How to legally reduce workforce costs in Indonesia due to COVID-19

Reducing workforce may be inevitable . But it has to be done correctly.

The special situation caused by the COVID-19 has forced many companies to find ways to reduce their expenses, such as cutting workforce costs. However, it’s important to keep in mind that actions such as terminating employees or reducing salaries are strictly regulated by the Indonesian laws.

To clarify the situation, the Indonesian government just released a new circular (SE-907/MEN/PHI-PPHI/X/2004) with the objective to both protect the employees’ rights and ensure the business continuity – essentially trying to find the middle ground between keeping companies running and employees rights protected.

Table of contents

    Paying to employees unable to work

    As an employer, you are required to pay full salaries to employees that have to stay home because they are officially under COVID-19 observation (as by the formal doctor letter – ODP) or who have to follow the mandatory 14-day quarantine.

    If the employee is unable to work for extended periods, the following salary reductions apply:

    Duration of absence% of wage the employee is entitled to
    First 4 months100%
    5-8th month75%
    9-12th50%
    Beyond 12 months25%

    Reducing salaries due to COVID-19

    The Circular states that if a company is directly affected by the COVID-19 outbreak they should first seek an agreement with the employee to find a working arrangement that suits both the employee and the employer.

    The listed measures are the following:

    • Salary adjustments if the employee is in a managerial or director position (as stated in the company’s salary matrix)
    • Reducing shifts
    • Reducing working hours
    • Reducing number of working days
    • Sending employees to unpaid leave

    Note that all of those measures must be mutually agreed between the employee and the employer. The law does not give the employer the right to one-sidedly for example cut the working hours of the employee.

    If the employee chooses not to work, for example instead of working from home will not do anything, you have the right as an employer to not pay for that time.

    We advise to document all negotiations and pay cuts, such as offer letters, in case there will be any future legal disputes. As an employer you want to make sure you show good intentions to the employee.

    For larger companies with more than 20 employees going through collective bargaining, we strongly advise to use a professional service, such as Emerhub, to reach agreements with the employees. A neutral party will ensure that the changes to the workforce are done correctly and the company is not exposed to legal liabilities.

    Terminating employees due to COVID-19

    Terminating employees follows the same regulations as stated in the Indonesian Employment Law.

    Options for terminating  time-based employees

    If the employee is on a time-based contract, such as a one year employment contract, the easiest way to terminate it is to not extend it.

    If you wish to terminate the contract earlier, then you need to pay the stated amount in the contract or reach a separate agreement with the employee.

    Terminating permanent employees

    There are several types of payments the terminated permanent employees are eligible for:

    • Severance pay (one month salary for every started working year)
    • Appreciation payment (if the employee has worked for at least three years with the company)
    • Compensation for the remaining rights, e.g. for unused vacation days
    • Separation payments (if stated in the employment agreement)

    How Emerhub can assist you in reducing workforce costs due to COVID-19

    Employment matters are sensitive issues and should be treated carefully, especially if you are a foreign company in Indonesia. However, if the company’s survival is at stake then reducing workforce costs may be inevitable.

    As said earlier, it’s important that before terminating employees you try to seek arrangements with the employees. Employees are more likely to be receptive to your offers if they know that the company has tried everything in their power to keep jobs and ensure the sustainability of the operations.

    Emerhub offers the following support to companies going through manpower restructuring:

    • Negotiations with the employees (Socialization). This includes explaining the company’s situation to the employees and offering new employment terms.
    • Documentation of circulars/ decrees from the Management to the Employees. For example, we will make sure your company’s internal regulations cover all the important aspects that define salary ranges and which wages can be legally reduced.
    • Employment disputes (Bipartit Procedure) – finding solutions with employees that refuse the new employment terms.
    • Registering revised employment terms with the Ministry of Labor

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