04 May 2023
Indonesian Gov’t Gives Employers Leeway to Cut Wage Costs Amid Global Economic Challenges
On 8 March 2023, the Minister of Manpower issued a new regulation that allows certain export-oriented, labor-intensive enterprises to reduce employees’ working hours and/or wages in order to help them survive amid the ongoing global economic turbulence and waning worldwide demand.
The new rules are set out in Minister of Manpower Regulation No. 5 of 2023 (“MoM 5/2023”), which permits eligible enterprises to adjust working hours and wages by agreement with employees or labour unions. An executed agreement is valid for a maximum of 6 months and must be registered with the local manpower agency.
Definition of Export-Oriented, Labor-Intensive Enterprises
Under MoM 5/2023, in order to be eligible to adjust working hours and wages, an enterprise must:
- have at least 200 employees;
- incur labor costs that account for at least 15% of production costs; and
- be dependent on the US and European markets, as evidenced by purchase orders.
Further, in order to be eligible, an enterprise must operate in one or more of the following sectors:
- Textiles and apparel;
- Leather and leather goods;
- Children's toys.
Reductions in Working Hours and Wages
The Ministry of Manpower has emphasized that reductions in working hours and wages are aimed at helping enterprises to survive and preventing layoffs.
Working hours may be reduced from a baseline of:
- 7 hours per day/40 hours per week (for a 6-day working week); or
- 8 hours per day/40 hours per week (5-day working week).
Hours that are not worked by an employee as a result of the introduction of reduced working hours cannot be treated by either the employer or employee as a shortfall in the overall number of hours worked. Consequently, the employee cannot be required to make them up in the future and the employee cannot subsequently claim wages for them.
Eligible enterprises may reduce wages, provided the new wage paid is at least 75% of what would usually be payable. In addition, wage reductions under MoM 5/2023 will not affect the calculation of social security contributions and benefits, severance payment entitlements upon termination of employment, and other employee entitlements. These will continue to be based on the employee’s unadjusted wage.
Few would question the fundamental aim of MoM 5/2023 to reduce employers’ costs amidst an increasingly challenging economic climate.
While belt-tightening that inevitably affects employee working conditions may be a difficult pill to swallow for those directly affected, it may be the only choice available if the alternative is to be laid off. The requirement for bilateral agreement between employers and their workers as an essential precondition should afford the latter a degree of protection and increase their bargaining power. However, the key problem in this regard is that things normally need to have reached a dire state in a business before a labor union will accept pay cuts. By that stage, it may simply be too late for the business to continue as a going concern.
By partners Mr. Indra Setiawan (email@example.com) and Mr. Ridzky F. Amin (firstname.lastname@example.org).
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.
 Minister of Manpower Regulation No. 5 of 2023 on Adjustments to Working Hours and Wages of Export-Oriented, Labour-Intensive Enterprises Affected by Changes in the Global Economy / Peraturan Menteri Ketenagakerjaan No. 5 Tahun 2023 tentang Penyesuaian Waktu Kerja dan Pengupahan pada Perusahaan Industri Padat Karya Tertentu Berorientasi Ekspor yang Terdampak Perubahan Ekonomi Global