workers, companies often offer additional benefits beyond those required by Manpower Law. These benefits can significantly enhance employee morale and job satisfaction. Examples include:

• Bonus structures (other than THR, which are not regulated by Indonesian Manpower Law but can be established in company regulations based on performance)
• Additional days for annual leave
• Expanded inpatient and outpatient health insurance to cover family members
• Permission to work remotely
• Mobile phone credit allowance
• Meal allowance or stipend

Work Permits and Visas

If you’re considering hiring foreign workers in Indonesia, it’s essential to understand the process and requirements for obtaining an Indonesian work visa for your employees. An Indonesian work visa cannot be obtained without a sponsor (employer). As the employer, you will handle most of the application process, including obtaining your foreign employees’ work permit and limited stay visa/residence permit (KITAS). This process can be lengthy and bureaucratic, often taking several months.

How to Apply for an Indonesian Work Visa

Here are the steps involved in obtaining an Indonesian work visa for your foreign employees:

1. Obtain Employer Approval: You must obtain approval from the Indonesian government to hire a foreign worker. This involves proving the necessity of hiring a foreign worker over an Indonesian citizen. This approval is formalised through an Expatriate Placement Plan (RPTKA – Rencana Penempatan Tenaga Kerja Asing), which you obtain from the Indonesian Ministry of Manpower.
2. Apply for Work Permit (IMTA): Once the RPTKA is approved, you apply for a work permit (IMTA—Ijin Mempekerjakan Tenaga Kerja Asing) from the Ministry of Manpower. The foreign employee must provide necessary documents, such as work and education certificates, passport copies, etc., for this application.
3. Apply for Limited/Temporary Stay Work Visa (VITAS): You then apply for a VITAS at the Indonesia Investment Coordinating Board (BKPM). The BKPM issues a recommendation letter to the Indonesian Immigration Department.
4. Indonesian Work Visa Application: The foreign employee applies for an Indonesian work visa (VITAS) at an Indonesian Embassy or Consulate nearest to them, using photocopies of the RPTKA and IMTA.
5. Conversion to ITAS: Upon arrival in Indonesia with the VITAS, the foreign employee must convert it to a Temporary Stay Permit (ITAS) at the Immigration Department, which allows them to live and work in Indonesia for up to a year (extendable).
6. KITAS Issuance: After receiving the ITAS, the foreign employee applies for the KITAS (Temporary Stay Permit Card) at a local immigration office. The KITAS is the physical card indicating their temporary stay permit.
7. Additional Requirements: Obtain a Police Report Letter (STM) from the local police department and register with the local municipality’s population office to receive a Certificate of Registration for Temporary Resident (SKPPS).
8. Foreign Workers Work Permit (IKTA): Finally, apply for the IKTA at the Ministry of Manpower. You must pay the Skill and Development Fund (DPKK), a monthly fee of $100 before the IKTA is issued.

Documents Needed for Indonesia Work Visa

For RPTKA Application

• RPTKA application form
• Employer’s letter explaining the hire
• Company documents (incorporation document, business license, tax number)
• Organizational structure of the company
• Annual reports on local and international employees (Wajib Lapor)
• Letter of recommendation (if applicable)

For IMTA Application

• RPTKA
• Passport copy
• Proof of education and work experience
• Work experience certificate (at least five years)
• Agreement letter from the foreign employee
• Insurance policy from an Indonesian insurance company
• National Social Security policy and Tax identification number (NPWP)
• Proof of DPKK payment
• Two passport-size colour photos

For KITAS Application

• Copy of RPTKA
• Sponsor’s identity card (KTP)
• Identity card of a local employee
• Company documents (NPWP, SIUP, SPPMA, TDP, SKTU, SITU & HO, Akta Notaris)
• Company’s annual reports (Wajib Lapor)
• Blank company letterhead paper
• Company’s stamp
• Foreign employee’s passport copy
• Foreign employee’s CV with company stamp and director’s signature
• Educational degree certificate with translations
• Work experience certificate
• Insurance policy from an Indonesian insurance company
• Two passport-size colour photos

Validity and Extension of Work Visa

The initial Indonesia work visa (KITAS) is valid for 3 months to one year and can be renewed before it expires. After three consecutive years on a KITAS, the foreign employee can apply for a permanent stay permit (KITAP), valid for five years and renewable.

