21 Jun 2021
‘Omnibus Law’ Manpower Regulation Turns Out to Be Mixed Bag for Indonesia’s Employers

February 2021 saw the issuance of a raft of new government regulations to give effect to the reformist Job Creation Law (colloquially known as the Omnibus Law), which entered into force on 2 November 2020. In this ABNR legal update, we discuss Government Regulation No. 35 of 2021 on Fixed-term Employment Contracts, Outsourcing, Working Hours and Rest Entitlements, and Termination of Employment.

From its inception, Indonesia’s principal source of law in the manpower sector, Law No. 13 of 2003 (the “Manpower Law”),[1] was criticized as being excessively pro-labor and biased against the interests of employers.

To address this perceived imbalance, the Manpower Law was heavily amended by Law No. 11 of 2020 on Job Creation (colloquially, the Omnibus Law),[2] in line with the government’s commitment to boosting the country’s ease-of-doing-business ranking, encouraging investment and increasing employment opportunities. To give effect to these amendments, the government has now issued Government Regulation No. 35 of 2021 on Fixed-term Employment Contracts, Outsourcing, Working Hours and Rest Entitlements, and Termination of Employment (the “Regulation”),[3] which signals a perceptible shift in the respective positions of employer and employee.

A. Fixed-term Employment Contracts

Previously, a fixed-term employment contract (temporary contract / “FTEC”) could run for a maximum of 2 years, extendable once for an additional one year, meaning that the maximum period of time that a person could work for the same employer under an FTEC was 3 years. If an employee worked on an FTEC for more than 3 years or his/her contract was extended or renewed more than once, it would automatically convert into a permanent contract. Under the Regulation, the maximum period of time that someone may be employed on an FTEC has been increased from 3 years to 5 years.

In another important development, employers are now required to pay employees compensation at the end of an FTEC if the employee performs a minimum of 1 month’s work. The Regulation stipulates that an employee who has performed at least 12 months’ work should be paid 1 month’s wages in compensation, while compensation for periods of service that are shorter or longer than 12 months will be calculated on a pro rata basis.

If an FTEC is extended, compensation must be paid at the end of the initial period (before the start of the extension), as well as at the end of each extension.

However, compensation is not payable to expatriate employees.

For an FTEC that was in existence at the time the Regulation entered into effect, compensation will be calculated counting from the date on which the Omnibus Law entered into force, that is, 2 November 2020.

The previous restrictions on the types of jobs that may be performed based on an FTEC remain unchanged. These mean that an FTEC is only an option in the case of work that is temporary in nature or which will be completed within a specified or limited timeframe, work that will be completed within a maximum of 5 years, seasonal work, and work related to the development of a new product or process. In addition, an FTEC may not be used in the case of an employee engaged in work that constitutes a permanent / routine part of the employer’s operations.

The Regulation maintains the previous requirement that an FTEC be registered by the employer with the local-government manpower service. However, this will now be able to be done online in many cases, whereas previously it had to be done manually. As for timelines, a contract should be registered within 3 days of signing, where registration is conducted online, or within 7 days, where it is done manually (for example, in a part of the country where online registration is not yet available). As was the case previously, there are no specific sanctions for a failure to register.

B. Outsourcing

The key change here is that the Regulation (mirroring the Omnibus Law) relaxes the rules on the types of work and jobs that may be outsourced so that they now extend beyond those that are purely auxiliary (non-core) in nature. Previously, outsourcing was very tightly restricted - work had to be of a character that was clearly capable of being separated or severed from the company’s core operations (i.e., it had to be ancillary in nature) before it could be outsourced. Thus, anything relating to the employer’s principal operations, such as production-line work, could not be lawfully outsourced.

Following a Constitutional Court decision in 2011,[4] “transfer of undertaking protection of employment” (TUPE) rules have been applicable to outsourced workers in Indonesia. What the Court’s decision in effect means is that if an outsourced worker employed by Outsourcing Provider A performs work on a long term basis at its customer, Company X, and Company X then switches to Outsourcing Provider B, the latter must step into the shoes of Outsourcing Provider A, if the work is still ongoing, by taking over Outsourcing Provider A’s contract with the outsourced worker, subject to the same terms, conditions and length-of-service benefits as the employee had under their contract with Outsourcing Provider A. This application of the TUPE principle remains unchanged under the Regulation.

