SmartDeer

Hiring Employees in Indonesia

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1. Key Points in Employment Contracts

  • Full – time Employees: Labor Contracts
    • The contract must be written in English or Bahasa Indonesia, and it can be bilingual. It must be in written form and signed by both parties.
    • The contract must include the names and detailed information of the employer and the employee, the employee’s date of birth, the position, duties and responsibilities, the work location, the employment status (full – time, part – time, or temporary), the start and end dates of the contract, the salary level, the payment date, working hours, vacation rights, and terms for terminating the employment.
  • Part – time Employees and Interns: IC Contracts
    • It is recommended to use an Independent Contractor (IC) agreement for part – time employees and interns.

2. Overview of Local Statutory Welfare Systems

  • Salary Payment
    • The employer can pay the employees’ salaries on the last day of each month or on a specific date each month (such as the 5th of each month). The specific payroll date should be clearly stipulated in the labor contract or company regulations. Usually, the salary payment must be completed within 7 days after the end of the pay period to ensure that employees receive their salaries in a timely manner.
  • Monthly Minimum Wage
    • In 2025, the latest minimum wage in Jakarta is IDR 5,396,761 (approximately 2,385 RMB per month). The minimum wages in other provinces vary and should be referred to the government’s announcements.
  • Probation Period
    • Article 60 of the Labor Law stipulates that an open – ended contract can enforce a probation period of no more than three months. A fixed – term contract cannot have a probation period.
  • Employer Costs
    • Most of Indonesia’s social welfare has a cap. Overall, the employer’s cost accounts for about 10.24% of the employee’s salary:
      • Provident Fund: 3.70%
      • Death Insurance: 0.30%
      • Work – related Injury Benefits: 0.24%
      • Healthcare and Social Security: 4% (maximum IDR 480,000)
      • Pension: 2% (maximum IDR 210,948)
    • The 13th – month salary is mandatory and is usually provided during festivals.

