01 Mar 2021
Indonesian Govt Shows Support for Labor-intensive Sectors by Giving Nod to Wage Cuts

The Ministry of Manpower (MOM) has thrown its support behind labor-intensive industries hit hard by Covid-19 by issuing a new regulation that smooths the way for eligible businesses to temporarily cut employee wages. While any decision on wage cuts (or indeed, wage increases) is a matter for employer and employee under Indonesian law, the regulation will nevertheless help to clarify the legal position as regards the rights of both sides should any disputes arising out of Covid-19 wage cuts in the prescribed sectors come before the Industrial Relations Tribunal.

The new regulation, Ministry of Manpower Regulation No. 2 of 2021 on Remuneration in Certain Labor-Intensive Industries During the Covid-19 Pandemic (the “Regulation”), entered into force on 15 February 2021.

The prescribed labor-intensive industries are:

1. food, beverages, and tobacco;
2. textile and garments;
3. leather and leather goods;
4. footwear;
5. children’s toys; and
6. furniture.

The Regulation applies in a situation where:

1. the company has at least 200 employees;
2. at least 15% of its production costs derive from labor; and
3. it has implemented Covid-19 restrictions, such as reducing the number of workers allowed to be present in offices or plants, which has affected its ability to pay existing wage rates.

The Regulation states that a plan to cut wages should be agreed in writing between the business and its employees based on the principles of consensus, transparency and good faith. However, it omits to mention whether wages may be reduced to a level that is below the mandatory minimum wage. Going by past experience, we believe the Government is likely to object if an employer attempts to do this as doing so would violate the statutory prohibition on paying less than the minimum wage.

The Regulation further states that an agreement to reduce wages should be in writing and state, at a minimum, the new wage rate and method of payment. Agreements that extend beyond 31 December 2021 are not covered by the Regulation.

Employers should be aware that the Regulation only applies to an employee’s basic monthly wage. Further, the reduced wage rate should not be used as the basis for calculating: 1) manpower social security premiums, 2) compensation for termination of employment, and 3) other legal entitlements provided under the laws and regulations. In calculating these things, the employer should use the pre-adjusted wage rate as the basis.

By partner Mr. Indra Setiawan (isetiawan@abnrlaw.com) and associate Ms. Jaime Angelique (jangelique@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.