14 Oct 2020
Amid Ongoing Confusion over Job Creation Bill, Manpower Reforms Less Radical Than Expected

This is the second of our ABNR Legal Updates on the Job Creation Bill that was passed by Indonesia’s House of Representatives on 5 October 2020 but has yet to be signed into law by the President. Today, we focus on the key changes it makes in the employment-law arena.

A. Introduction

As confusion reigns over the current status of the Job Creation Bill (“JCB”),^[1]or “Omnibus Bill,” as it is often dubbed, the changes that it proposes for the manpower sector are perhaps the most controversial.

Upon promulgation, JCB will significantly amend the legal regime governing formal-sector employment established by the 2003 Manpower Law (“ML”)[2]and its body of ancillary / implementing regulations. However, the reforms it envisages have been very much watered down compared to the original version of JCB that was submitted to the House of Representatives (Dewan Perwakilan Rakyat/ DPR) back in February.

Despite what one might think, given the many purportedly definitive analyses of the “Omnibus Law” that have been published since JCB’s approval by the DPR on Monday, Oct. 5, it is not yet law as it has yet to be signed by the President and promulgated. Indeed, a series of divergent drafts have been publicly circulated by the DPR over the last week or so. It is not clear whether this has been a deliberate ploy to confuse the opposition or is simply the result of a lack of coordination. Given the ongoing uncertainty, what is stated in this ABNR Legal Update may be subject to change.

Our analysis is structured as follows:

1. Bonus Proposal
2. Unemployment Benefit
3. Compensation on Termination of Employment
4. Restrictions on Termination of Employment
5. Pay Structure / Scale
6. Minimum-Wage Regime
7. Maximum Working Hours, Overtime and Weekly Rest Days
8. Paid Leave
9. Paid Sick Leave
10. Fixed-term (Temporary) Contracts
11. Outsourcing
12. ABNR Commentary

But first, a word on terminology. To facilitate comparison, we refer to the version of the Job Creation Bill that has been used as the basis of this analysis as “Latest Version JCB”, while the first version that was submitted to the DPR back in February is “Original Version JCB.”

B. Analysis

1. Bonus Proposal

Latest Version JCB make no mention of the proposed bonus that would have been payable to employees of medium and large-scale enterprises under Original Version JCB. This will naturally come as a relief to employers, who appeared to be greatly taken aback when the bonus proposal first came to light, given that it would require them to pay bonuses of between one month’s and five months’ wages to their workers, depending on length of service.

Note:

The bonus proposal was widely perceived as a “sweetener” designed to buy off workers and their unions with a view to securing their acceptance of the wide-ranging labor reforms proposed in Original Version JCB.

2. Unemployment BenefitScheme

Latest Version JCB amends the 2004 National Social Security System Law[3]so as to establish a new unemployment benefit scheme as part of the existing National Manpower Social Security Program (NMSSP) administered by the Manpower Social Security Agency (Badan Penyelenggara Jaminan Sosial Ketenagakerjaan /BPJamsostek). Participation in the social insurance-based scheme will require the payment of premiums. Under Original Version JCB, it was unclear whether employers would be required to pay a portion of these. However, Latest Version JCB seems to imply that all premiums will be paid by the State, although it has to be said that the wording of the relevant provision is somewhat unclear.

Latest Version JCB also makes clear that the scheme is not going to be an open-ended free-for-all. Unemployment benefit will be available for a maximum of six months, and only those who have worked for a minimum period of time will be eligible.

Further details on the operation and funding of the scheme are to be provided by Government Regulation.

Note:

The addition of unemployment benefit to the range of benefits already available under the NMSSP could well result in higher premiums overall, given the significant additional financial obligations that will have to be borne by the program, not to mention the existing financial pressures and cost overruns it faces. While Latest Version JCB implies that the State will cover premiums for participation in the unemployment-benefit scheme, the Government may well be tempted to try to shift at least some of the burden onto employers.

3. Compensation on Termination of Employment

ML provides for generous compensation for terminated employees. Such compensation consists of 3 components: (a) severance payment /Uang Pesangon(payable to all terminated employees on an ascending scale of up to a maximum of 9 months’ wages depending on length of service); (b) service payment /Uang Penghargaan Masa Kerja(payable to employees with 3 or more years’ service on an ascending scale up to 10 months’ wages); and (c) compensation for foregone entitlements (Uang Penggantian Hak) – this includes compensation for such things as untaken leave, unclaimed medical benefits and other unused entitlements that are provided under individual employment agreements.

While Latest Version JCB fully maintains the severance and service pay entitlements under ML, it changes the rules on the calculation of compensation for foregone entitlements. Under ML, compensation for foregone entitlements in the form of housing and medical benefits is set at 15 percent of the severance pay and service pay to which the terminated employee is entitled. This rather unreasonable stipulation is not included in Latest Version JCB.

