Indonesia Labor Law: A Guide for Employers Under Law 27/2026

Indonesia’s new labor law, Law 27/2026 on Employment Protection, took effect on 28 October 2026. It replaces the 2003 Manpower Law and changes the rules on fixed-term contracts, probation pay, outsourcing and employee leave.

If you employ staff in Indonesia, you need to review how those changes affect your workforce. Existing contracts and HR policies may need updating, while companies preparing their first hires need to build the new requirements into their employment arrangements.

In this article, we will walk you through the main changes, what they mean for employers and which transition periods apply. We also cover the rules on wages, working hours, termination and hiring foreign workers.

Main Changes to Indonesia’s Employment Rules

The changes affect decisions throughout an employee’s service, from choosing a contract to calculating termination payments. Five changes are particularly relevant to employment documents and workforce costs.

When Employers Must Apply the New Rules

Law 27/2026 applies from 28 October 2026, except where it provides a specific transition period. For employers, that means some employment arrangements need attention now, while others have their own adjustment deadlines.

Please note that the older implementing regulations remain in force where they do not conflict with the new Act. These include the regulations on employment contracts and termination, wages and foreign workers.

Further implementing regulations are due by 28 October 2027. Until then, the absence of a new regulation does not provide a general exemption from requirements already set out in the Act.

Hiring in Indonesia Under the New Law

Indonesia has two main types of employment contracts: fixed-term contracts (PKWT) and permanent contracts (PKWTT). The right choice depends on the nature of the role, with fixed-term contracts reserved for permitted temporary work and permanent contracts used for ongoing positions.

Your choice also affects probation and end-of-contract payments. For example, a PKWT cannot include probation and carries a compensation requirement when it ends. In comparison, a permanent contract can include up to three months of probation, provided the statutory conditions are met.

Fixed-term contracts

A fixed-term contract, known as perjanjian kerja waktu tertentu or PKWT, is available for work such as a defined project, seasonal activity or another permitted temporary assignment. It can suit a genuine short-term staffing need, provided the work falls within the permitted categories.

Law 27/2026 limits the initial term to two years, followed by two extensions of up to one year each. Employers therefore need to plan around a maximum of four years rather than the previous five-year ceiling.

However, duration is only one part of the decision. A contract within the four-year limit can still be incorrectly classified if the employee performs permanent work. The arrangement needs a genuine temporary basis, regardless of its stated expiry date.

The contract must:

• Be written in Indonesian using Latin script
• Cover a permitted category of temporary or non-permanent work
• Exclude probation
• Be registered within three working days of signing

Where a bilingual agreement creates different interpretations, the Indonesian text prevails. Having both versions reviewed together helps keep the translated terms consistent with the agreement you intend to make.

An unwritten PKWT, or one used outside the permitted work categories, becomes a permanent employment relationship by law. Document preparation and registration should be part of onboarding rather than left until the employee is already working.

Extending or ending a fixed-term contract

A contract’s expiry date creates both a staffing and a budgeting decision. If the assignment needs to continue, the employer must give written notice of a planned extension at least seven days before expiry.

When a fixed-term contract ends, the employer must pay compensation based on the employee’s length of service. Under Government Regulation 35/2021, an eligible employee receives one month’s wage for 12 months of service, with the amount calculated proportionally for other periods. Foreign workers are excluded from this payment under that regulation.

For contracts signed before 28 October 2026, the main uncertainty is how the new four-year limit affects existing arrangements. Law 27/2026 does not provide a specific transition rule for those contracts, so an extension should be assessed against the original agreement and previous extensions before it is offered.

The guide to PKWT and PKWTT employment contracts covers classification and compensation calculations in more detail.

Permanent contracts and probation

A permanent contract, known as perjanjian kerja waktu tidak tertentu or PKWTT, suits an ongoing employment relationship. Employers can include probation of up to three months, giving both sides a defined period to assess the arrangement.

During probation, the employee remains entitled to statutory protection. Employers must:

• Pay at least 75% of the wage for the position
• Pay no less than the applicable minimum wage
• Enroll the employee in the required social security programs
• Provide the employee’s other statutory rights

For a position paying IDR 9 million a month, the 75% floor is IDR 6.75 million. Probation pay cannot fall below that amount or the applicable minimum wage, whichever is higher.

