07 Feb 2023
Indonesian Gov’t Opts for Quick Fix for “Conditionally Unconstitutional” Job Creation Law

Background

On 30 December 2022, the Indonesian Government promulgated an emergency regulation, Government Regulation in Lieu of Law No. 2 of 2022 on Job Creation (“Perppu 2/2022”).[1] The new regulation repeals and replaces Law No. 11 of 2020 on Job Creation (“Job Creation Law” or “JCL”),[2] which was declared “conditionally unconstitutional” by the Constitutional Court (“Court”) on procedural grounds on 25 November 2021.[3]

The Job Creation Law (dubbed the “Omnibus Law” by many) was a vast piece of legislation, extending to more than 1,000 pages; it was enacted to reform key aspects of Indonesia’s governmental and business life as part of an overall effort to improve the country’s ease of doing business. However, the Court found that the process by which JCL had been enacted failed to follow mandatory statutory procedures, including the requirement for wide-ranging public participation in the legislative process.

Instead of annulling the JCL, the Court handed the House of Representatives (Dewan Perwakilan Rakyat / “DPR”) and Government a deadline of two years (before 25 November 2023) to “redo” the legislative process in accordance with the requirements of the law and the basic principles of lawmaking.

However, rather than go through the time-consuming legislative process in the DPR from scratch once again, the Government has opted for the fast-track Perppu route.

What exactly is a Perppu?

A “Government Regulation in Lieu of Law,” or Perppu, is an emergency regulation issued by the Government that temporarily has the power of statute. It must be submitted to the DPR for ratification during the DPR’s next session subsequent to its issuance. Should it receive DPR approval, it will then be confirmed as statute law. Otherwise, it must be revoked.

Under Indonesia’s Constitution, an emergency regulation may only be issued to fill a legal vacuum or in particularly pressing circumstances.

Why is a Perppu needed?

According to the Government, Perppu 2/2022 is necessary for a long list of reasons, including a deterioration in global economic and political conditions; looming global recession; rising inflation; food, economic and energy crises; supply-chain disruptions; climate change; ever-increasing competition among states; and globalization.

What changes does Perppu 2/2022 make to JCL?

In reality, Perppu 2/2022 makes few truly substantive changes to JCL. The vast majority that it does make are corrections to a slew of editorial errors in the JCL’s text, such as incorrect citations, inaccurate numbering, typographical errors, etc. Of those that are substantive, the amendments to the following statutes are perhaps the most significant:

1. Law No. 13 of 2003 on Manpower:

1. imposition of a new requirement that a Government Regulation be issued to specifically identify those parts of work processes that may be outsourced to third parties (Article 64) – this may result in the rules on outsourcing becoming tighter as there was no such requirement under the JCL, meaning that theoretically all types of work could be outsourced;
2. provincial governors are given unambiguous authority to set a new minimum wage if a regency/city has adopted one that exceeds the provincial minimum wage (Article 88C) – while similar authority was provided by the JCL, the circumstances in which it may be exercised have now been made clearer;
3. adjustments to the method of calculating the minimum wage, with economic growth, inflation, and specified indices to be used as determining factors (Articles 88C and 88D) - the new rules appear to be little more than a tweaking of those in the JCL;
4. the central government is also given additional powers over the minimum wage regime through an express right to, in certain circumstances, set aside or ignore the determining factors described in point (iii) above (Article 88F). The Elucidation explains that such special circumstances would include a disaster declared by the President, an extraordinary global economic crisis, or a national crisis such as a pandemic;
5. the imposition of an obligation on employers to establish remuneration structures and scales for workers who have been employed for at least one year (Article 92). These structures and scales should have regard to the financial capacity of the employer and productivity. A similar requirement was also incorporated in the JCL.

2. Law No. 4 of 2009 on Minerals and Coal Mining

Perppu 2/2022 allows for the holders of Mining Licenses (IUP) or Special Mining Licenses (IUPK) which have entered the production stage to be exempted from paying royalties if they engage in the further development and/or utilization of their coal resources (new Article 128A).

