Regulatory Update: August 2026
Executive Summary: Indonesian labor law is a set of formal and substantive legal norms that govern industrial relations among workers, employers, and the government. Following the enactment of Law No. 6 of 2023 (the Job Creation Law) and its implementing regulations, such as Government Regulation No. 35 of 2021, the labor compliance landscape has undergone a structural shift, particularly regarding the duration of fixed-term employment contracts (PKWT) of up to 5 years, obligations for periodic contract compensation, the restructuring of severance pay schemes, and termination procedures (PHK) that prioritize fair bipartite deliberation.
1. Real-World Challenges: Contractual Loopholes That Place a Financial Burden on Companies
In mid-2025, a medium-sized logistics company in the Cikarang industrial zone faced a lawsuit worth Rp420 million in the Industrial Relations Court (PHI). This issue did not stem from a mass strike or employee fraud, but rather from an administrative oversight that seemed trivial: The HR department extended the Fixed-Term Employment Agreements (PKWT) for 12 operational staff members without a valid addendum and exceeded the cumulative length of service limit without providing termination compensation as mandated by regulations.
As a result, the Industrial Relations Court judge ruled that, by law, the status of the 12 workers had automatically changed to Indefinite-Term Employment Contracts (PKWTT/Permanent Employees) as of the first day of the legally flawed extension. When the company was forced to restructure its organization in the following quarter, the amount of severance pay obligations skyrocketed—shifting from the calculation based on fixed-term employment severance pay to the full severance pay for permanent employees, plus a penalty for delayed payment.
The case above underscores a fundamental reality: labor laws in Indonesia are not merely administrative HR documents. These regulations are instruments for operational risk management, corporate compliance, and the protection of economic human rights—all of which have direct implications for financial statements and the survival of business entities. Whether you are a startup founder, HR director, in-house counsel, or a professional employee, understanding the dynamics of power and compliance with labor laws is an essential preventive measure to avoid resource-draining legal disputes.
2. Regulatory Transformation: Law No. 13/2003 vs. the Job Creation Law (Law No. 6/2023)
Many business owners and labor unions often find themselves confused by legal issues due to rapid regulatory changes that occurred between 2020 and 2026. The most frequently asked question is: “Is Law No. 13 of 2003 no longer in effect?” The answer is that Law No. 13 of 2003 remains in effect, but most of its substantive provisions regarding employment relationships, wages, foreign workers, and layoffs have been amended, harmonized, or replaced by Law No. 6 of 2023 on the Enactment of the Job Creation Government Regulation in Lieu of Law (Perppu) into Law.
To navigate these dynamics, corporate law practitioners must understand the key areas where paradigm shifts are occurring from a comparative perspective:
| Labor Aspects | Old Regulations (Law No. 13/2003) | New Regulations (Law No. 6 of 2023 & Government Regulation No. 35 of 2021) | Practical Implications for Management |
|---|---|---|---|
| Maximum Term of a Fixed-Term Employment Contract | Up to 3 years (2-year contract + 1-year extension). There is a renewal waiting period. | A maximum of 5 years in total (including contract extensions). | Companies have greater flexibility in hiring project workers without being constrained by the 3-year limit. |
| Compensation for the Expiration of a Fixed-Term Employment Contract | There is no obligation to pay cash compensation when a fixed-term employment contract (PKWT) expires under normal circumstances. | Employers are required to pay proportional severance pay for a minimum of 1 month of continuous service. | The HR cash flow must allocate a budget for compensation reserves at the end of each contract. |
| Outsourcing Scheme | Strictly limited to only 5 types of support services (non-core business). | The government has established regulations governing the outsourcing of certain work through Government Regulation No. 35/2021. | Outsourcing partnerships must strictly ensure the legality of the labor service provider’s permits. |
| Severance Pay Multiplier for Layoffs | Most layoffs are based on a multiplier of 2x the severance pay (UP) provisions. | The range of severance pay multipliers has been adjusted: 0.5x, 0.75x, and up to 1x (as specified in detail in Government Regulation No. 35 of 2021). | Severance pay costs associated with efficiency-based terminations are more predictable, but the formal verification process remains rigorous. |
This paradigm shift requires every in-house legal counsel and HR division head to realign the existing standard contract templates (master employment agreements) used by your company’s business contract drafting department so that they do not conflict with current labor law principles.
