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Why a foreign company’s obligations in Indonesia begin at recruitment, what the Omnibus Law actually changed, and the compliance gaps that surface long after the first hire.
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Most foreign investors arrive in Indonesia with their attention fixed on three things: market entry, tax structuring and licensing. Employment is treated as an operational detail to settle once the business is running. That order is the error. Under Indonesian law, the obligations of an employer attach well before the first contract is signed, and the protections they carry are stronger than the post-Omnibus headlines suggested.
This page works through six questions with Sri Wahyu Ningsih, a partner at NDP who has spent more than sixteen years on Indonesian employment and compliance. The aim is practical: what applies from day one, why termination is genuinely difficult, where the recurring compliance gaps sit, and what is changing over the next two years.
Why employment law is so often underestimated
The rules that apply from day one
Why termination is such a sensitive issue
Can a poor performer be terminated easily
The gaps discovered after a company hires
What is changing in the next 12 to 24 months
Sri Wahyu Ningsih
Partner
Sri is a Partner at Nusantara DFDL Partnership, an Indonesian law firm and a DFDL collaborating firm. Sri’s areas of expertise cover investment law, labour and employment, immigration, tourism, consumer protection, general corporate and commercial matters.
Practice Areas: Compliance & Investigations | Corporate & M&A | Employment
SPEAK WITH Sri Wahyu NingsihEmployment gets pushed to the end of the entry checklist, behind market strategy, tax and licensing. Two misreadings drive that. The first is a belief that the Omnibus Law liberalised employment protection. It did not. The second is an assumption that an employer’s obligations start with the first signed contract. They start at recruitment.
The Omnibus Law, formally the Job Creation Law, was reported at the time as deregulation. In practice it streamlined certain procedures and broadened the rules on outsourcing, but it left the core protective structure in place. Constitutional Court Decision No. 168/PUU-XXI/2023 went further still, restoring several protections the law had reduced, including duration limits on fixed-term contracts and sectoral minimum wage obligations.
The timing point is just as important. Under the Manpower Law, the employment relationship is regulated from the recruitment stage. Advertising a role, running interviews and extending an offer all sit inside that framework, which is built on the constitutional principle that local workers are protected from the earliest point of contact.
The Omnibus Law streamlined procedure; it did not soften severance, termination or salary protection.
The Constitutional Court’s 2023 decision restored protections, including fixed-term contract limits.
Employer obligations attach from recruitment, not from the first signed contract.
Indonesian employment law is layered across statute and implementing regulation, and it keeps moving.
Your legal obligations as an employer start not when you begin hiring, but when you begin recruitment.
Four rules form the baseline. The contract type, since permanent and fixed-term employment are governed differently and are not interchangeable. Minimum wage, which is set regionally and updated every year. Termination and severance, which are mandatory. And outsourcing, which is permitted but easy to get wrong in the drafting.
Contract type. Indonesia recognises permanent contracts (PKWTT), which may carry a probation period of up to three months, and fixed-term contracts (PKWT), which carry no probation and are meant strictly for temporary or project work, capped at a cumulative five years. A fixed-term contract used for a permanent role can lead to the employee being reclassified as permanent.
Minimum wage is set and updated annually by each region, and the employer must meet the applicable provincial or district figure. Termination and severance are mandatory: every termination involves a severance package, and a unilateral dismissal without process exposes the employer to the maximum liability. Outsourcing is allowed and was broadened under the Omnibus Law, but a loosely drafted agreement can create an implied employment relationship and pull vendor staff onto the principal’s books.
Fixed-term PKWT is capped at five cumulative years; misuse triggers reclassification to permanent.
Minimum wage is regional and annual; the higher of the provincial or district rate applies.
There is no zero-cost termination; severance is mandatory in almost every case.
Outsourcing is legal, but weak drafting creates direct liability for vendor staff.
Termination is difficult along three axes at once: process, cost and culture. The law treats dismissal as something to be avoided, requires a documented multi-stage procedure before it is valid, makes severance mandatory in almost every case, and sits inside a culture where a dispute can quickly become a matter of dignity rather than money.
