Severance Pay Rules in Indonesia Explained: What Employers Must Pay, When, and How to Avoid Costly Disputes

Table of Contents

The Main Legal Question

When are employers in Indonesia legally required to pay severance, how much must be paid, and what happens if they get it wrong?

Short answer:
In Indonesia, severance pay is a statutory obligation, not a discretionary benefit. Employers must pay severance, long-service pay, and compensation of rights in most termination scenarios, as regulated under Indonesia’s manpower laws. The amount depends on the reason for termination and the employee’s length of service. Failure to comply can result in invalid termination, court-ordered payments at the highest statutory level, administrative sanctions, and prolonged labor disputes.

For U.S. and foreign employers, severance pay is often the single largest hidden cost of doing business in Indonesia.

Legal Explanation

Why Severance Pay Is Central to Indonesian Employment Law

Indonesia’s labor system is designed to financially cushion employees when employment ends. Severance pay is not treated as compensation for wrongdoing by the employer, but as a mandatory social protection mechanism.

This approach is fundamentally different from U.S. employment practice:

• There is no employment-at-will
• Termination almost always triggers payment
• Courts interpret severance rules strictly and literally
• Employers cannot contract out of statutory severance obligations

Even a lawful termination can still be expensive.

The Three Core Components of Severance Entitlements

Under Indonesian law, termination-related payments usually consist of three separate elements:

1. Severance Pay (Uang Pesangon)
2. Long-Service Pay (Uang Penghargaan Masa Kerja)
3. Compensation of Rights (Uang Penggantian Hak)

Each component is regulated separately and must be calculated carefully.

Severance Is Not Always the Same

A common misconception is that severance pay in Indonesia follows a single formula. In reality:

• Different termination grounds trigger different multipliers
• Some terminations reduce severance
• Others increase severance
• A few eliminate severance entirely (rare)

Understanding why the employment ended is just as important as how long the employee worked.

Legal Basis

This section explains the exact statutory framework governing severance pay in Indonesia, with official law names, numbers, articles, and practical meaning.

1. Core Manpower Legislation

Law Name:
Law No. 13 of 2003 on Manpower, as 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

This law establishes the fundamental right of employees to severance-related payments.

Article 156 – Severance and Compensation Entitlements

• Article 156 paragraph (1)

Employers are required to pay severance pay and/or long-service pay and compensation of rights in the event of termination of employment.

Practical meaning:
Severance is a legal obligation, not a goodwill gesture.

2. Detailed Severance Rules

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

This regulation provides the calculation formulas, multipliers, and termination-based variations.

3. Severance Pay Formula

Article 40 of Government Regulation No. 35 of 2021
Severance pay is calculated based on length of service, as follows:

• Less than 1 year: 1 month salary
• 1 year or more but less than 2 years: 2 months salary
• 2 years or more but less than 3 years: 3 months salary
• Continues up to a maximum of 9 months salary

Practical meaning:
Longer service equals higher severance exposure.

4. Long-Service Pay Formula

• Article 40 paragraph (3)

Long-service pay applies after 3 years of service, ranging from:

• 2 months salary (3–6 years)
• Up to 10 months salary (24 years or more)

Practical meaning:
Senior employees are significantly more expensive to terminate.

5. Compensation of Rights

• Article 40 paragraph (4)

Compensation includes:

• Unused annual leave
• Repatriation costs (if applicable)
• Other benefits stipulated in employment contracts or company regulations

Practical meaning:
Benefits promised in contracts must be paid, even if not statutory.

6. Severance Multipliers Based on Termination Grounds

Different termination reasons result in different severance multipliers.

Examples under Articles 41–59 of Government Regulation No. 35 of 2021:

• Company efficiency: up to 1x severance
• Company closure due to losses: reduced severance
• Employee misconduct: may eliminate severance
• Mutual termination: negotiable, but courts reference statutory levels
• Retirement: often full severance plus benefits

Practical meaning:
Mislabeling the termination reason can double your financial exposure.

7. Fixed-Term Employees (PKWT)

Article 15 of Government Regulation No. 35 of 2021

Employers must pay contract completion compensation equal to:

(Length of service ÷ 12) × 1 month salary

Practical meaning:
Even temporary employees are entitled to termination-related payments.

Risks and Legal Consequences

1. Underpayment of Severance

If an employer pays less than the statutory amount:

• Termination may be declared unlawful
• Courts may order maximum severance
• Back pay and interest may apply

2. Invalid Termination Decisions

Improper termination procedures often result in:

• Reinstatement orders, or
• Severance obligations at the highest multiplier

3. Labor Court Litigation

Severance disputes commonly escalate to:

• Bipartite negotiations
• Government mediation
• Industrial Relations Court proceedings

Litigation is time-consuming and public.

4. Administrative Sanctions

Labor authorities may impose:

• Written warnings
• Fines
• Suspension of business services

5. Reputational and Operational Damage

Severance disputes disrupt operations and damage employer branding, especially for foreign companies.

Case Examples

Case 1: Efficiency Termination Gone Wrong
A foreign company terminated staff citing “efficiency” but failed to show financial losses. The court ordered full severance plus long-service pay.

Case 2: Miscalculated Severance
An employer excluded housing allowance from salary calculation. The court ruled the allowance was part of wages and ordered recalculation with penalties.

Case 3: Fixed-Term Employee Compensation Ignored
A company let a PKWT contract expire without paying compensation. The employer was ordered to pay statutory compensation retroactively.

What Can Be Done

Practical Compliance Strategies for Employers

1. Identify the Correct Termination Ground

Always determine:

• Why the employment ends
• Which statutory article applies
• Which severance multiplier is triggered

2. Calculate Severance Carefully

Include:

• Base salary
• Fixed allowances (as defined in wage regulations)
• Correct length of service

Errors are expensive.

3. Use Mutual Termination Strategically

A mutual separation agreement can:

• Reduce litigation risk
• Control costs
• Provide certainty

However, it must be properly drafted and voluntary.

4. Prepare Financially

Severance is a known legal cost. Budget for it in advance.

5. Obtain Legal Review Before Termination

Legal review often costs a fraction of litigation exposure.

Conclusion

Severance pay in Indonesia is not negotiable by default, not simple, and not forgiving of mistakes. It is a core pillar of Indonesian employment law and one of the most significant financial risks for employers.

For foreign and U.S. companies, the key takeaway is clear:

Termination decisions must always be paired with a severance strategy.

Understanding the statutory formulas, applying the correct termination grounds, and documenting every step can mean the difference between a controlled exit and a costly labor dispute.

If your business is planning layoffs, restructuring, or employee terminations in Indonesia—or if you are already facing a severance dispute—you should consult an experienced Indonesian employment law advocate. Please refer to the contact details provided in this website’s navigation to obtain tailored legal advice and protect your business interests.

FAQ: Severance Pay Rules in Indonesia

Is severance pay mandatory in Indonesia?
Yes. Severance is mandatory under Law No. 13 of 2003 as amended by Law No. 6 of 2023, except in very limited situations.

Can an employer agree on lower severance in a contract?
No. Employment contracts cannot waive statutory severance rights.

Does resignation require severance?
Generally no, but compensation of rights may still apply under Government Regulation No. 35 of 2021.

Are foreign employees entitled to severance?
Yes, unless otherwise regulated by immigration-specific arrangements.

Can severance be paid in installments?
Only if agreed by the employee. Unilateral installment payments are risky.