3. The Hierarchy of Labor Laws in Indonesia
The application of labor standards in Indonesia is subject to the principle of the hierarchy of laws: lower-ranking regulations must not conflict with higher-ranking ones (lex superior derogat legi inferiori), and provisions in employment contracts must not grant rights that are less favorable than the normative standards set forth in the law.
| Levels of Regulation | Legal Instruments | Focus and Scope | Practical Implications for Companies |
|---|---|---|---|
| Law (UU) | Law No. 13 of 2003 as amended by Law No. 6 of 2023 | The fundamental legal framework for industrial relations, criminal penalties, and basic labor rights. | The minimum scope of statutory rights that cannot be waived by any contractual provision. |
| Government Regulation (PP) | Government Regulation No. 35/2021 & Government Regulation No. 36/2021, as amended by Government Regulation No. 51/2023 | Technical operational guidelines regarding fixed-term employment contracts, outsourcing, working hours, wages, severance pay, and layoffs. | A daily technical reference for HR professionals on calculating overtime, severance pay, and contract compensation. |
| Internal Corporate Autonomy | Company Regulations (PP) / Collective Bargaining Agreement (CBA) | Internal work policies, code of ethics, career paths, company benefits, and disciplinary procedures. | Must be registered/approved with the Department of Manpower; serves as the official guideline for issuing a Warning Letter (SP). |
| Individual Agreement | Employment Agreement (PKWT / PKWTT) | Individual agreements between employees and employers regarding positions, salaries, and job descriptions. | Legally binding under civil law (Articles 1320 and 1338 of the Civil Code) as long as it does not violate the law. |
4. Types of Employment Agreements: A Critical Analysis of PKWT vs. PKWTT
In corporate practice, the misclassification of employment relationships is the most common source of disputes at labor agencies. Labor law distinguishes between two main types of employment relationships:
A. Fixed-Term Employment Agreement (PKWT)
Fixed-term employment contracts (PKWT) are permitted only for work that, based on its type, nature, or scope, is expected to be completed within a specific period of time. Pursuant to Articles 4 and 5 of Government Regulation No. 35 of 2021, the scope of fixed-term employment contracts is limited to:
- Work that is completed in a single instance or is of a temporary nature (with a maximum duration of 5 years).
- A project that is expected to be completed in the near future.
- Seasonal work (depending on the season or specific conditions).
- Work related to new products, new initiatives, or additional products that are still in the trial or exploratory phase.
Strict Legal Prohibition (Mandatory Rule):
Fixed-term employment contracts (PKWT) are strictly prohibited from requiring a probationary period. If a probationary period clause is included in a PKWT contract, that probationary period is null and void, and the period of employment is calculated from the start. Furthermore, fixed-term employment contracts may not be used for permanent positions (core ongoing business).
Mandatory Formula for Compensation for Fixed-Term Employment Contracts (Articles 15–17 of Government Regulation No. 35/2021)
Employers are required to provide compensation to workers under fixed-term employment contracts (PKWT) who have worked continuously for at least 1 (one) month when the contract expires or when it is renewed.
Case Study: Mr. Hendra is employed under an 18-month fixed-term contract (PKWT) with a monthly salary of Rp6,000,000. Upon the contract’s expiration, the company is required to pay compensation in the amount of: (18 / 12) × Rp6,000,000 = Rp9,000,000 net, in addition to the remaining salary for the final month.
B. Indefinite-Term Employment Agreement (PKWTT)
A PKWTT is an employment agreement between an employee and an employer to establish a permanent employment relationship. A PKWTT may stipulate a probationary period of no more than 3 (three) months. During the probationary period, the employer is prohibited from paying wages below the applicable minimum wage.
| Parameters | PKWT (Contract) | PKWTT (Permanent) | Risk of Legal Violations |
|---|---|---|---|
| Nature of the Work | Meanwhile, the seasonal project is complete. | Ongoing (routine/core). | It automatically becomes a permanent employment contract (PKWTT) by law if the nature of the work is permanent. |
| Probation Period | There must be no probationary period. | It can be up to 3 months. | The probation clause in a fixed-term employment contract (PKWT) is null and void; the period of employment is immediately counted in full. |
| Official Record | It must be registered online with the Department of Labor. | It is not required to be recorded on a regular basis. | Administrative sanctions imposed by labor inspectors if a fixed-term employment contract (PKWT) is not reported. |
| Termination of Employment | Ends at the end of the contract term + compensation payment. | Official layoff procedures are mandatory + severance pay (UP, UPMK, UPH). | A lawsuit regarding unilateral termination has been filed with the Industrial Relations Court, and the claim for back pay is currently pending. |
5. Wage System and Wage Scale Structure (SUSU)
Compensation is not merely a figure stated ina joboffer letter; rather, it is a legal instrument subject to minimum wage policies and transparent wage governance based on a corporation’s financial capacity.