Of potentially greater importance, Latest Version JCB repeals ML’s rules on the calculation of severance pay in special cases, including the requirement that twice the normal amount of severance pay be paid to employees in the following circumstances:

• The retirement of employee upon reaching retirement age where the employee is not enrolled by the employer in a pension scheme by the employer;
• The death of employee (which is treated as a termination of employment under Indonesian law); and
• Where employer ceases operations in circumstances other than prolonged financial losses or force majeure;
• In a case where employee is terminated upon a change in status or the merger or amalgamation of employer and the new management / owner does not wish to continue the relationship of employment;
• The termination of an employee on grounds of prolonged illness or permanent incapacity arising from an occupational accident (based on a determination of the Industrial Relations Tribunal).

However, it should also be noted that the legislation provides flexibility to the Government to impose further rules governing severance pay, service pay and compensation for foregone entitlements by way of Government Regulation. Thus, it is quite conceivable that pressure from the labor unions could yet force the Government to do a U-turn on the issue of severance pay in special cases.

Note:

Given the above, it may be concluded that Latest Version JCB makes little in the way of significant change to employee entitlements upon involuntary termination of employment, other than repealing ML’s rules on the more generous calculation of severance pay in certain circumstances (although even these changes may yet be rolled back). Given the scale of the financial obligations that can face employers in cases of mass redundancy, many will no doubt be disappointed that the Government has not gone further.

4. Restrictions on Termination of Employment

Latest Version JCB relaxes ML’s strict rules on termination of employment somewhat, although probably nowhere near as much as employers would like.

The situation under ML may be briefly summarized as follows:

Termination is strongly discouraged and employer, workers, labor unions and government are required to do everything possible (segala upaya) to avoid terminations, including participating in pre-termination mediation at the local manpower agency level. Should termination still be unavoidable, the employer must apply to the Industrial Relations Court (“IRC”) for a ruling approving the termination. If the IRC finds in favor of the employer, the employee can then appeal directly to the Supreme Court, with the result that it could take years for a final and conclusive determination to be handed down. In the meantime, the employer must continue to pay wages to the employee concerned, irrespective of whatever wrongdoing the employee may be guilty of. A termination that is not backed by a ruling of the IRC will in most circumstances be void by operation of law.

ML also lists of incidences of misconduct where an employee may be terminated without a ruling of the IRC. These include violation of an employment agreement, company regulations or collective labor accord (provided that 3 consecutive written warnings have been served); change of status, merger, consolidation, or change in the ownership of the company; closure of the company due to continuous losses over 2 consecutive years, force majeure, bankruptcy, unauthorized absence of the employee from work, etc. However, even in these circumstances, in practice the employer is required to first negotiate with the employee with a view to reaching an agreement. If an agreement is not reached, the employee may bring an action for wrongful termination against the employer in the IRC.

Latest Version JCB reduces the level of effort required to avoid termination from “making all efforts” to “making efforts”. Whether this will have any real implications in practice remains to be seen as it will be a matter of judicial interpretation. Should such efforts fail to achieve a resolution and termination becomes unavoidable, then the employer must serve notice of termination on the employee and/or his labor union, giving reasons for the termination. If the employee refuses to accept the termination, then the matter must be negotiated on a bipartite basis as between the worker and /or his union and employer. If these negotiations fail to achieve a settlement, then the matter must be resolved through mediation. Should that also fail and the employer attempt to press ahead with termination, the matter may be brought by the employee to the IRC under the Industrial Disputes Resolution Law[4]and ultimately the Supreme Court.

In reality, the above is very similar to the situation that currently prevails under ML.

However, Latest Version JCB adds a number of new grounds for termination besides those set out in ML. Importantly, these include the need for business efficiencies as a result of losses (whether or not the employer is forced to close down) and a situation where the employer is placed under a debt moratorium and restructuring arrangement (penundaan kewajiban pembayaran utang/ PKPU). It also allows room for more flexible termination policies by providing that further grounds for termination may be set out in the employment agreement, company regulations or collective labor accord.

More detailed rules on termination are to be provided by Government Regulation.

Note:

Most objective observers would agree that the termination procedure under ML is unduly onerous on employers. In fact, it is so onerous that employers (particularly those mindful of their public image) often prefer to offer substantial settlements to misbehaving employees to encourage them to resign rather than have their internal problems aired in public during a hearing in the IRC. Indeed, it is quite common to see employees who defrauded employers like banks receive large settlements just so that their employers can be rid of them. Thus, many employers will be disappointed that Latest Version JCB fails to make it much easier to effect terminations.

