Indonesian Manpower Law: Hiring Employees in Indonesia

Hiring employees in Indonesia requires a thorough understanding of the local labor laws. The workforce is regulated by the Indonesian Manpower Law, which protects the rights and interests of both workers and employers. These laws can change frequently, so employers must stay updated on current regulations.

This guide will walk you through the essential steps and regulations for recruiting and hiring in Indonesia.

The process of Hiring Employees in Indonesia

1. Conduct Employee Background Check

Background checks are not legally required in Indonesia but are highly recommended. They help verify candidate information and ensure there are no false claims or criminal history.

Emerhub’s personal background check services provide an extremely thorough screening for potential candidates, covering employment history, education, references, criminal records, and more.

2. Make a Formal Offer Letter

After deciding to hire a candidate, provide a formal offer letter. This letter is not legally regulated but sets clear expectations for both parties and forms the basis for the employment contract. It should include:

• Position (title, division, direct supervisor)
• Job description
• Performance metrics
• Starting date
• Type of contract
• Salary and other benefits

Specify if the salary is gross (including taxes) or net (take-home pay). Using gross salary is simpler as net salary depends on various factors like previous income.

3. Sign an Employment Contract

When hiring an employee in Indonesia, you must specify what type of employment contract you are offering. Employment contracts are legally binding and must adhere to the Indonesian Manpower Law. 

4. Introduce company regulations (Peraturan Perusahaan – PP)

In addition to employment contracts, companies must also have Peraturan Perusahaan (PP) This is the internal regulations of a company, understood and legally binding to both the company and its employees. Company Regulations must always comply with the Indonesian Manpower Law.  

Clauses within the PP are typically referred to when settling industrial disputes – disagreements between management and employees that fall outside their terms of employment. Examples include labor strikes and lock-outs.  

Employment Benefits Packages in Indonesia

Salary

Discuss whether the salary is net or gross. Net payment means the employer pays the employee’s Income Tax (PPH 21) and social and health insurance (BPJS) contributions. Most Indonesian candidates, especially juniors, prefer to state their expected salaries as net.

Festive Holiday Leave (THR)

It can be surprising to non-Indonesians when they realize how many holidays there are throughout the year. Indonesians celebrate a substantial number of holidays, national, religious, international and commemorative. The tanggal merah or “red dates” are public holidays when banks, schools, government offices and most businesses are closed. 

Companies need to prepare for festive days, knowing that they will either be closed, or if they are open, they will pay their employees extra for holiday time. 

Indonesian Manpower Law also requires the religious holiday allowance equal to a one month salary, known as Tunjangan Hari Raya (THR). This essentially means that the employees receive 13 salaries per year.

Read more:  Understanding the Religious Holiday Allowance THR in Indonesia.

Healthcare and social security program (BPJS)

As an employer, you must also provide basic health care and social security to all full-time employees.  Badan Penyelenggara Jaminan Sosial (BPJS) is a public program, providing medical and old age coverage to all Indonesians. 

There are two parts to the program – BPJS Kesehatan (health insurance) and BPJS Ketenagakerjaan (Social Security). You must register employees for both.

BPJS Kesehatan Contribution of Monthly Salary

	Borne by employer	Borne by employee	Maximum gross salary for BPJS
Health Insurance	4%	1%	12,000,000

• BPJS Kesehatan Contribution: Employers pay 4% and employees pay 1% of the maximum gross salary of 12,000,000 IDR. It covers the employee, spouse, and three children. Additional family members can be added for 1% per person, per month.
  
• BPJS Ketenagakerjaan Contribution: Employers pay 2% for the pension plan (JP), 3.7% for retirement savings (JHT), and 0.24% – 1.74% for work-related injury insurance (JKK). Employees pay 1% for the pension plan and 2% for retirement savings. Non-work related accidental death insurance (JMT) is 3%, paid by the employer.

BPJS Ketenagakerjaan Contribution of Monthly Salary

	Borne by employer	Borne by employee
Pension Plan (JP)	2%	1%
Retirement savings (JHT)	3.7%	2%
Work-related injury insurance (JKK)	0.24% – 1.74%*	0%
Non-work related accidental death insurance (JMT)	3%	0%

*JKK contribution will depend on the industry and risks of working in that field.

You can find more information on coverage for Social Security Compliance in Indonesia. 

Non-mandatory employee compensation benefits

As the workforce becomes more competitive with highly skilled workers, companies are finding ways to ‘sweeten the deal’ for hiring or rewarding their loyal employees. These benefits are not required by Manpower Law, but they go a long way for employee morale and job satisfaction.

• Bonus structures for employees* 
• Additional days for annual leave
• Expanded Inpatient and Outpatient health insurance to cover family members
• Permission to work remotely 
• Mobile phone credit allowance 
• Meal allowance or stipend 

*Bonuses (other than THR) are not regulated nor required by the Indonesian Manpower Law, but companies can set up a structure for their Company Regulations, based on performance. 

Employment Termination in Indonesia

When terminating a contract, both employer and employee should clearly understand the action and consequences. In addition, both parties have rights and obligations, and proper procedures to follow.  

• Negotiations: Try to negotiate with the employee or their labor union.
• Follow Company Regulations: Adhere to steps in the PP.
• Warning Letters: Give three consecutive warning letters before termination.
• Compensation: Calculate and pay the remaining compensation owed to the employee.

Learn more about Employment Termination in Indonesia.

Indonesian Manpower Law Regulations for Hiring Foreign Workers

Hiring foreign workers is regulated but becoming easier. Employers must provide both work (IMTA) and stay (KITAS) permits. Foreign employees can only be hired on temporary contracts (PKWT) for 6 to 12 months, extendable annually. They are not eligible for full-time benefits but can receive Reimbursement of Rights payments if included in their contracts.

Emerhub can help you navigate these regulations and ensure compliance with Indonesian labor laws. Contact us for assistance with employment contracts, compliance audits, and HR consulting.