How To Hire And Pay Employees In Indonesia

Indonesia is a country with a population of over 260 million people and is the fourth most populous country in the world. Indonesia is also one of the fastest growing economies in Asia, with an average growth rate of 5% per year.

The business climate in Indonesia is stable and favorable for foreign investors. The country has a well-developed infrastructure, including an efficient financial system and efficient telecommunications. This makes it easy to conduct business activities. Thirdly, the country has a stable economy, which is conducive to investment.

However, conducting business in Indonesia poses some challenges; language barrier and that there is lack of skilled workers.

Employees in Indonesia are entitled to receive 12 days of annual leave per year, once they have completed 12 months’ continuous service.

Indonesia has 15 public holidays over 16 days. 

January 1st: New Year's Day 

February 1st: Chinese New Year

February 28th: Isra 'Mi'raj of Prophet Muhammad

March 3rd: Nyepi Day 

April 15th: Good Friday 

May 1st: Labour Day 

Probation periods may be implemented, up to a maximum of three months.

There is no required notice period for employers in Indonesia. Employees may resign with 30 days’ notice. Severance pay varies depending on the reason for employment termination and includes events such as imprisonment, death, retirement, and bankruptcy.

• Standard Severance Pay: one month of wages for service of less than one year, plus an additional month of wages for every year of service, up to nine months’ salary.
• Long Service Pay: two months’ salary after the first three years of service, followed by an additional one month’s salary for every three years of service thereafter, up to a maximum of ten months’ salary for 24 years of service.

Additional Compensation Pay must be paid to cover the following:

• annual leave that has not expired or been
• relocation expenses (expenses to return the employee and their family to the place from which they were recruited).
• medical and housing allowance: 15% of the total severance pay and service appreciation pay, if any.
• other benefits provided under the employment agreement, the company regulations or the CBA.
• other compensation amounts as determined by the Industrial Relations Court (this can include special arrangements between the employer and employee).

In theory, restrictive covenants are enforceable by virtue of the principle of freedom of contract, adopted in the Indonesian Civil Code. However, in practice, they are very difficult – and sometimes impossible – to enforce. This applies to non-compete clauses as well as provisions for customer and employee non-solicitation.

Fixed-term employment agreements must be made in writing and registered with the local Manpower office within:

• 3 days of the signing, if the agreement is registered through online registration; or
• 7 days of the signing, if the agreement is registered through manual

Indefinite-term employment agreements may be made either orally or in writing.

Under Indonesian law, businesses must give three months' paid maternity leave to pregnant employees, at least half of which must be taken after the birth. Fathers in Indonesia working in the public sector are eligible for one month’s paid paternity leave, while those in the private sector are granted two days of paid leave.

Employees are entitled to 100% of their salary for their first four months of sickness. After this, their pay is reduced by 25% and an employer may terminate an employee who has been sick for 12 months. Sick pay is covered by the employer, not the government.

Employers are required to contribute 4% of employees‘ monthly salaries to the Health Care programme, with employees themselves contributing an additional 1%. For these contributions, salary is capped at IDR 8M per month.

The Indonesian government prefers that expatriates be employed in Indonesia only in positions that cannot currently be filled by Indonesian nationals. Companies that wish to hire expatriates must provide the necessary education and training programs for Indonesians who will replace the expatriates within a reasonable time period. In addition, employers must appoint Indonesian employees as the counterpart of the foreign workers and implement education and training for Indonesian employee as part of a transfer-of-knowledge program. The employer also is obliged to facilitate education and training of and the teaching of Indonesian language to the foreign workers. Work permits are usually issued for a maximum period of 12 months and may be extended, subject to approval from the government.

Indonesia's minimum wage is established by provincial and district authorities, which vary by province, district, and sector. The Indonesian monthly minimum wage varies from IDR 1.1M in Central Java to 3.1M in Jakarta.

The payroll cycle in Indonesia is monthly and is usually paid on the last working day or any other date as agreed in the employment contract. There is a statutory requirement to pay the 13th month salary, which is called THR - a religious holiday pay to reflect the religious diversity in the country. For non- Muslims, the THR is paid by December, and for Muslims, before Eid.

Employees contribute 2% of their monthly salary to old-age benefit (Jaminan Hari Tua), in addition to a 3.7% employer contribution, and 1% of their monthly salary to pension benefit (Jaminan Pensiun), in addition to a 2% employer contribution.