Bringing Family Members

Dependent family members of your foreign employees can apply for Indonesian visas together with the primary applicant and will receive their KITAS simultaneously. However, dependent spouses cannot work unless they obtain their own work permit and sponsor.

By understanding these steps and requirements, you can ensure a smoother process for hiring and managing foreign workers in Indonesia, ensuring compliance with local regulations and successfully integrating them into your team.

Source: The Most Important Dimension of the Corporate Culture of Indonesian Companies (A Case Study) and Permitindo

Cultural Nuances

When managing employees in Indonesia, understanding and respecting the local office culture is essential for creating a harmonious and productive work environment. Indonesian office culture is influenced by a mix of traditional values and modern business practices, and recognising these cultural nuances can help in effectively managing your team.

Hierarchy and Respect

Indonesian workplaces often have a hierarchical structure. Respect for seniority and authority is deeply ingrained in the culture. Managers must lead by example and maintain a respectful and professional demeanour. Employees may hesitate to speak up or challenge authority, so creating an open and inclusive atmosphere where feedback is encouraged is important.

Communication Style

Indonesian communication tends to be indirect and nuanced. Employees may avoid direct confrontation and prefer to convey their messages subtly to maintain harmony. As a manager, reading between the lines and understanding the underlying concerns or suggestions is crucial. Regular meetings and one-on-one sessions can help build trust and encourage open communication.

Collectivism and Teamwork

Indonesian culture places a high value on collectivism and community. Teamwork and collaboration are essential aspects of the workplace. Encourage team-building activities and foster a sense of camaraderie among your employees. Recognise group achievements and emphasise the importance of working together towards common goals.

Work-Life Balance

Balancing work and personal life is important to Indonesian employees. Many value spending time with family and participating in community activities. As an employer, offering flexible working hours, allowing remote work when possible, and understanding the need for personal time can greatly enhance employee satisfaction and productivity.

Religious and Cultural Sensitivities

Indonesia is a diverse country with a rich tapestry of religious and cultural practices. Respecting religious holidays, prayer times, and dietary restrictions is important. Providing prayer rooms and allowing time for religious observances can show respect for employees’ beliefs and foster a more inclusive workplace.

Festive Celebrations

Indonesians celebrate a variety of festivals and holidays, both religious and national. Participating in these celebrations and acknowledging these holidays can strengthen your team’s morale. Providing bonuses, known as Tunjangan Hari Raya (THR), during major religious festivals is a common practice and helps in building goodwill among employees.

Professional Development

Investing in the professional development of your employees is highly valued. Offering training programs, workshops, and opportunities for skill enhancement can motivate employees and improve their performance. Show genuine interest in their career growth and provide clear paths for advancement within the company.

Conflict Resolution

Handling conflicts delicately and with sensitivity is important in Indonesian office culture. Mediation and dialogue are preferred methods for resolving disputes. Ensuring that all parties feel heard and respected during the resolution process helps maintain a positive work environment.

Conclusion

Expanding your business operations into Indonesia offers significant opportunities, thanks to its dynamic economy and substantial labour force. However, navigating the complexities of the local labour market, understanding regulatory requirements, and respecting cultural nuances are crucial for success. This comprehensive guide provides strategies for attracting and retaining top talent, ensuring compliance with employment laws, and managing a diverse workforce effectively. It is also important to refer to official sources when executing these strategies, as this guide is a reference, and the information may change over time.

Leveraging EOR Services for Seamless Expansion

Navigating the intricacies of Indonesia’s labour market can be challenging for foreign businesses. This is where Employer of Record (EOR) services come into play. An EOR can handle all aspects of employment, from recruitment and onboarding to payroll and compliance, ensuring that your business adheres to local regulations while you focus on core operations. EOR services provide the expertise and local knowledge needed to manage your workforce efficiently and mitigate risks associated with international expansion.

At Eos Global Expansion, we specialise in helping businesses like yours successfully navigate the complexities of international markets. Our EOR services in Indonesia offer comprehensive support, ensuring that your business remains compliant and your employees are well-managed. Contact us today to learn how we can assist you in achieving your global growth objectives while minimising risks and administrative burdens. Let us help you unlock the potential of Indonesia’s vibrant market and drive your business forward.

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