EMPLOYMENT CLUSTER – what you need to know?

Some changes to certain provisions in Law Number 13 of 2003 on Manpower (“Manpower Law”) are made under Law No. 11 of 2020 on Job Creation (known as “Omnibus Law”) on employment cluster, and it has been a hot topic of discussion within the society. These are the essential changes of the employment cluster under the Omnibus Law:

1. The Use of Foreign Employees

Under the Omnibus Law, a company that needs to hire a foreign employee is required to obtain a Foreign Employer Utilization Plan (Rencana Penggunaan Tenaga Kerja Asing/RPTKA) approved by the central government (in this case, the Minister of Manpower). However, the Omnibus Law waives this requirement for the following individuals:

1. directors or commissioners with certain shares ownership or shareholders;
2. diplomat and consular who are working at representative office of foreign countries; or
3. foreigners who are required for the production activities that are ceased due to an emergency situation, vocational, start-up company, business visit, and research for recent period of time.

As also provided in the Manpower Law, the Omnibus Law allows foreigners to be employed in Indonesia only in an employment relationship for a certain position and a certain period and have the necessary expertise to the position to be served by the foreign employee.  Further, a foreigner may not fill any personnel/human resources (HR) management position or certain other positions and therefore, may not handle HR matters in any way. In the previous practice on the implementation of the Manpower Law and under the unwritten policy of the Ministry of Manpower, this prohibition includes signing any HR related documents (including employment agreements, warning letters, Mutual Termination Agreement, etc.) or participating in bipartite meetings, etc.

However, the specific provisions on the certain positions and period for the foreign employees, and other provisions regarding the use of foreign employees will be further provided in a Government Regulation.

2. Fixed-Term Employment Agreement

The Omnibus Law provides almost similar principal requirements for a Fixed Term Employment Agreement/Contract (“FTC”) as in the Manpower Law, where an FTC is generally explained as an employment contract between an employer and an employee based on a specified term or the completion of specific work, ie (i) one-off (not continuing) or temporary in nature, (ii) the work is estimated to be completed in not a very long time (previously, the Manpower Law determined the estimated completion time of the work should be 3 years), (iii) seasonal in nature, (iv)  related to a new product, activity, or ancillary product which is on trial, and (v) for the type and the nature of the work or the activity is not permanent.

An FTC that fails to comply with the above provisions shall become a Permanent Employment Agreement. However, as you can see in the above explanation, the Omnibus Law does not provide an estimated term for the completion of the one-off (not continuous) or temporary work. It only states that the work should be completed for a certain time that are not too long, without a specific estimated time.

As previously regulated under the Manpower Law, no probation is allowed for an FTC. The difference is that in the Omnibus Law, if the FTC contains a probation period, it will be considered invalid and the term of employment should be calculated from the beginning. The Omnibus Law also removes one of the requirements in the Manpower Law, which stated that an FTC which are not made in writing to become a Permanent Employment Agreement (Perjanjian Kerja Waktu Tidak Tertentu).

Further, the Omnibus Law is silent regarding the term/limitation of the FTC as previously provided under the Manpower Law (ie FTC can be agreed to for up to 2 years, extendable once for up to 1 (one) more year, and can be renewed once for up to 2 (two) years, but not commencing until at least 30 days after the expiry of the previous FTC).

Further provisions regarding the types and natures of work activities, period, and limit of extensions of an FTC will be provided under a Government Regulation.

3. Outsourcing

Under the Omnibus Law, the employment relationship between the outsourcing workers and the outsourcing company is established under a written agreement, either made under an FTC (PKWT) or Permanent Contract (PKWTT). The outsourcing company must be in the form of a legal entity and must comply with the business license issued by the Central Government. The protection to the outsourcing workers’ wage, welfare, employment terms and conditions, and any dispute arises is implemented at least in accordance with the prevailing laws and regulations, and is the responsibility of the outsourcing company.

Further specific provisions regarding worker protection and business licensing for an outsourcing arrangement will be provided in a Government Regulation.

4. Working Hours and Overtime

Under the Omnibus Law, the regular working hours are 7 hours a day or 40 hours a week (for a 6-working day week), or 8 hours a day or 40 hours a week (for a 5-working day a week).

Employees who work in excess of the above standard working hours are entitled to overtime pay. However, the overtime pay requirement does not apply to certain business sectors and jobs, which will be further provided in a Government Regulation. In the previous practice, employees who are working as the thinker, planner, implementor, and controller of the company (usually those who have higher position such as manager) are not entitled to overtime as they are paid a higher wage, anyway.