However, the 75% figure does not permit reducing a higher salary already agreed with the employee. If the contract promises the full position salary from the start, the employer must honor that agreement.

Probation must appear in the contract or appointment letter; otherwise, there is no probation period. The period counts toward service, and an employee who meets the requirements must be confirmed as permanent.

Preparing the employment documents

Written employment contracts must identify the parties, position and workplace, wage and payment method, employment conditions, and the start date and duration. Prepare at least two copies with equal legal force, keeping one and giving the other to the employee.

A permanent contract can be oral, but the employer must still issue an appointment letter identifying the employee, start date, work and wage. A written agreement provides a clearer record of the terms both sides accepted.

Employers cannot require or retain an employee’s diploma or personal documents as security. Article 78 allows a limited exception for legally justified arrangements involving documents obtained through employer-funded education or training under a written agreement.

Wages and Payroll Obligations

When setting salaries in Indonesia, the starting point is the minimum wage for the employee’s location and sector. The minimum wage applies to employees with less than one year of service, while pay for longer-serving employees is guided by the company’s wage structure and scale.

That structure sets out salary ranges across positions and employee groups. Under Law 27/2026, employers prepare it with input from employee representatives or the union and attach it to the company regulations or collective labor agreement.

The salary package also needs the right composition. If you offer a base wage plus fixed allowances, the base wage must account for at least 75% of their combined value. For example, a package totaling IDR 8 million in base pay and fixed allowances must include at least IDR 6 million in base pay.

For employers, this means considering both the salary level and its breakdown before making an offer. An allowance-heavy package may meet the intended total but still fall short of the required base-wage proportion.

Religious holiday allowance

The religious holiday allowance, or tunjangan hari raya (THR), remains part of national wage policy. Existing implementing rules continue where they do not conflict with Law 27/2026.

THR is a statutory employment cost, separate from a discretionary performance bonus. Including it in the annual budget gives the company a more accurate view of the cost of each hire.

Emerhub can manage payroll in Indonesia, including salary calculations, statutory deductions and employee records. Our team can also coordinate payroll changes with revised contracts and HR policies.

Micro and small businesses

Micro and small businesses have specific exceptions. Article 144 permits agreed wages below the regional minimum, provided they are at least 50% of that minimum.

However, those exceptions do not remove all employment obligations. Micro and small employers must still enroll staff in the required social security programs, while termination payments follow the separate agreement-based provision in Article 250.

Working Hours and Overtime

The working schedule agreed with employees affects overtime costs and weekly rest. The standard options are:

Certain sectors and occupations have separate working-time rules. Under the standard framework, employees also receive at least a 30-minute break after four continuous hours of work.

Overtime requires employee consent and an employer instruction in writing or through a digital channel. Article 116 limits overtime to four hours a day and 18 hours a week.

For a business with fluctuating demand, the approval process belongs alongside shift planning. The instruction, employee agreement and attendance records provide the basis for the resulting payroll entry.

Calculating overtime pay

On a normal working day, the first overtime hour is paid at 1.5 times the hourly wage. Each following hour is paid at twice the hourly wage.

The hourly wage is the base wage plus fixed allowances, divided by 173. For an employee earning IDR 8.65 million a month, three overtime hours would cost:

Work on weekly rest days and public holidays uses different rates. For an employee on a five-day schedule, the first eight hours are paid at twice the hourly wage, the ninth at three times, and the 10th to 12th at four times.

The day worked therefore affects the calculation as well as the number of hours. Applying the ordinary working-day formula to every overtime entry can understate the payment due.

Employee Leave Entitlements

Employees in Indonesia receive paid leave for annual holidays, childbirth, illness and specified family events. Under Law 27/2026, employers must also provide 30 calendar days of long-service leave after five consecutive years of service and each further five-year period.

For companies with long-serving employees, that entitlement adds a longer absence to the staffing calendar. The main leave entitlements and payment rules are summarized below.

Annual, long-service and collective leave

An employee taking long-service leave does not receive annual leave in the same year. The two entitlements therefore need to be coordinated when determining the employee’s leave balance.

