Law No. 11/2020, the Job Creation Law (widely known as the “Omnibus Law”), was enacted on 2 November 2020 and makes some important changes to Indonesian labour law and regulations. One of the key implementing regulations, Government Regulation No. 35/2021 (PP 35/2021), was published on 2 February 2021 bringing these changes into effect from the same date.

Termination payments

The Omnibus Law reduces statutory severance packages and makes some changes to the approved reasons for termination.

Under the previous Labour Law No. 13/2003, employers were obliged to pay Severance Pay, Service Pay and Compensation Pay (as applicable) on termination of employment. In certain circumstances, such as on retirement, death, total permanent disability, companies were required to pay 2x Severance Pay.

The Omnibus Law amends this “2x” requirement, so that a lower multiple of Severance Pay is payable in the future. The multiple remains at 2x Severance Pay on death and total permanent disability, but reduces to:

• 1.75x Severance Pay for retirement,
• 1x Severance Pay for reasons generally relating for restructuring of an ongoing employer,
• 0.75x Severance Pay for reasons of force majeure where the employer is ongoing, and
• 0.5x Severance Pay for reasons related to the employer being in financial difficulties or if an employee is being transferred to a new employer following restructuring and declines the new employment.

The various reasons for termination are described in detail in the regulations.

The Omnibus Law also removes the requirement to pay an additional 15% of Severance and Service Pay for employees who qualify for compensation for housing, medical/healthcare benefits (previously part of Compensation Pay). However, this amount will still need to be paid to an employee if it is specified in the employee’s employment contract, the company regulations or collective labour agreement.

With a lower multiple of Severance Pay and elimination of compensation for medical and housing, the overall benefit at retirement age is capped at 25.75 months’ salary (plus any unused leave and travel expenses for employees and their families to return to their home town). As a result, companies with pension plans can expect to see a reduction in “top up” payments needed, where the pension benefits fall short of the mandatory termination benefit when employees retire.

On voluntary resignation effectively there is no change, with Compensation Pay and Separation Pay continuing to be payable.

Integration with company pension plans

Another significant change is on the integration of mandatory severance benefits with similar benefits from company pension plans. Under the Labour Law, the pension plan benefit could only be used to reduce the company’s severance pay obligation on retirement. Under the Omnibus Law, the pension plan benefit can be offset against the mandatory severance benefits on termination of employment for any reason.

Accounting implications

Changes to the termination payments that employees receive will have implications for companies’ financial statements. For example, under IAS 19 and PSAK 24 companies disclose post-employment benefit provisions for the termination payments at retirement. The reduction in the Severance Pay multiple and the housing and medical benefit compensation are a plan amendment and can therefore lead to a past service credit being recognised in the P&L at the date of the change. This may also prompt a remeasurement of the current service cost. The extent of the impact of changes to the termination payments on the value of the corporate pension liabilities in the balance sheet will vary from company to company and depend on the employee profile.

The timing and extent of impact of the change will also depend on how the statutory benefits integrate with the supplementary benefits offered by the employer under the company regulations or in collective labour agreements. For those companies that provide only statutory minimum benefits, the change from 2 February 2021 will need to be accounted for accordingly.

Companies offering benefits in excess of the statutory minimum benefits may need time to decide on how to restructure their benefit offering – including negotiation with the unions and/or revising the company regulations before any accounting impact may be determined. However, the benefits payable on termination can in no event be lower than the new Omnibus Law benefit.

New social security program

The Omnibus Law also introduces a new social security program (Jaminan Kehilangan Pekerjaan or “JKP”) managed by BPJS Labour with benefits payable upon employment termination in circumstances other than reaching retirement age, voluntary resignation, death and disability. The JKP is funded by contributions redirected from the mandatory work accident insurance (JKK) and mandatory life insurance (JKM) sections of the social security system as well as an initial injection of funds from the state budget.

Long service leave

The Omnibus Law removes the entitlement to at least 2 months of long-service leave for workers who have completed 6 years’ continuous service with the same company (introduced by Labour Law 13/2003, and applied with effect from 8 April 2004 to all existing long-service leave policies). In future, long service leave entitlements may be agreed between employers and employees in the employment contract, company regulations or collective labour agreement.

This provision impacts relatively few employers these days. However this easing may see employers with such legacy promises seek to adjust their long-service leave policies, where an alternative structure or benefit would better fit with their business needs.

Fixed term contracts

The Omnibus Law has eased regulations relating to fixed-term contracts (Perjanjian Kerja Waktu Tertentu or “PKWT”) by relaxing the rules on the maximum contract period. Previously labour law specified that the PKWT contract period must not exceed 2 years, which could be extended once for a maximum period of 1 year, and renewed once for a further 2 year period following a 30 days grace period (i.e. a maximum of 5 years) after which time the contract would be considered permanent.

PKWT is now segmented into three types: based on a set period of time, based on completion of a specified job, or where work is non-permanent, i.e. daily-paid employees. The maximum contract period for time-based PKWT is 5 years including any extensions. There is no maximum specified for job-based PKWT, though the scope and timetable for the job must be defined clearly. For non-permanent employees, the maximum number of days that can be worked in a month is 20 days. If such an employee works for 21 days or more for 3 consecutive months the contract is viewed as a permanent role.

Besides the clarification in the definition of contract period, there will now be a requirement to pay Compensation Pay to the employee when the fixed term contract expires. Compensation depends on the duration of the contract period.  It is 1 month of salary for 12 months of consecutive work, and pro-rata for contract periods greater or less than this, provided the contract period is at least one month.

For in-force contracts in place as at 2 February 2021, Compensation Pay will be assessed for service from 2 November 2020 on contract expiry.

Employers with significant numbers of contract employees should assess the potential impact of providing Compensation Pay.  Where the amount is potentially material, this may need to be accounted for in the company’s financial statements under IAS 19 or PSAK 24.

Other changes

Overtime limits are increased from 3 hours per day and 16 hours per week to 4 hours per day and 18 hours per week.

Normal working hours remain at 40 hours per week.  However the Omnibus Law recognises shorter working hours for companies with certain characteristics.  It also recognises industries that may require longer normal working hours – however this remains subject to further regulations.

Sector specific minimum wages will no longer be set by the provincial governments, but they will continue to set minimum wages for provincial, district and city levels (Indonesia does not have a national minimum wage). Micro and small enterprises will be exempt from the minimum wage rates, and minimum wages will instead be agreed between these employers and their employees.

Expatriate work permit application processes are simplified. Approval by government is still required for the employer’s “Plan for the Use of Foreign Workers” (Rencana Penggunaan Tenaga Kerja Asing or “RPTKA”), but employers need only notify the Ministry of Manpower once that approval is granted, rather than seeking separate work permit approval from the Ministry. Additional relaxations are introduced for foreign workers in certain sectors (e.g. technological start-ups and scientific research), where RPTKA approval will not be required.

The Omnibus Law also removes the restrictions on the types of work that may be outsourced, although regulations on the types of work that can be outsourced may be included in sectoral regulations under the Indonesian Civil Code in due course. The Omnibus Law specifies that the responsibility for the protection of outsourced workers remains with the company providing the workers, including the responsibility for all wage and social security matters.

Next steps

Companies will need to consider whether amendments to their company regulations and/or collective labour agreements are needed in light of the new regulations under the Omnibus Law.

Companies should also evaluate the impact and timing of these changes on their IAS 19 and PSAK 24 disclosures in their financial statements.