Termination of Employment in Indonesia: What Employers Must Know to Avoid Costly Severance, Disputes, and Legal Sanctions

Table of Contents

The Main Legal Question

Can an employer legally terminate an employee in Indonesia without triggering excessive severance costs, labor disputes, or court sanctions?

Short answer:
Yes—but only if the employer strictly follows Indonesian labor laws. Termination of employment in Indonesia is not “at-will.” Employers must have a legally recognized reason, follow mandatory procedures, and pay statutory compensation. Failure to comply often results in invalid termination, reinstatement orders, or severance liabilities far exceeding expectations.

For U.S. and foreign employers, termination is the single highest-risk area of Indonesian employment law.

Legal Explanation

Why Termination in Indonesia Is So Strict

Indonesian labor law is built on the principle that termination is a last resort. The legal framework actively discourages dismissals and prioritizes job preservation. This philosophy is explicitly stated in Indonesia’s manpower legislation and reinforced through administrative regulations and court practice.

Unlike the U.S. concept of employment-at-will, Indonesian employers:

• Cannot terminate freely
• Must justify termination with legal grounds
• Must follow a defined process
• Must pay severance and compensation in most cases

Even poor performance, misconduct, or restructuring does not automatically allow immediate dismissal.

Key Termination Concepts Employers Must Understand

1. Termination Is Heavily Regulated
Every termination scenario is regulated by statute, not company policy.

2. Mutual Termination Is Preferable
Many employers rely on mutual separation agreements to manage risk.

3. Severance Is the Default Outcome
In most cases, termination means mandatory severance payments, even when termination is lawful.

4. Courts Favor Employees
Industrial Relations Courts often interpret ambiguities in favor of employees.

Legal Basis

This section outlines the exact legal framework governing termination of employment in Indonesia, with statutory references and practical explanations.

1. Primary Manpower Law Framework

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 is the backbone of all termination rules.

Article 151 – Termination as a Last Resort

• Article 151 paragraph (1)

Employers, workers, trade unions, and the government must make every effort to avoid termination of employment.

Practical meaning:
Employers are legally expected to explore alternatives such as reassignment, training, or negotiation before dismissal.

• Article 151 paragraph (2)

If termination cannot be avoided, the employer must negotiate with the employee or labor union.

Practical meaning:
Unilateral termination without discussion exposes employers to disputes.

2. Grounds for Termination

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

This regulation details lawful reasons for termination.

Article 36 – Recognized Grounds for Termination

Termination may occur due to:

• Company closure
• Force majeure
• Efficiency
• Bankruptcy
• Employee misconduct
• Prolonged illness
• Retirement
• Death
• End of contract (PKWT)

Practical meaning:
Termination must fit one of the legally defined categories. Employers cannot invent reasons.

3. Termination Due to Misconduct

Articles 52–53 of Government Regulation No. 35 of 2021

• Serious misconduct includes fraud, theft, assault, or gross negligence.

Practical meaning:
Even serious misconduct usually requires:

• Internal investigation
• Evidence
• Prior warnings (except for extreme cases)

Immediate termination without proof often fails in court.

4. Termination for Poor Performance

Poor performance is not expressly listed as an automatic ground for termination.
Practical implication

Employers must:

• Issue written warnings
• Provide performance improvement opportunities
• Document evaluations carefully

Without this, termination risks being ruled unlawful.

5. Termination Due to Efficiency or Restructuring

Article 43 of Government Regulation No. 35 of 2021
Efficiency-based termination is allowed when the company:

• Suffers losses, or
• Reorganizes to prevent losses

Practical meaning:
“Efficiency” cannot be cosmetic. Courts often require financial evidence.

6. Severance Pay and Compensation

Articles 40–59 of Government Regulation No. 35 of 2021
Employers must pay:

1. Severance Pay
2. Long-Service Pay
3. Compensation of Rights

Amounts depend on:

• Length of service
• Reason for termination

Example:

An employee with 5 years of service may be entitled to:

• 1x severance
• 1x long-service pay
• Compensation for unused leave and benefits

7. Termination of Fixed-Term Employees (PKWT)

Article 15 of Government Regulation No. 35 of 2021

• Employers must pay contract completion compensation, even if the contract ends naturally.

Practical meaning:
PKWT termination still has financial consequences.

Risks and Legal Consequences

Employers who mishandle termination face serious exposure.

1. Invalid Termination

Courts may declare termination null and void, resulting in:

• Reinstatement orders
• Back pay obligations

2. Excessive Severance Awards

Courts may award maximum severance multiples when employers act in bad faith.

3. Labor Court Litigation

Disputes go through:

1. Bipartite negotiation
2. Mediation
3. Industrial Relations Court

Litigation is public, slow, and costly.

4. Administrative Sanctions

Violations may result in:

• Written warnings
• Monetary penalties
• Business service suspensions

5. Criminal Exposure (Limited but Real)

Certain wage and benefit violations connected to termination may trigger criminal liability under manpower laws.

Case Examples

Case 1: Immediate Termination for Poor Performance
A foreign-owned company dismissed a manager for underperformance without warnings. The court ruled the termination unlawful and awarded double severance.

Case 2: Efficiency Termination Without Financial Proof
An employer cited “efficiency” but remained profitable. The court rejected the justification and ordered reinstatement or severance at the highest level.

Case 3: Mutual Termination Done Correctly
An employer negotiated a mutual separation agreement with clear compensation. The agreement was upheld, and no dispute followed.

What Can Be Done

Practical Strategies for Employers

1. Prioritize Mutual Termination

A properly drafted mutual separation agreement minimizes:

• Litigation risk
• Reputation damage
• Unpredictable court awards

2. Document Everything
Maintain:

• Performance reviews
• Warning letters
• Internal memos
• Financial records

Documentation wins cases.

3. Follow the Legal Process Step by Step

Do not skip:

• Bipartite discussions
• Mediation attempts
• Statutory timelines

4. Budget for Severance Early
Termination is a financial decision. Budget realistically.

5. Seek Legal Review Before Termination
Preventive legal advice is far cheaper than litigation.

Conclusion

Termination of employment in Indonesia is one of the most legally sensitive actions an employer can take. The law strongly protects employees and imposes strict procedural and financial obligations on employers.

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

Termination is not just an HR decision—it is a legal strategy.

By understanding the statutory grounds, following the correct process, and using negotiation wisely, employers can exit employment relationships lawfully and predictably.

If your business is considering terminating employees in Indonesia—or is already facing a labor dispute—you should consult an experienced Indonesian employment advocate. Professional guidance can prevent costly mistakes and protect your commercial interests. Please refer to the contact details available in this website’s navigation to obtain tailored legal assistance.

FAQ: Termination of Employment in Indonesia

Is employment-at-will recognized in Indonesia?
No. Termination must comply with Law No. 6 of 2023 and Government Regulation No. 35 of 2021.

Can an employer terminate without severance?
Only in very limited cases, such as proven serious misconduct.

Can employees be terminated during probation?
Yes, but probation must comply with Government Regulation No. 35 of 2021 and minimum wage rules.

Do foreign employees have the same termination rights?
Generally yes, subject to immigration rules and employment agreements.

Is a court decision always required?
No. Mutual termination avoids court involvement if properly executed.