Hiring Employees in Indonesia: A Practical Labor Law Overview for Foreign Companies and U.S. Employers

Table of Contents

The Main Legal Question

What do foreign and local employers need to legally hire employees in Indonesia without exposing their business to labor disputes, fines, or criminal sanctions?

Short answer:
Hiring employees in Indonesia is legally possible and commercially viable, but it is highly regulated. Employers must comply with Indonesia’s post–Job Creation labor framework, covering employment contracts, wages, social security, working hours, termination procedures, and employee protections. Non-compliance can invalidate contracts, trigger mandatory severance payments, or result in administrative and criminal penalties.

This article explains how Indonesia’s labor law system works in practice, what risks employers commonly face, and how to hire employees lawfully and efficiently.

Legal Explanation

Indonesia’s Labor Law System in Plain English

Indonesia’s employment law is employee-protective by design. Courts and labor authorities tend to prioritize worker rights, especially in disputes involving termination, unpaid wages, or social security.

Since 2020, Indonesia’s labor regime has been reshaped by the Job Creation Law, which aimed to make hiring more flexible while preserving core employee protections. However, flexibility does not mean “at-will employment” as understood in the U.S. Employers must still follow formal procedures, written contracts, and statutory entitlements.

Key characteristics of hiring employees in Indonesia include:

• Mandatory written employment agreements
• Strict rules on fixed-term vs. permanent employment
• Government-regulated minimum wages
• Compulsory social security enrollment
• Complex termination and severance rules
• Heavy reliance on government regulations rather than case law

For U.S. companies, the biggest mistake is assuming Indonesian employment law operates like U.S. employment-at-will. It does not.

Legal Basis

Below are the core laws governing hiring employees in Indonesia, with practical explanations of each.

1. Manpower Law (as amended)

Law Name: Law No. 13 of 2003 on Manpower
Amended by: Law No. 6 of 2023 on the Stipulation of Government Regulation in Lieu of Law No. 2 of 2022 concerning Job Creation into Law

Key Articles and Practical Meaning:

• Article 1

Defines “employment relationship” as a relationship based on a work agreement involving work, wages, and authority.

Practical meaning: If someone works under your direction and receives payment, labor law likely applies—regardless of job title.

• Article 50

Employment relationships arise from employment agreements.

Practical meaning: Verbal agreements are risky. Written contracts are essential.

• Article 51

Employment agreements may be written or oral, but written agreements are strongly recommended.

Practical meaning: In disputes, courts favor written contracts.

2. Fixed-Term and Permanent Employment

Regulation: Government Regulation No. 35 of 2021 on Fixed-Term Employment Agreements, Outsourcing, Working Time, and Termination of Employment

Key Provisions:

Article 2
Employment may be based on:

• Fixed-Term Employment Agreement (PKWT)
• Indefinite-Term Employment Agreement (PKWTT)

Articles 4–8
PKWT may only be used for:

• Temporary work
• Work expected to be completed in a certain time
• Seasonal or project-based workPractical meaning: You cannot freely use fixed-term contracts for permanent roles.

Article 15

• Employers must pay compensation at the end of a PKWT.

Practical meaning: Even contract employees are entitled to statutory compensation.

3. Working Hours and Overtime

Regulation: Government Regulation No. 35 of 2021

Article 21
Normal working hours:

• 7 hours/day and 40 hours/week (6-day workweek), or
• 8 hours/day and 40 hours/week (5-day workweek)

Article 26

• Overtime requires employee consent and overtime pay.

Practical meaning: Unpaid overtime is illegal.

4. Wages and Minimum Salary

Regulation: Government Regulation No. 36 of 2021 on Wages, as amended by Government Regulation No. 51 of 2023

Article 23

• Governors set provincial and regency/city minimum wages.

Practical meaning: Minimum wage differs by location.

Article 24

• Employers are prohibited from paying below minimum wage.

Practical meaning: Even probationary employees must receive minimum wage.

5. Social Security (BPJS)

Law Name: Law No. 24 of 2011 on Social Security Administering Bodies

Article 15

• Employers must register employees in social security programs.

Practical meaning: BPJS Health and BPJS Employment are mandatory.

Failure to enroll employees can lead to administrative sanctions, including suspension of business services.

6. Termination of Employment

Regulation: Government Regulation No. 35 of 2021

Article 36

• Termination must be based on valid legal grounds.

Practical meaning: Termination without cause is not allowed.

Articles 40–59

• Regulate severance pay, long-service pay, and compensation.

Practical meaning: Termination almost always costs money.

Risks and Legal Consequences

Hiring employees without understanding Indonesian labor law exposes employers to serious risks:

1. Invalid Employment Contracts

• Improper PKWT use can automatically convert a contract employee into a permanent employee.

2. Mandatory Severance Liabilities

• Unlawful termination can result in severance obligations exceeding 12 months’ salary.

3. Labor Court Disputes

• Employment disputes are resolved through the Industrial Relations Court, which often favors employees.

4. Administrative Sanctions

Authorities may impose:

• Written warnings
• Fines
• Suspension of business licenses

5. Criminal Exposure

• Certain wage and social security violations may trigger criminal penalties under labor laws.

Case Examples

Case 1: Misused Fixed-Term Contract
A Jakarta-based foreign company hired a “Marketing Manager” under a 3-year PKWT. The court ruled the role was permanent by nature, converting the employee to PKWTT status and awarding severance upon termination.

Case 2: Minimum Wage Violation
An employer paid below the provincial minimum wage during probation. The employer was ordered to pay wage shortfalls retroactively.

Case 3: Failure to Register BPJS
A company skipped BPJS registration for foreign and local employees. The government suspended licensing services until compliance.

What Can Be Done

Practical Steps for Employers

1. Choose the Correct Employment Type

• Use PKWT only for legally permitted roles.
• Use PKWTT for core positions.

2. Draft Clear Written Contracts

• Specify job title, wages, working hours, termination rights.
• Use bilingual contracts where appropriate.

3. Comply with Wage Regulations

• Monitor annual minimum wage updates.
• Adjust payroll accordingly.

4. Register Social Security Immediately

• Enroll employees in BPJS Health and BPJS Employment.

5. Plan Termination Strategically

• Conduct legal review before dismissal.
• Budget for severance costs.

6. Consult a Labor Law Advocate

• Prevent disputes rather than litigate them.

Conclusion

Hiring employees in Indonesia offers access to a skilled and competitive workforce, but the legal framework is not forgiving of mistakes. Indonesian labor law imposes clear obligations on employers—especially foreign companies unfamiliar with its protective structure.

By understanding the correct employment classifications, mandatory wage rules, social security obligations, and termination procedures, businesses can significantly reduce legal exposure while building a stable workforce.

If you are facing employee hiring, restructuring, or termination issues in Indonesia, professional legal guidance is not optional—it is essential. We invite you to consult an experienced Indonesian labor law advocate through the contact details provided in this website’s navigation to protect your business and ensure full compliance.

FAQ: Hiring Employees in Indonesia

Is employment-at-will allowed in Indonesia?
No. Indonesian law requires valid grounds and procedures for termination under Law No. 6 of 2023 and Government Regulation No. 35 of 2021.

Can foreign companies hire employees directly?
Yes, if they have a legally established Indonesian entity or representative office with hiring authority.

Are probation periods allowed?
Yes, but only for permanent employees and limited to 3 months under Government Regulation No. 35 of 2021.

Do independent contractors fall under labor law?
Misclassification is common. If control and wages exist, labor law may apply regardless of contract labels.

Is severance always required?
In most termination scenarios, yes. The amount depends on the legal basis for termination.