Legally Permissible Wage Composition
Pursuant to Articles 5 and 6 of Government Regulation No. 36 of 2021 on Wages, the components of wages consist of:
- Base pay only, excluding allowances; or
- Base Pay and Fixed Allowances: Under this format, the minimum base pay must be 75% of the total amount of base pay and fixed allowances received by the employee; or
- Base Pay, Fixed Allowances, and Non-Fixed Allowances: Non-fixed allowances (such as daily meal allowances based on attendance) must not reduce the 75% portion of base pay relative to fixed allowances.
Requirements for Establishing a Wage Structure and Scale (SUSU)
Many business owners overlook the fact that every employer is required to establish and implement a Wage Structure and Scale within their company, taking into account employee categories, job titles, length of service, education, and competencies. Violations of this Wage Structure and Scale obligation are subject to tiered administrative sanctions, ranging from written warnings and restrictions on business activities to the temporary suspension of some or all production equipment.
For growing businesses or those undergoing capital restructuring, conducting a corporate compliance audit is a crucial step to ensure that all payroll systems are in line with local and sector-specific labor regulations.
6. Working Hours, Break Times, and Overtime Formula Simulation
Provisions regarding working hours are exhaustively set forth in the Labor Law in conjunction with Government Regulation No. 35 of 2021, Article 21. Employers are required to choose one of the standard working hour schemes:
- 6-Day Workweek Schedule: 7 (seven) hours per day and 40 (forty) hours per week for 6 working days in a week.
- 5-Day Workweek Schedule: 8 (eight) hours per day and 40 (forty) hours per week for a 5-day workweek.
Overtime Requirements and Maximum Limits
Overtime work may only be performed if all three of the following conditions are met: (1) There is written consent from the employee concerned; (2) Overtime is limited to a maximum of 4 (four) hours per day and 18 (eighteen) hours per week (excluding overtime on official holidays); and (3) The company is required to provide food and beverages totaling at least 1,400 kcal if the overtime lasts 4 hours or more.
Standard Formula for Hourly Overtime Pay (Articles 31 & 32 of Government Regulation No. 35/2021)
The basis for calculating hourly overtime pay is 1/173 of the monthly wage (base pay + fixed allowances).
Overtime Multiplier Rules on Regular Workdays:
- First Hour: Paid at 1.5 times the hourly wage.
- Second hour and beyond: Paid at 2 × the hourly wage.
Calculation Example: An employee earning Rp5,190,000 per month works 3 hours of overtime on Wednesday. Hourly wage = 1/173 × Rp5,190,000 = Rp30,000.
Total Overtime Pay = (1.5 × Rp30,000) + (2 × 2 hours × Rp30,000) = Rp45,000 + Rp120,000 = Rp165,000.
[SPACE PLACEHOLDER IMAGE 2: Work Hours Management, Overtime Pay, and Payroll Management]
AI Image Prompt: A detailed close-up of a legal counselor and corporate HR manager calculating employee compensation formulas and overtime analytics on a modern tablet interface; a clean office desk featuring a gavel and an Indonesian law book; cinematic lighting; corporate professional style.
ALT Text (ID): A simulation of overtime pay and work compensation calculations based on Indonesian labor laws.
Suggested File Name: perhitungan-upah-lembur-hukum-ketenagakerjaan.webp
Caption: The management of working hours and the calculation of overtime pay must be based on the 1/173 formula to prevent violations of workers’ rights.
7. Statutory Leave Entitlements and the 5 Mandatory Programs of the BPJS Ketenagakerjaan
Employers are prohibited from reducing workers’ statutory rights to rest and basic social protection. Under the harmonized Labor Law, these statutory rights include:
A. Entitlement to Official Leave and Rest Periods
- Annual Leave: At least 12 (twelve) working days after an employee has worked for 12 consecutive months (full pay is still provided).