Previously, under the Manpower Law, the maximum overtime hours permissible on weekdays is 3 hours in a day and 14 hours a week. Meanwhile, under the Omnibus Law, the time limit for overtime hours are extended to 4 hours in a day and 18 hours a week.

5. Wage

The Omnibus Law stipulates the minimum wage is determined by Governors (ie the provincial minimum wage) based on the economic and employment conditions. The calculation for determining the minimum wage in the relevant area is conducted by taking into account the economic and manpower conditions, and regional economic growth and inflation variable of the relevant regency/city. The economic and manpower conditions should be based on the data which are sourced from a relevant agency authorized for statistics. As also provided under the Manpower Law, employers may not pay their employees less than the applicable minimum wage. The minimum wage only applies in the first year of employment, which was set out according to the existing implementing regulations to the Manpower Law. The employers is not allowed to reduce or cut the wage if they have paid a higher wage determined before the issuance of the Omnibus Law.

The most noticeable difference is that, under the Omnibus Law, the minimum wage requirements is exempted for Micro and Small-Scale Businesses (“UMK”) which was not provided under the Manpower Law. The wage in UMK shall be stipulated based on an agreement between the employer and the employee at the company. The wage agreement shall at least in the amount of a certain percentage of average public consumption based on the data that are sourced from an agency authorized for statistics.

Further, the government will address and implement this new concept of wage in the implementing regulations under a Government Regulation.

6. Insolvency

Under the Omnibus Law, if a company is declared bankrupt or liquidated based on statutory provisions, wages and other rights that have not been received by the employees constitute a debt with priority payment. Payment to all creditors must wait until all wage payments to the employees have been carried out. The exception is applied for creditors with security rights (eg mortgage, fiduciary, etc).

7. Employment Termination

In general, no significant change is made under the Omnibus Law regarding the procedure for termination of employment. Previously, the basic principle of the Manpower Law is that dismissal of an employee should be prevented or even in some cases, prohibited. The general principle was that the relevant authorities must approve every termination of employment (with certain exceptions). Meanwhile, under the Omnibus Law, if termination cannot be avoided, the company should notify the employee and/or the union of its intention and the reason for termination. If the employee/union refuses the termination, this will be considered an industrial relations dispute and it will be processed according to Law No. 2 of 2004 on Settlement of Industrial Relations Disputes.

Further, under the Omnibus Law, companies do not have to provide notification if: (i) the employee resigns voluntarily, (ii) the term of employment under an FTC is expired, (iii) the employee reaches the applicable pension age according to the employment agreement, company regulations, or collective labor agreement, and (iv) the employee is passed away.

The Omnibus Law acknowledges almost all of the reasons for termination of employment as provided in the manpower law. There are a few additional reasons recognized under the Omnibus Law for termination of employment, ie (i) the company is in the delay of payment status (PKPU), and (ii) the company conducts efficiency measures that is followed or not followed by the closing of the company due to losses suffered by the company.

Despite the above reasons, the Omnibus Law allows the employment termination to be based on other reasons which are specified under the employment agreement, company regulations or collective labor agreement. This means that the reasons for termination are not limited to those specified under the Omnibus Law.

 Severance Pay

The Omnibus Law still requires companies to pay employees severance pay, long service pay, and compensation of rights following an employment termination. However, unlike the Manpower Law, the Omnibus Law does not provide specific provisions regarding the payment formula which correspond with the termination reasons. Further, a reduction to compensation (ie housing and medical allowance which was set for 15% of the total severance pay and long service pay) is no longer included in the compensation entitlements.

The government will address and implement this new concept of termination under a Government Regulation.

8. Social Security Program

The Omnibus Law introduces a new program for employees’ social security, namely Unemployment Security (Jaminan Kehilangan Pekerjaan). When employees are terminated, they are entitled to benefits from the unemployment security program in form of cash and access to the job market and training information. This program will be administered by the Social Security Administration Agency for Employment (Badan Pengelola Jaminan Sosial Ketenagakerjaan/BPJS Ketenagakerjaan).

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This alert is intended to inform generally on the topics covered and should not be treated as a legal advice or relied upon when making investment or business decision. If you have any questions or need further specific advice on the above matter, or other general matters made available by B.Av, please do not hesitate to contact Towy Aryanosa (towy.aryanosa@b-av.co), or Andrew Timothy (andrew.timothy@b-av.co).