3. Salary Payment and Statutory Holiday Responsibilities

  • Personal Income Tax
    • Personal income tax rates range from 5% to 35%, calculated on a progressive basis. Factors such as family status and the number of children may affect the final tax rate.
    • Non – resident individuals are subject to a 20% withholding tax on their total income in Indonesia, unless otherwise stipulated in a double – taxation treaty.
  • Overtime Pay and Maximum Working Hours
    • The standard weekly working hours are 40 hours, with two options: an average of 7 hours per day for 6 working days, or an average of 8 hours per day for 5 working days.
    • Overtime pay standards:
      • On weekdays, the first hour of overtime is paid at 1.5 times the hourly wage, and each subsequent hour is paid at 2 times the hourly wage.
      • On holidays, for a 5 – day workweek (8 – hour workday), the first 8 hours of overtime are paid at 200% of the normal hourly wage, the 9th hour is paid at 300%, and the 10th – 11th hours are paid at 400%. For a 6 – day workweek (7 – hour workday), the first 7 hours of overtime are paid at 200% of the normal hourly wage, the 8th hour is paid at 300%, and the 9th – 10th hours are paid at 400%.
      • Overtime hours cannot exceed 3 hours per day and 14 hours per week, and the employer must pay overtime wages.
  • Annual Leave
    • Employees who have worked continuously for 12 months are entitled to at least 12 days of annual leave. The leave can be accumulated at a rate of one day per month from the date of employment. The employer has the discretion to grant more.
    • Employees usually hope to take leave during Eid al – Fitr. Theoretically, the full leave entitlement must be taken in one block. However, with the employer’s consent, leave can be taken separately, but each leave period must be at least six working days.
    • Employees who have worked continuously for six years with the same employer are also entitled to at least two months of leave in the seventh and eighth years of employment.
    • In practice, employees are not entitled to annual leave during the probation period. Any absence will be considered unpaid leave. The carry – over of leave is at the company’s discretion. For example, the leave balance can be carried over until March 31 of the following year. If an employee fails to take their leave entitlement within six months of becoming eligible, the annual leave will be forfeited.
  • Treatment or Calculation Logic of Unused Annual Leave at the End of the Year
    • Unused annual leave can be cashed out or the employee can take the leave before leaving. If the workweek is 5 days, it is 21 working days; if it is 6 days, it is 25 working days.
    • Calculation method: If there are 21 working days in a month, the calculation is 1/21 * monthly salary × number of unused annual leave days.
  • Statutory Holidays
    • Indonesia has 15 statutory public holidays. In addition, there was a special election – day holiday in 2024. National public holidays include New Year’s Day, Chinese New Year, the Ascension of the Prophet Muhammad, Election Day, Nyepi Day, Good Friday, Eid al – Fitr (Day 1), Eid al – Fitr (Day 2), Labor Day, Ascension Day, Pancasila Day, Vesak Day, Eid al – Adha, Islamic New Year, Indonesian Independence Day, the Prophet Muhammad’s Birthday, and Christmas.
  • Other Leaves
    • Sick Leave
      • Employees are entitled to paid sick leave and extended paid sick leave. If there is a medical certificate or statement proving illness or injury, employees are entitled to paid sick leave. Employees are also entitled to long – term paid sick leave, provided that such leave is recommended in writing by a doctor and lasts for more than one year.
      • If a long – term employee is absent due to a serious illness, he or she is entitled to receive the monthly salary. This expense is paid by the employer. For the first four months of absence, the employee must receive 100% of the salary. In the next four months of absence, they must receive 75% of the salary. In the third four – month period of absence, they must receive 50% of the salary. In the subsequent months of absence, they must receive 25% of the salary until the contract is terminated.
    • Parental Leave
      • Women are entitled to three months of paid maternity leave (provided by the employer), with half of it to be taken before the expected due date and half after.
      • The maternity leave period can be extended based on the advice of an obstetrician or midwife.
      • Male workers are entitled to two days of paid paternity leave when their wives give birth or have a miscarriage.
    • Unconventional Leaves
      • Employees can take short – term paid leave for various personal reasons, such as marriage, their children’s marriage, etc. The Labor Law in Indonesia does not mention the rights of caregivers. In practice, employers can consider such leaves as unpaid leave. Female employees suffering from menstrual pain are entitled to paid leave on the first and second days of their menstrual cycle. Muslim employees have the legal right to take up to three months of paid leave to perform the Hajj, and they can only take this leave once in their lifetime.
  • Expatriate Employees
    • Local Minimum Wage Required for Work Permits
      • The monthly salary should be above USD 1,500, but the actual requirement depends on the industry and the position.
    • Withdrawal of Local Social Welfare (such as Provident Fund)
      • The provident fund (pension) can be withdrawn one month after the employee leaves.