Process. Under the Manpower Law and Government Regulation No. 35/2021, there is no lawful unilateral dismissal. The route runs through documented bipartite negotiation, then mediation at the local Manpower Office, and only then to the Industrial Relations Court. A performance or conduct dismissal must be supported by formal written warnings, each with valid grounds and a prescribed validity period. Verbal warnings carry no legal weight.
Cost. Severance applies across virtually every termination category. For permanent employees the formula runs across severance pay, long service pay and compensation of rights. Culture is the dimension most often missed: employees sometimes pursue a claim over dignity rather than recovery, and a process that feels disrespectful escalates fast.
There is no unilateral dismissal; the law’s default position is to prevent termination.
The sequence is bipartite negotiation, then Manpower Office mediation, then the Industrial Relations Court.
Written warnings with valid grounds and validity periods are mandatory; verbal warnings count for nothing.
Thin documentation at court usually means the maximum severance award.
Disputes are not always about money. Sometimes they are about dignity, and a process that feels disrespectful is the one that escalates.
No. A poor-performance dismissal still requires the full documented process: written warnings citing specific grounds, prescribed validity periods, and evidence that the employee was given a genuine chance to improve. The burden of proof sits with the employer, and a court reading an ambiguous record will read it for the employee.
Performance is not a shortcut around procedure. The warning letters must be in writing, grounded in specific legal reasons, and carry the validity periods that regulation prescribes. The employer also has to be able to show a genuine, documented improvement opportunity rather than asserting one after the fact.
If the matter reaches the Industrial Relations Court and the documentation is thin, the likely outcome is a ruling for the employee and the maximum permissible severance. For a long-serving employee that is a material number. The framework exists by design: Indonesian labour law prioritises worker protection, and courts interpret ambiguity in the employee’s favour. The practical consequence is that performance management has to be built into the HR system from the first hire, not assembled once a problem appears.
There is no fast-track dismissal for underperformance.
Written warnings, valid grounds, prescribed validity periods and a documented improvement opportunity are all required.
The burden of proof rests on the employer; courts read an ambiguous record for the employee.
Build performance-management systems from the first hire, not after an issue arises.
Four rules form the baseline. The contract type, since permanent and fixed-term employment are governed differently and are not interchangeable. Minimum wage, which is set regionally and updated every year. Termination and severance, which are mandatory. And outsourcing, which is permitted but easy to get wrong in the drafting.
Four gaps recur in almost every audit, and each carries real financial weight: defective employment contracts, systematic overtime underpayment, overuse of fixed-term contracts, and the absence of registered company regulations. A fifth, data protection, is rising fast.
None of these is exotic. They are the predictable result of building a workforce without employment counsel, and they are also the findings that most often surface in legal due diligence ahead of an M&A transaction, where the buyer inherits the accumulated liability.
Indonesian regulation prescribes mandatory clauses. Miss them and the contract can be unenforceable; a fixed-term employee on a defective contract can be reclassified as permanent from day one.
The prescribed formula applies to base salary plus fixed allowances. Employers routinely calculate on base salary alone, producing systematic underpayment and a large back-pay exposure.
The five-year cap on PKWT is regularly breached, sometimes by a decade, dragging in secondary failures in social security registration and payroll tax.
An employer with ten or more staff must register a Peraturan Perusahaan and renew it every two years. Its absence invites sanctions and weakens the employer in any disciplinary dispute.
Under the Personal Data Protection Law, employee data is regulated personal data requiring consent, security and a governance framework.
These are the findings buyers discover in diligence. Inherited gaps reduce deal value and become the acquirer’s liability.
Four rules form the baseline. The contract type, since permanent and fixed-term employment are governed differently and are not interchangeable. Minimum wage, which is set regionally and updated every year. Termination and severance, which are mandatory. And outsourcing, which is permitted but easy to get wrong in the drafting.
Three developments are worth preparing for now: continued regulatory refinement after the Omnibus Law, including an expected standalone Manpower Law; expanding data protection obligations as the Personal Data Protection Law applies in full to employee data; and a generational shift, with younger employees more legally literate and more willing to assert their rights.