However, government-designated collective leave, or cuti bersama, follows a different rule. Where the company implements it, those days cannot be deducted from annual leave.

Paid leave also covers family events beyond those in the table, including a child’s marriage, circumcision or baptism, and the death of certain family members. Including these categories in the company’s leave policy gives employees a clearer basis for requesting leave and managers a consistent basis for approving it.

Salary during extended illness

An employee’s illness can create a continuing salary obligation even when they are unable to work. The payment reduces in stages according to the length of the absence:

• 100% of wages for the first four months
• 75% for the next four months
• 50% for the following four months
• 25% thereafter until employment is terminated in accordance with the law

For payroll, the important point is when the employee moves from one payment period to the next. Recording the absence dates and supporting medical documents together helps the company apply the correct rate without treating the absence as ordinary unpaid leave.

Social Security and the Severance Reserve Fund

Social security enrollment belongs in the onboarding process, including for employees on probation. Employers must enroll workers in the programs required for their employment, following the eligibility rules for each scheme.

The national framework includes:

• National health insurance
• Work accident insurance
• Death benefits
• Old-age savings
• Pensions
• Job loss insurance

Check eligibility for the employee concerned, particularly when hiring foreign workers. The list of national programs does not mean every worker participates in every scheme on identical terms.

Job loss insurance provides cash benefits, labor-market information and training to participants who meet its conditions. The Act identifies government funding and the recomposition of existing social security contributions as funding sources, without introducing a separate employer contribution in the Act itself.

The severance reserve fund

Article 253 creates a separate obligation to provide a severance reserve fund, or dana cadangan pesangon. Micro and small businesses are exempt.

A government institution will manage the fund, with operating arrangements to be established by government regulation. Employers should monitor those arrangements before treating an internal accounting provision as sufficient to meet the obligation.

Termination and Severance

Ending an employment relationship in Indonesia involves both a legal process and a financial obligation. The reason for termination determines the procedure and the employee’s payment entitlement, so the same severance calculation cannot be applied to every departure.

Law 27/2026 recognizes grounds including mergers, closure, resignation, specified misconduct and retirement. However, efficiency is no longer a permitted standalone ground, and the new Act supersedes conflicting efficiency provisions in Government Regulation 35/2021.

For employers reducing headcount to cut costs, that changes the options available. Employment can still end by mutual agreement under Article 81(1)(d), while any other proposed restructuring needs a legal basis under the new framework.

Agreed and contested terminations

A proposed termination may be settled through negotiation with the employee’s union or directly with the employee if they are not a union member. These bipartite negotiations must conclude within 30 working days.

If both sides agree, the settlement is recorded in a perjanjian bersama and registered with the Industrial Relations Court. Otherwise, the dispute proceeds through the industrial relations dispute-resolution process, and a contested termination requires a final and binding decision.

The distinction has a direct financial consequence for the employer. Employment obligations continue while the dispute is being resolved, including wages and other usual rights where the employee is suspended. A termination made without the required agreement or decision is void and requires reinstatement under Article 228(7).

Not every departure requires negotiation. Article 229 provides exceptions for resignation, fixed-term expiry, retirement and death. Existing court cases also have a transition rule: the substance of claims registered before 28 October 2026 is decided under the earlier law.

Warning letters and employee misconduct

For employers dealing with repeated breaches of employment terms, the warning process forms part of the basis for termination. Article 231(k) requires successive first, second and third written warnings before termination on that ground.

Each warning remains valid for up to six months unless the employment contract, company regulations or collective labor agreement provides otherwise. The timing and documentation therefore need to support the decision, alongside evidence of the breaches.

How severance is calculated

Termination payments depend on service, the termination ground and entitlement to each component.

The termination ground determines which payments and multipliers apply. For example, termination after the required warning process under Article 244 gives one times severance and one times long-service pay, plus compensation of rights.

“One times severance” means the full amount due under the employee’s length-of-service bracket. For example, an employee with four years of service receives five months’ wages under the base scale, so a 1× multiplier gives five months’ wages in severance.

Separation pay

Separation pay, or uang pisah, applies in specified termination situations. Article 233 provides that where the company has not set an amount, separation pay may be established at no less than one month’s wages.