4. Dismissal Rules and Compensation Arrangements

  • Dismissal (Legal Requirements and Best Practices)
    • Notice Period
      • The written notice must be in the form of a notice letter and must be officially served to the employer at least 14 working days before the termination takes effect. However, it is actually recommended to give 30 days’ notice.
      • The Labor Law (as amended by the Job Creation Law) and GR 35/2021 can be interpreted as allowing the employer to effectively terminate the employment relationship by giving a written termination notice and stating the reasons, while ensuring that the employee has the right to object, negotiate, and resolve the issue and file a legal lawsuit in the labor court. The termination notice should be in the form of a termination letter and be delivered to the affected employee within 14 working days before the termination takes effect.
    • Voluntary Resignation
      • Open – ended Employees
        • Employees must provide a written resignation letter and give 30 days’ notice before resigning from an open – ended employment contract.
        • The written resignation letter must be signed in wet ink.
        • The legal notice period for resignation is 30 days.
        • For open – ended contracts, employees are entitled to certain payments when resigning:
          • The 13th – month salary (THR) if they resign within 30 days before a religious holiday.
          • Compensation (pro – rated).
          • Any other accumulated unused benefits.
        • The final payment is due on the date of termination of the employment contract.
      • Fixed – term Employees
        • Employees must give 30 days’ notice if they resign from a fixed – term contract before the agreed – upon end date.
        • Employees are required to pay a penalty equivalent to the remaining salary before the end of the contract.
        • The penalty can be waived if both parties agree.
    • Dismissal during Probation
      • The employer is allowed to terminate the employment relationship at any time during the probation period. Reasons include poor work performance, misconduct, persistent lateness/absence, etc.
      • A 7 – working – day notice is required if the dismissal is initiated by the employer.
      • There is no legal requirement for severance pay during the probation period.
      • The employee should be notified in person, by email, registered mail, or private courier to their last known address.
      • The final payment is due on the date of termination of the employment contract. The probation period cannot be extended or repeated, and the employer must follow the specific terms outlined in the employment agreement and keep appropriate records.
    • Negotiated Dismissal
      • The basic policy of Indonesia’s labor law is to prevent the dismissal of employees. In general, every termination of an employment relationship must be approved by the labor court, unless the termination agreement is agreed upon by the employee or there is no dispute.
      • If the employee agrees to a voluntary mutual termination agreement (MTA) after receiving the written notice, the issue of whether the employee accepts or rejects the termination becomes irrelevant. The implementation of the MTA will be based on the employee’s response.
      • The employer must report the dismissal of employees to the local manpower office and submit standard documents as required by Letter No. 4/2022. These include the dismissal notice, the employee’s non – objection letter to the dismissal, and the standard application form. After submitting these documents, the manpower office will issue a standard receipt.
    • Dismissal with Just Cause
      • Dismissal should be handled carefully. The employer should determine the reason for dismissal, follow the disciplinary procedure, provide notice, calculate severance pay, notify the relevant authorities, and the final payment is due on the date of termination of the employment contract.
      • Due to the high risk of unfair dismissal claims, a mutually agreed – upon dismissal is usually recommended, which often involves providing additional severance pay (6 weeks to 3 months) on top of the legal requirements.
      • The dismissal process in Indonesia is complex and the litigation risk is high. It is strongly recommended to seek local legal advice before any dismissal. It is recommended to allow at least 30 days to handle a dismissal request, except in cases of serious misconduct.
      • There are some situations where the employer may not need to pay severance pay, such as when the employee violates company regulations (including receiving 3 warnings), the company declares bankruptcy, the employee reaches the retirement age of 55, the employee is absent without leave for 5 days, or the employee is imprisoned.
    • Severance Pay
      • Open – ended Employees
        • Mandatory severance pay includes severance pay, service pay, and compensation (for unused annual leave, repatriation expenses, and other compensations stipulated in the employment contract).
        • Depending on the reason for termination, the severance pay has multipliers of 0.5x, 0.75x, 1.0x, 1.75x, or 2x. In addition to the service pay, different situations correspond to different compensations. Employees with a tenure of 5 years or more are also required to pay a separation fee when resigning.
      • Fixed – term Employees
        • Fixed – term employees are entitled to compensation after the completion of the labor contract. If the employer terminates the fixed – term labor contract before the expiration date, the employer should pay the employee’s salary until the end of the contract period.
  • Calculation of Unused Annual Leave for Departing Employees
    • If an employee has unused annual leave before leaving, with the employer’s consent, the remaining days of the notice period can be filled with annual leave. Otherwise, the employer must pay the employee for the unused annual leave before the employee leaves.
  • Official Website of Labor Law

5. Analysis of Incentive Measures and Policies of Local Governments for Opening Companies and Hiring Local Employees

  • Incentive Policies
    • Local Employment Protection Policy
      • The employer must pay for the employees’ health insurance and work – related injury insurance (BPJS Kesehatan and BPJS Ketenagakerjaan) to safeguard the employees’ basic rights.
      • The employer must provide a religious holiday allowance (THR) every year and pay it to the employees at least 7 days before the religious holiday.
      • The working hours per week should not exceed 40 hours, and overtime pay must be provided for extra hours.
      • Currently, only foreign professional personnel are allowed to be recruited. For foreign professional personnel needed for Indonesia’s economic construction and national development, on the premise of giving priority to hiring local professional personnel, foreign professional personnel are allowed to apply for work visas through legal channels.
    • Quota Ratio for Foreign Employees’ Work Permits
      • Foreign employees can only hold management, technical, or specific – field positions. Some basic positions cannot be held by foreign employees.
      • Although the 10:1 quota requirement has been removed from the latest regulations, employers still need to pay attention to the quota quantity (the government may require a ratio between 3:1 and 10:1).
    • Funding Policies
      • Investment Allowance: The government provides tax – relief policies for investments in specific industries and regions. For example, manufacturing and infrastructure construction projects can enjoy a certain percentage of investment tax relief.
      • Government – funded programs: Financial subsidies and loan support are provided through the Indonesia Investment Coordinating Board (BKPM) or provincial governments to help enterprises with pre – project preparations and development.
      • Financing facilitation: Preferential loan interest rates are provided through national banks to support enterprises’ business expansion and equipment investment in Indonesia.