- Maternity Leave: 1.5 months before and 1.5 months after childbirth, based on a certificate from an obstetrician or midwife.
- Miscarriage Leave: 1.5 months of leave, or as specified in a medical certificate from an obstetrician.
- Special Leave (Full Pay): Marriage (3 days), arranging a child’s marriage (2 days), circumcision or baptism of a child (2 days), wife’s childbirth or miscarriage (2 days), death of a household family member (1–2 days).
B. Social Security Enrollment (BPJS Health & BPJS Employment)
Pursuant to Law No. 24 of 2011 on BPJS, as amended by Government Regulation No. 37 of 2021, companies are required to enroll their employees in the social security protection program, which now encompasses the five pillars of labor:
1. JKK (Workplace Accident)
Coverage for accident risks from the moment you leave home, while at work, until you return home.
2. JKM (Death)
Cash benefits and educational scholarships for the dependents of workers who die from causes other than work-related accidents.
3. JHT (Retirement Fund)
Accumulated savings consisting of the principal and its returns, which are paid out upon retirement or termination of employment.
4. JP (Retirement)
The benefits of a monthly income for maintaining a decent standard of living upon reaching retirement age.
5. JKP (Job Loss)
A 6-month cash allowance, access to job market information, and job training for those laid off.
8. Valid Termination Procedures and the Multiplier Table for Severance Pay Calculations
Even after the enactment of the Job Creation Law, the practice of “immediate unilateral termination” remains an unlawful act. Companies cannot simply terminate employees without following the formal notification procedures and bipartite consultations as stipulated in Article 37 of Government Regulation No. 35 of 2021.
Mechanisms for a Valid Termination of Employment Procedure
- Notice of Termination: Must be provided by the employer no later than 14 (fourteen) business days before the effective date of termination (or 7 business days if the employee is still in the probationary period). The notice must include the reason for termination and details regarding severance pay.
- Employee Response: If the employee accepts, the employer must report the termination to the labor authorities. If the employee refuses, he or she must submit a letter of refusal stating the reasons within 7 (seven) business days of receiving the notice.
- Bipartite Negotiations: In the event of a rejection, both parties are required to hold bipartite negotiations through deliberation to reach a consensus.
Three Financial Components of Severance Pay (Article 40 of Government Regulation No. 35 of 2021)
In the event of the termination of an employee under a fixed-term employment contract (PKWTT), there are three components of entitlements that must be carefully calculated:
- Uang Pesangon (UP): Dihitung berdasarkan masa kerja riil, berkisar dari 1 bulan upah (<1 tahun masa kerja) hingga maksimal 9 bulan upah (≥8 tahun masa kerja).
- Length-of-Service Bonus (UPMK): Awarded to employees with a minimum of 3 years of service (2 months’ salary) up to a maximum of 10 months’ salary (≥24 years of service).
- Compensation for Entitlements (UPH): Includes unused annual leave that has not expired, travel expenses for returning to the place of employment, and other items specified in the Government Regulation (PP) or Collective Bargaining Agreement (PKB).
Table of Severance Pay Multipliers Based on Reason for Termination (Government Regulation No. 35/2021)
| Reasons for Termination of Employment (PHK) | Severance Pay (UP) Multiplier | UPMK Multiplier | UPH Rights |
|---|---|---|---|
| Mergers, Consolidations, Acquisitions (Employees Unwilling) | 1.0x UP | 1.0x UPMK | Eligible |
| Corporate Efficiency to Prevent Losses | 1.0x UP | 1.0x UPMK | Eligible |
| Efficiency Because the Company Is Suffering Actual Losses | 0.5x UP | 1.0x UPMK | Eligible |
| Company Closes Due to Force Majeure | 0.5x UP | 1.0x UPMK | Eligible |
| Employee Breaches the Employment Agreement (After SP1, SP2, SP3) | 0.5x UP | 1.0x UPMK | Eligible |
| Employee Voluntarily Resigns (Valid Resignation) | 0x (Unauthorized) | 0x (Unauthorized) | Entitlement + Severance Pay (in accordance with Government Regulation/Collective Bargaining Agreement) |
| Workers Reaching Retirement Age | 1.75x UP | 1.0x UPMK | Eligible |
Case Study: Calculation of Severance Pay for Normal Efficiency Layoffs
Ms. Ratna served as Financial Supervisor at PT Logistik Jaya for 6 years and 4 months , with a final fixed monthly salary of Rp10,000,000. She has 6 working days of unused annual leave remaining. The company is downsizing its divisions (to improve efficiency and prevent losses).