More favorable existing provisions continue to apply. Review separation-pay clauses alongside severance and compensation of rights, because they are separate payment categories.

The guide to terminating employees in Indonesia explains the grounds, calculations and dispute process in more detail.

Hiring Foreign Workers

A foreign hire involves approval requirements and ongoing employer duties. The employer needs an approved foreign worker plan, or rencana penggunaan tenaga kerja asing (RPTKA), and ministerial authorization for the employment, subject to the statutory exceptions.

Article 62 permits foreign workers to be employed only in specified positions and for specified periods, with the required competence. The positions must be ones Indonesian workers cannot yet fill.

Individual employers cannot employ foreign workers. Foreign workers also cannot hold positions involving personnel or human resources management.

Approval exceptions and compensation-fund exemptions need to be checked separately. For example, the approval exception for a foreign spouse of an Indonesian citizen includes a five-year marriage condition, while the compensation-fund exemption does not use the same test.

Employer obligations

Depending on the position and any exemption, employers must:

• Appoint and train an Indonesian companion employee for knowledge transfer
• Arrange Indonesian-language education and training
• Pay fair, non-discriminatory wages
• Repatriate the foreign employee when employment ends
• Pay the foreign-worker compensation fund, or DKPTKA, currently USD 100 per position, per foreign worker, per month under the implementing rules, unless an exemption applies

The USD 100 rate comes from Article 35 of Minister of Manpower Regulation 8/2021. Law 27/2026 leaves the amount to implementing regulations rather than setting the figure itself.

For language training, employers can teach in-house or work with an Indonesian-language education and training institution. Exemptions cover directors, commissioners, representative-office heads, specified foundation positions and foreign workers in the temporary-work category.

Foreign workers in the technology and skills transfer roles covered by Article 65(1)(a) also have their own duty to learn Indonesian under Article 69. Include the learning and training arrangements in the hiring plan rather than treating them as an issue to address after approval.

Repatriation was already an employer duty under the earlier law. Article 273 now expressly provides corporate criminal fines for failing to repatriate a foreign worker or pay fair wages.

Training and Apprenticeships

Employee training is becoming a mandatory obligation for businesses that meet criteria to be set by the Minister of Manpower. Under Article 19 of Law 27/2026, employers are responsible for developing their employees’ skills, although the implementing rules will determine which businesses must provide training.

Businesses have three options for delivering it:

• Government training institutions
• Private training institutions
• Their own registered company training institution

Employers can therefore choose between using an external provider and building their own training capacity. However, a company-run institution must register its activities with the relevant regional government and have certified training personnel, an appropriate curriculum, facilities and funding. Whichever route the business chooses, its training programs must follow occupational competency standards.

Workplace training requirements

Workplace training delivered through private or company training institutions must follow Article 22. The requirements include:

• A maximum of six hours a day and five days a week
• Daytime training with an instructor
• No production targets during training
• A prescribed mix of at least 60% practical training and 40% theory

For companies operating a training institution, these conditions affect scheduling, staffing and the curriculum. Training time should be planned separately from ordinary production targets.

Apprenticeship arrangements

Businesses offering apprenticeships need to provide a structured training program for jobseekers. Under Law 27/2026, the arrangement operates through a training institution or government apprenticeship program working with the host company.

Participants are not employees under a properly established apprenticeship. However, a written apprenticeship agreement is required; without one, the arrangement is invalid and the participant becomes an employee.

The program must provide:

• A mentor and a defined training curriculum
• An allowance, or uang saku
• Occupational safety and health protection
• Work accident and death insurance
• A certificate or confirmation of completion

Apprenticeships can last up to six months, with no more than eight hours a day and 40 hours a week. The agreement must also set out a proportionate balance between practical training and theory.

For employers, this means planning the learning program, supervision, allowance and insurance together. An internship agreement alone is not enough to establish an apprenticeship without the required program structure.

Company Regulations and Workplace Policies

If your company has at least 10 employees, its workplace rules need to be recorded in company regulations, or peraturan perusahaan, unless you have a collective labor agreement. These regulations bring together working conditions, employee and employer obligations, and workplace procedures.