6. Human Resources Analysis and Employment Suggestions

  • Number of Employed People
  • Unemployment Rate
    • In February 2024, the unemployment rate was 4.82%.
  • Average Salary Trend
    • In February 2024, the average monthly net salary of formal employees in Indonesia reached 3.04 million Indonesian rupiahs, an increase of 100,000 compared to February 2023 and a decrease of approximately 140,000 compared to August 2023.
    • The provinces with the highest average monthly salaries are Jakarta Province (5.25 million Indonesian rupiahs) and Papua Province (4.56 million Indonesian rupiahs).
    • The industries with the highest average monthly salaries are finance and insurance (5.15 million Indonesian rupiahs), mining and ore (4.94 million Indonesian rupiahs), etc.
  • Employment Suggestions
    • The religious holiday allowance/bonus (THR) is a mandatory annual bonus for all employees. The minimum amount is calculated based on the number of months of employment. The payment date is related to Indonesian festivals, depending on the employees’ religious beliefs. It is recommended to pay it during Eid al – Fitr.
    • Employment contracts: If a one – year fixed – term labor contract is signed with an employee, a one – month compensation (equivalent to the 13th – month salary) must be provided at the end of the contract. The payment date of the religious holiday allowance should be clearly stated.
    • Welfare management: Provide basic statutory welfare benefits, including social insurance, medical insurance, etc., and ensure that employees enjoy annual leave and sick leave. The employer must pay social insurance premiums for employees.
    • Annual leave benefits: Although employees are not entitled to annual leave until they have worked for one year, in practice, it is recommended to allocate one day of annual leave per month for employees to apply for. There is no need to provide additional annual leave as there are various holidays in Indonesia.
    • Probation period: A probation period of no more than three months can be stipulated in writing in an open – ended labor contract. Fixed – term contracts cannot have a probation period.
    • Severance pay: The calculation of severance pay is complex and requires consultation to avoid violating local regulations.
    • Hiring foreign employees: Foreign employees are usually required to hold technical, managerial, or expert – level positions, such as senior engineers, management personnel, technical consultants, etc. These positions must be proven to be unfeasible for local employees to fill, and foreign employees must have the corresponding educational background and work experience.
    • It is recommended to formulate a company policy for Indonesian employees, including company rules and regulations, code of conduct, etc., to protect the company’s interests.

7. Cultural Adaptation

  • Language
    • There are more than 200 ethnic languages in Indonesia, and the official language is Bahasa Indonesia.
  • Religious Customs
    • Religion
      • Approximately 87% of the population in Indonesia adheres to Islam, making it the country with the largest Muslim population in the world, with most being Sunni. 6.1% of the population adheres to Protestant Christianity, 3.6% to Catholicism, and the rest to Hinduism, Buddhism, and primitive animism.
    • Customs
      • Pork is forbidden, and alcohol is prohibited.
      • Men generally do not initiate hand – shakes with women. If a woman offers her hand, a light handshake is appropriate.
      • The left hand is considered unclean, so gifts should not be received or items submitted with the left hand.
      • Indonesians consider it rude for a stranger to touch their heads.
  • Business Culture
    • Dress Code
      • The traditional Indonesian national clothing, “Batik” shirts, made from traditional batik fabric, are known as the “national costume.” In formal occasions, men can wear long – sleeved Batik shirts and dark – colored trousers, while women usually wear Batik or other fabric suits.
    • Greetings
      • Men generally do not initiate hand – shakes with women. If a woman offers her hand, a light handshake is appropriate.
      • The left hand is considered unclean, so gifts should not be received or items submitted with the left hand.
    • Prayer during Work Hours
      • Prayers during work hours (mainly the Zuhur noon prayer and the Asar afternoon prayer) are generally allowed as it is the employees’ religious right. Most companies, factories, and government agencies provide Musholla (small prayer rooms) or Masjid (mosques) for employees to perform their prayers during breaks. Article 29 of the 1945 Constitution of Indonesia guarantees freedom of religious belief, so employers cannot prevent employees from fulfilling their prayer obligations.
      • In summary, in Indonesia, Muslim employees are fully allowed to pray during work hours and are supported by law and social culture.

Note: The above content is for reference only. Laws and policies may change. It is recommended to consult professionals to ensure compliance with the latest regulations and policies.