Technical gaps remain in the current framework, particularly around termination, outsourcing and severance calculation. A new standalone Manpower Law is expected to follow the Constitutional Court’s mandate, with a target of late 2025 or 2026. On data, the Personal Data Protection Law places direct obligations on how employers collect and process employee information, which means documented consent and a real governance programme rather than an informal one.
The cultural shift is quieter but consequential. A workforce that knows its rights, and is willing to assert them, raises the cost of weak HR practice. The implication is that HR has to operate as a strategic compliance function, not an administrative one.
A standalone Manpower Law is expected around late 2025 to 2026.
The Personal Data Protection Law applies in full to employee data; HR needs documented consent and governance.
A more legally literate workforce raises the cost of weak HR practice.
Run a structured compliance review covering contracts, payroll, data governance and company regulations.
Indonesian employment runs principally on the Manpower Law (Law No. 13/2003), as amended by the Job Creation Law (Omnibus Law), with Government Regulation No. 35/2021 governing fixed-term work, outsourcing, working time and termination. Constitutional Court Decision No. 168/PUU-XXI/2023 restored several employee protections and mandated a new standalone Manpower Law.
National employment policy, and the implementing regulations that sit beneath the statute.
Pengadilan Hubungan Industrial: adjudicates employment disputes that mediation does not resolve.
The local Manpower Office: registers company regulations and mediates disputes.
Mandatory employment and health social security registration and contribution.
Indonesian law does not allow a dismissal to be imposed unilaterally. Where termination cannot be avoided, it has to move through three stages in order, each documented, before it is enforceable.
Bipartite negotiation between employer and employee, documented in writing.
Mediation at the local Manpower Office if the parties cannot agree.
The Industrial Relations Court, where weak documentation favours the employee.
1
Have Indonesian employment counsel audit the proposed structure before any contract is issued.
2
Put compliant contracts, BPJS registration and a location-specific minimum wage check in place.
3
Register company regulations once the workforce reaches ten employees, and renew every two years.
The conversation in compressed form, for an HR leader or country manager preparing to build a workforce in Indonesia.
Sri Wahyu Ningsih
Partner
Sri is a Partner at Nusantara DFDL Partnership, an Indonesian law firm and a DFDL collaborating firm. Sri’s areas of expertise cover investment law, labour and employment, immigration, tourism, consumer protection, general corporate and commercial matters.
Practice Areas: Compliance & Investigations | Corporate & M&A | Employment
SPEAK WITH Sri Wahyu NingsihPKWT is a fixed-term contract for genuinely temporary or project-based work, capped at a cumulative five years across all extensions. PKWTT is an open-ended permanent contract and may include a probation period of up to three months. The two are not interchangeable.
No. A fixed-term PKWT can only be used for roles that are genuinely temporary or project-based. Using one for an ongoing permanent role is unlawful and exposes the employer to automatic reclassification of the employee as permanent, with full severance entitlements.
No. Severance applies across virtually all categories of termination. For permanent employees the formula runs across severance pay, long service pay and compensation of rights. Unilateral dismissal without process exposes the employer to the maximum liability.
No. A performance dismissal requires written warning letters citing specific legal grounds and carrying prescribed validity periods, plus documented evidence of a genuine improvement opportunity. The burden of proof rests on the employer, and courts read an ambiguous record for the employee.
Any employer with ten or more employees must register company regulations with the local Manpower Office. The handbook must cover working time, overtime, salary, leave, safety, discipline and termination, and must be re-registered every two years.
At minimum: a compliant employment contract, whether PKWT or PKWTT; proof of registration with BPJS Ketenagakerjaan and BPJS Kesehatan; a minimum wage compliance check for the relevant province and district; and, for employers with ten or more staff, registered company regulations.
A new standalone Manpower Law is expected around late 2025 to 2026, following the Constitutional Court’s mandate in Decision No. 168/PUU-XXI/2023. Employers should monitor the legislative programme rather than treat the current framework as final.