Calculation of Entitlements:
- Severance Pay (6–7 years of service = 7 months’ salary × 1.0): 7 × 10,000,000 IDR = 70,000,000 IDR
- UPMK (6–9 years of service = 3 months’ wages × 1.0): 3 × Rp10,000,000 = Rp30,000,000
- UPH Leave (6 days / 25 working days): (6 / 25) × Rp10,000,000 = Rp2,400,000
- Total Net Severance Pay: 70,000,000 IDR + 30,000,000 IDR + 2,400,000 IDR = 102,400,000 IDR
9. Governance and Mitigation of Industrial Relations Disputes (PPHI)
Labor disputes are an inherent risk in corporate governance. Under Law No. 2 of 2004 on the Settlement of Industrial Relations Disputes (PPHI), disputes are classified into four types: disputes over rights, disputes over interests, disputes regarding termination of employment, and disputes between labor unions within a single company.
Stages of Litigation and Non-Litigation in Labor Relations
- Bipartite Negotiations (Mandatory Phase 1): Direct negotiations between workers and employers. The maximum duration of negotiations is 30 (thirty) working days. If an agreement is reached, a Collective Agreement (PB) is drafted and registered with the Industrial Relations Court (PHI). If negotiations fail, an Official Bipartite Minutes is prepared.
- Tripartite Mediation by the Department of Labor (Phase 2): One of the parties submits the case file to the local Department of Labor for mediation by an Industrial Relations Mediator. If the mediation fails to reach a resolution, the mediator will issue a Written Recommendation.
- Lawsuit Filed with the Industrial Relations Court (PHI) (Stage 3): If either party rejects the mediator’s written recommendation, the dispute may be referred to the Industrial Relations Court at the local District Court through a formal lawsuit.
- Appeal to the Supreme Court (Final Stage): For disputes regarding rights and termination of employment, a decision by the Industrial Relations Court (PHI) may be appealed to the Supreme Court of the Republic of Indonesia in accordance with the formal procedural deadlines.
To prevent disputes from escalating and diverting attention from business operations, our team of attorneys in the business dispute resolution and arbitration practice always prioritizes a data-driven negotiation approach and proportionate commercial consensus.
10. Labor Audit Compliance Checklist for HR & Founders
Use the employment compliance checklist below to ensure your company’s HR system remains within legal boundaries:
Legal Compliance Checklist (Labor Department Audit Compliance)
11. Frequently Asked Questions (FAQ) About Labor Law
Is Law No. 13 of 2003 Still in Effect Following the Enactment of the Job Creation Law?
Yes, Law No. 13 of 2003 remains in effect as the primary labor law in Indonesia, except for those provisions that have been explicitly amended or repealed by Law No. 6 of 2023 and its implementing regulations.
What Is the Maximum Duration of a PKWT Employment Contract?
The total duration of a fixed-term employment contract (PKWT) under Government Regulation No. 35 of 2021 is a maximum of 5 (five) years, whether it is a single contract or includes any extensions.
Are Contract Employees Who Resign Entitled to Compensation?
Normatively, PKWT employees who have worked continuously for at least one month remain entitled to proportional compensation for the period of service they have completed. However, if the resignation violates the contract term, the party terminating the contract risks being liable for damages covering the remaining contract period as specified in the written agreement.
Are Startups and SMEs Required to Have Articles of Incorporation (PP)?
The obligation to draft Company Regulations (PP) applies without exception to every business entity that employs at least 10 employees. For startups with teams of fewer than 10 people, employment relationships may be governed by individual employment agreements, which must not conflict with applicable laws.
Can a Company Withhold an Employee’s Original Diploma?
Under national law, there is no provision in the Labor Law that requires the withholding of diplomas. Diplomas may only be withheld based on a voluntary, written civil agreement that includes guarantees for the security of the documents, an official receipt, and a clause stipulating immediate return upon termination of the employment relationship without onerous conditions.