That makes them an important part of adapting to Law 27/2026. For example, changing a probation clause in a new employment contract may also require updating the company-wide policy that managers use. The same applies to leave, working hours and disciplinary procedures.

However, company regulations cannot be amended through an internal handbook edit alone. Changes made before their expiry require agreement with employee representatives and approval from the Ministry of Manpower or regional government. Employee consultation and the approval process therefore need to be included in the update schedule.

The regulations are valid for up to two years. For approval, the authority has 30 working days after the documents are declared complete; legally compliant regulations are treated as approved if that period passes without a decision.

Once the regulations are approved, employees must receive an explanation and a printed or accessible electronic copy. Communicating the changes gives managers and employees the same reference for applying the revised policies.

Outsourcing Rules in Indonesia

If your Indonesian company uses workers supplied by another business, review what they actually do rather than relying only on the service agreement’s title. Law 27/2026 limits outsourcing under an alih daya arrangement to the activities it permits.

Article 95 lists four support services:

• Cleaning
• Catering for workers
• Security
• Transport for workers

Separate provisions cover support services in mining and oil, where outsourcing must take place through a limited liability subsidiary. 

The provider must be a licensed limited liability company with a wage structure and scale. It cannot reduce workers’ agreed rights.

The consequences of using the wrong arrangement extend beyond the provider. If outsourced workers perform activities directly related to production, Article 98 provides for their employment relationship to transfer to the company using their services.

Existing companies have until 28 October 2027 to adjust their arrangements, while agreements concluded before the law took effect remain valid until expiry. Review the transition provision alongside each agreement’s renewal date and the sector-specific requirements.

Workplace Safety and Employee Protections

Some obligations affect facilities, recruitment and supplier relationships as well as employment documents. Depending on the company’s workforce and activities, the following requirements may involve operational changes.

Penalties for Employment Violations

Underpaying an employee during probation, withholding overtime pay or deliberately failing to pay termination entitlements can expose employers to criminal penalties. Law 27/2026 distinguishes between individual liability and corporate fines, so the consequences depend on the offense and who is responsible.

For the offenses listed in the table, a corporate employer can also face fines of IDR 200 million to IDR 2 billion. The law expresses these as Categories IV–VI, with the monetary amounts set by Article 79 of the Criminal Code.

For social security, the penalty depends on the circumstances. Failing to cover an employee during probation falls under the probation offense shown above. However, an employer that ignores an administrative sanction for failing to enroll employees can face prosecution under Article 290, with up to four years’ imprisonment and/or an IDR 200 million fine for the responsible individual.

Micro and small businesses are exempt from that Article 290 criminal offense. They remain responsible for enrolling employees and can still receive administrative sanctions for failing to do so.

Updating Your Employment Arrangements

For an established company, adapting to Law 27/2026 will involve more than updating the contract used for new hires. The changes also affect existing leave policies, outsourcing agreements and the amounts payroll needs to calculate.

The extent of the work will depend on your workforce. A business using fixed-term contracts will need to consider contract durations and upcoming extensions. In comparison, a company with long-serving employees may have more immediate questions about long-service leave and the staffing needed to cover it.

Company regulations bring many of these arrangements together. Changes to probation, leave or disciplinary procedures may need employee consultation and approval, so they should be planned alongside contract and payroll updates.

For businesses employing foreign workers or apprentices, the review also needs to cover the arrangements behind the paperwork, including training, insurance and the employer’s ongoing responsibilities.

A coordinated review can help you identify which changes are needed now and which depend on further implementing regulations. It also gives your HR, finance and management teams a shared basis for applying the new rules.

Employment Compliance Support From Emerhub

Emerhub’s Indonesia team can coordinate employment documents, registrations and payroll around your workforce. We support new employers and established companies adapting their arrangements to Law 27/2026.

Our support includes:

• Reviewing and drafting employment contracts
• Coordinating amendments and approval of company regulations
• Registering fixed-term contracts and arranging employee social security enrollment
• Calculating termination payments and supporting the termination process
• Coordinating foreign-worker approvals
• Managing payroll and employment records

Talk to our Indonesia team about your workforce and the support your company needs.