3. Law No. 33 of 2014 on Halal Product Guarantees

Perppu 2/2022 makes substantial changes to the procedures for the granting of halal status. The amendments focus primarily on the role of, and dynamics between, the different government bodies and agencies involved in the process, including the establishment of the Halal Fatwa Committee (Articles 5, 7, 10, 32, 33, and 52A).

4. Law No. 27 of 2007 on Management of Coastal Zones and Small Islands and Law No. 32 of 2014 on Maritime Affairs

Perppu 2/2022 establishes a new requirement to obtain a “confirmation of conformity” with spatial zoning requirements for the proposed utilization of maritime areas (kesesuaian kegiatan pemanfaatan ruang laut) (in amendments to Articles 16, 16A, 17, 17A, 18, 22, 22A, 22B, 71, 75, and 78A of Law No. 27/2007, and Articles 47, 47A, 49 and 49B of Law No. 32/2014).

Transitional and Concluding Provisions

The transitional provisions of Perppu 2/2022 set out broad grandfathering arrangements to maintain the validity of decisions and rules/regulations issued under JCL.

Article 182 of Chapter 14 provides that:

1. Business licenses and/or certificates that were issued under JCL will remain valid until their expiry;
2. Agreements, sectoral licenses, certificates, and/or other forms of licenses that were issued by central or regional government prior to the promulgation of JCL will remain valid until their expiry;
3. Legal entities established under JCL will remain valid until the expiry of their term of incorporation;
4. Business licenses currently being applied for will be processed in accordance with Perppu 2/2022;
5. Legal actions undertaken by central or regional government, or an agency/institution established by or based on JCL will remain valid, provided that they comply with the general principles of good governance.

In addition, Article 183 of Chapter 14 stipulates that the Investment Management Agency (Lembaga Pengelola Investasi) established by JCL will remain under Perppu 2/2022.

Similarly, the concluding provisions in Article 184 provide that (i) implementing regulations issued for laws amended by Perppu 2/2022, and (ii) implementing regulations issued for JCL, remain in effect, provided that they do not conflict with the provisions of Perppu 2/2022.

Consequently, Perppu 2/2022 maintains the validity of business licenses and certificates, legal entities, and legal actions issued, established or undertaken based on JCL.

ABNR Commentary

Few would argue with the Job Creation Law’s goals, such as expediting business licensing, streamlining government bureaucracy, reforming Indonesia’s labour market, etc. Equally laudable is the Government’s commitment to achieving these goals. However, from a legal perspective, the big question is whether an emergency regulation is the right way to respond to the Constitutional Court’s concerns about JCL -- in particular, the lack of public participation during its drafting process?

While the elucidation to Perppu 2/2022 claims that the Government has gone to considerable lengths to elicit and take into consideration the views of the public, as required by the Constitutional Court, many might be tempted to disagree with this premise, given how Perppu 2/2022 appears to have popped up from nowhere in the middle of the year-end holidays, when people were focused on other matters.

As to the question of whether an emergency regulation is justified in the present circumstances, the Elucidation to Perppu 2/2022 presents a long list of reasons as to why the Government believes it is needed, covering everything from Covid to climate change. Many, however, remain unconvinced. So far, a total of 13 labour unions have joined forces to challenge the constitutionality of Perppu 2/2022 in the Constitutional Court. So, it is now up to the judges to decide whether the Government’s justifications for Perppu 2/2022 are sufficient.

In addition, as mentioned in our Introduction above, an emergency regulation must be ratified into law by the DPR during its next session after the regulation’s issuance. As Perppu 2/2022 was issued on 30 December 2022, this means that it should be ratified by the DPR during its current session. If not, it must be revoked. While the Government still enjoys an unprecedented majority in the DPR, the legislators -- or a significant portion of them -- could yet decide to play hardball, especially with the political climate heating up rapidly ahead of presidential and legislative elections in 2024.

Given all the above, the Government is not home and dry just yet in its long-running efforts to make Indonesia an easier place in which to do business.

By partners Mr. Freddy Karyadi (fkaryadi@abnrlaw.com) and Ms. Rita Taufik (rtaufik@abnrlaw.com), and senior associate Ms. Kartika Lestari (klestari@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.