On a positive note, the addition of business efficiency as a clear ground for termination (albeit subject to conditions) will be welcomed by employers. The current difficulties facing employers that need to reduce costs by slimming down their workforces serve as a major disincentive to hiring – an employer will always have to think twice before hiring employees on a permanent basis if he knows he will have to retain them indefinitely, even in the midst of a downturn.

5. Pay Structure / Scale

Under ML, an employer is required to design its pay structure / scale having regard to employee grade, position, length of service, education and competencies. Under Latest Version JCB, by contrast, a pay structure / scale is to be determined based on the employer’s capacity to pay and productivity.

Note:

The new approach is more rational, realistic and less bureaucratic than its predecessor. Nevertheless, it is considerably more restrictive than the approach proposed in Original Version JCB, which set no preconditions at all for the determination of pay structure / scale, leaving the matter entirely in the hands of the employer.

6. Minimum-Wage Regime

Currently, minimum wage rates vary by geographical location around the country as they are determined at the provincial, county or municipal level, as the case may be. Higher minimum wage rates than the relevant local rate may also be set for specific sectors that are particularly profitable.

Under Latest Version JCB, minimum wage rates are to be set at the provincial level by the governor. In certain circumstances, special minimum wage rates may also be set for counties and municipalities by the provincial governor. In all cases, rates should be determined based on economic and labor-market conditions, and take into consideration economic-growth and inflation data. This stands in marked contrast to Original Version JCB, which stripped out the inflation component from the minimum wage calculation formula.

Latest Version JCB also abolishes special sectoral minimum wage rates, while micro and small enterprises are to be exempt from minimum-wage requirements.

It is noteworthy that Article 90(2) ML is also repealed. This permits temporary exemptions from the requirement to pay the minimum wage for employers that lack the financial capacity to do so. Thus, it would appear that employers will now be required to pay the minimum wage in all circumstances (save for micro and small enterprises). However, there is a possibility that further exemptions could subsequently be provided by the relevant ancillary / implementing regulation.

Note:

Unlike Original Version JCB, which contained detailed formulae for the determination of minimum wage rates, Latest Version JCB leaves this to be fleshed out by Government Regulation. However, it is clear that inflation has been reinstated as one of the factors that must be taken into account during the calculation process.

7. Maximum Working Hours, Overtime and Weekly Rest Days

ML sets statutory limits on working hours, namely, employees who work a 6-day week may be required to work 7 hours per day and 40 hours per week, while those who work a 5-day week may be required to work 8 hours per day. Overtime pay must be provided in respect of any work performed in excess of these hours, but no more than 3 hours per day and 14 hours per week of overtime may be worked in any one week. All of these general rules are subject to certain exceptions.

Latest Version JCB makes little change to the arrangements governing normal working hours under ML, except to add a rider that they should be stipulated in an employment agreement, company regulations or collective labor accord, as the case may be.

In the case of overtime, greater flexibility is provided to both employers and employees by increasing the maximum number of overtime hours to 4 hours per day (3 under ML) and 18 hours per week (14 under ML), subject to the consent of the employee.

Another change pertains to weekly rest days. While ML stipulates a minimum of 1 day’s weekly rest for employees who work a 6-day week (maximum of 7 hours per day before overtime) and 2 days for those on a 5-day week (maximum of 8 hours per day before overtime), Latest Version JCB merely stipulates a minimum of 1 day’s rest per 6-day working week.

Note:

The new working-hours arrangements have been the subject of all manner of alarming rumors, including that employees will only be allowed a maximum of one day off per week, whereas what the legislation actually says is that workers must be given a minimum of one day off per week.

When one assesses the new rules objectively, they do not appear to unduly undermine employee rights as overall working hours will remain the same as under ML at a maximum of 40 hours per week (before overtime). As a result of the changes, both employees and employers will enjoy greater flexibility to agree on working hours in line with the trends taking place in work patterns all around the world. In addition, the new rules on overtime will help loosen the straitjacket that employers often find themselves in when trying to complete urgent work, while at the same time allowing employees to boost their incomes by working longer hours.

8. Paid Leave

Besides 12 days annual leave, ML sets out a long list of other circumstances in which an employer is obliged to provide paid leave, including paid leave for menstruation (2 days), on the marriage or death of a close family member (up to 2 days); birth, baptism or circumcision of employee’s child (2 days), employee suffering a miscarriage (2 days), and for the performance of religious obligations (length of paid leave not specified).

While specific references to these rights were deleted in the Original Version JCB, they have been reinstated in Latest Version JCB.

Note:

The deletion of these rights was a major cause of concern to labor unions. The Government has now bowed to the protests by reinserting them.

9. Paid Sick Leave

Under ML, employees who are unable to work due to illness are entitled to be paid full wages during the first 4 months of absence from work, after which their entitlements are reduced on a sliding scale to 75% for the second 4 months, 50% for third 4 months and 25% thereafter until the termination of the relationship of employment, which may be effected by employer after 12 months or more of absence from work due to illness.