C. Overtime

Maximum permissible overtime has been extended from 3 hours per day and 14 hours per week to 4 hours and 18 hours, respectively. The Regulation also emphasizes that employee consent for overtime work must be provided in writing or by electronic means.

The increase in permissible overtime marks a small but welcome change that should 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.

D. Termination of Employment

The Regulation stipulates additional grounds that may be used by an employer as a basis for termination of employment:

1. Due to a spinoff of part of the employer’s business;
2. Need for efficiency measures due to ongoing losses or to avoid incurring a loss
3. Closure due to non-consecutive losses over a 2-year period (previously losses had to be consecutive for at least 2 years);
4. Gross misconduct;
5. Employer is undergoing a debt restructuring process (PKPU) under the Bankruptcy Law;

These additional grounds now complement the grounds provided previously, such as breach of employment contract, company regulations or collective labor accord (provided that 3 consecutive written warnings have been served); merger, consolidation or acquisition of the company; closure of the company due to continuous losses over 2 consecutive years (as mentioned above), force majeure, bankruptcy, unauthorized absence of the employee from work, etc.

It is interesting to note that the government has reintroduced gross misconduct as a ground for termination after it was removed from the Manpower Law by the Constitutional Court a few years ago. However, the precise scope and purport of “gross misconduct” must now be described in the employment contract, company regulations or collective labor accord, as the case may be. No severance pay is payable on termination for gross misconduct.

Importantly, the Regulation also provides new multipliers for the calculation of severance pay in the permissible termination situations prescribed by the Regulation, as discussed above. These multipliers are applied to standard or default severance-pay entitlements in the event of a statutory or mutually agreed termination, as listed in Table 1 below, while the new multipliers, which should result in significantly lower termination costs, are presented in Table 2. Table 3 then provides a number of concrete examples of how the new multipliers will produce significant cost savings for employers in selected cases involving the termination for an employee with 10 years of service:

Table 1

Default Severance Pay Entitlements Under the Regulation

Table 2

New Severance Pay Multipliers for Terminations on Selected Grounds

Table 3

Sample Cost Savings on Severance Pay for Employee with 10 Years’ Service Using New Multipliers

(It should be noted that severance pay is the predominant component out of a total of 3 components used in the calculation of a terminated employee’s overall severance package, with the other two being service pay and compensation for foregone entitlements, such as annual leave and sickness benefits)

The Regulation also establishes a more streamlined procedure for termination of employment, as the employer now only needs to serve notice of termination on an employee, whereas previously the employer required permission from the Industrial Relations Court to effect termination. However, if the employee refuses to accept termination, the matter will then become one for the industrial relations dispute resolution mechanism established by Law No. 2 of 2004, as was the case previously.[5]

ABNR Commentary

The manpower provisions of the Omnibus Law were among the most controversial, sparking street demonstrations that continued for a number of weeks across Indonesia. The government appears to have heeded the protests by refraining from introducing the kind of radical reforms in the Regulation that labor unions were concerned about. Nevertheless, the reforms that have been made are meaningful. They afford employers greater flexibility in managing labor issues and should help reduce manpower costs overall.

Of course, many employers will be disappointed that the government did not go further so as to redress what might be perceived as continuing pro-labor bias in Indonesian manpower law. However, it is important to note that the Omnibus Law affords government the power to make changes to many facets of manpower law by way of regulation rather than statute. This makes it considerably easier for the government to amend the law in the future. Consequently, given the government’s overarching policy objective of boosting Indonesia’s ease-of-doing-business ranking, investment and employment opportunities, we expect that the reforms introduced by the Regulation will continue to be built upon and developed on a gradual basis going ahead.

By partner Mr. Indra Setiawan (isetiawan@abnrlaw.com), senior associate Mr. Ridzky Firmansyah (tamin@abnrlaw.com), and counsel Mr. James Boyd (jboyd@abnrlaw.com).

This ABNRNewsand its contents are intended solely to provide a general overview, for informational purposes, of selected recent developments in Indonesian law. They do not constitute legal advice and should not be relied upon as such. Accordingly, ABNR accepts no liability of any kind in respect of any statement, opinion, view, error, or omission that may be contained in this legal update. In all circumstances, you are strongly advised to consult a licensed Indonesian legal practitioner before taking any action that could adversely affect your rights and obligations under Indonesian law.