These provisions are unaffected by the Latest Version JCB. In contrast, Original Version JCB envisaged their repeal, thereby enraging labor activists.

Note:

The fact that protections for the right to paid sick leave were not included in Original Version JCB was a very obvious omission and a clear tactical error in the campaign to win hearts and minds.

10. Fixed-term (Temporary) Contracts

While ML’s rules on permanent employment contracts (Perjanjian Kerja Waktu Tidak Tertentu) are left unchanged by Latest Version JCB, those governing fixed-term contracts / temporary contracts – (Perjanjian Kerja Waktu Tertentu/ “FTC”) are amended by Latest Version JCB.

The rules on FTCs in ML may be broadly summarized as follows: FTCs may only be used in very limited circumstances, namely, for work that is temporary in nature or will be completed within a specified timeframe, work that will be completed with a maximum of 3 years, work that is seasonal, and work related to the development of a new product or process. In addition, an FTC may not be used in the case of an employee engaged in work that constitutes a permanent / routine part of the employer’s operations, and an employee may only work on the basis of an FTC for a maximum of 3 years. If they work for more than 3 years on an FTC, it automatically converts into a permanent contract by operation of law.

Original Version JCB repealed all of these rules and instead left it up to the employer and employee to negotiate the terms of their FTC.

By contrast, Latest Version JCB reinstates the relevant provisions of ML, subject to one potentially important change: The maximum period of three years permitted for employment under an FTC has now been abolished. Instead, all that is required is that “it is expected that the work will be completed within a timeframe that is not unduly long.” However, it seems likely that the purpose of this change is simply to provide the Government with greater flexibility to respond to labor market conditions rather than to open the door to indefinite employment on fixed-term contracts (as is claimed by labor activists). This is because Latest Version JCB mandates the issuance of a Government Regulation stipulating the types and duration of work that may be performed on an FTC, and the maximum number of times an FTC may be extended.

In addition, Latest Version JCB requires a person employed on an FTC to be paid compensation upon its expiry or upon completion of the relevant work. Original Version JCB also mandated payment of such compensation, but only in cases where the employee had worked for more than one year.

Note:

It is to be hoped that the upcoming Government Regulation will not impose unduly tight restrictions on contract working. Employers need greater flexibility in their hiring arrangements so as to be able to fully harness the technological advances that have led to the creation of many new types of short-term work. However, labor unions are worried that temporary working could become the new norm, thus stripping many workers of the protections and benefits enjoyed by permanent employees.

11. Outsourcing

On the surface of it, Latest Version JCB appears to significantly liberalize ML’s strict rules that tightly restrict the types of work that may be outsourced. In particular, ML requires that outsourced work must be separable or severable from the company’s main operations and must be ancillary in nature. These restrictions are not incorporated in Latest Version JCB. However, it should to be noted that Latest Version JCB appears to envisage the subsequent setting of restrictions on outsourcing by way of Government Regulation.

Note:

The future direction of outsourcing in Indonesia will not become apparent until the issuance of the required Government Regulation. However, one thing is certain: nothing short of the tightest of restrictions will be acceptable to the labor unions, given that outsourcing has been a major bone of contention and source of protest in Indonesia for many years as companies have attempted to circumvent the high cost of hiring through the use of third-party labor suppliers.

12. ABNR Commentary

In common with many other developing nations, there is a sharp dichotomy in Indonesia between the rights and protections enjoyed by the small minority of workers in the formal sector and the almost complete absence of rights and protections for the vast majority working in the informal sector.

Unfortunately, the rights and protections of formal-sector workers come at a high price as they discourage hiring, thus condemning the majority to eke out an existence in the informal sector, often on the streets.

Of course, formal-sector workers and their unions are anxious to cling on to their privileges at all costs. Given that they are better organized and enjoy greater political clout than their informal-sector brethren, they normally get their way. This appears to be what has happened with Latest Version JCB as many of the more “radical” industrial-relations reforms proposed in Original Version JCB have now been jettisoned.

Upon promulgation, the new legislation will face a plethora of challenges in the Constitutional Court, which has repeatedly proved itself inimical to economic liberalization and reform. Consequently, there is still a long way to go before the controversy subsides over this latest in a long series of Government attempts to reform Indonesia’s labor market.

Contact us

Should you have any queries on the above or require legal advice as to how you can best protect your interests during this time of uncertainty, please contact the persons below, call us on +6221-2505125 or email us atinfo@abnrlaw.com.

Mr. Emir Nurmansyah (enurmansyah@abnrlaw.com)

Mr. Nafis Adwani (nadwani@abnrlaw.com)

Mr. Agus Ahadi Deradjat (aderadjat@abnrlaw.com)

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