29 Nov 2021
Omnibus Law Declared ‘Conditionally Unconstitutional’: What Exactly Does it Mean?

In a decision published on 25 November 2021, the Indonesian Constitutional Court (“the Court”) ruled that Law No. 11 of 2020 on Job Creation (colloquially, the Omnibus Law) is “conditionally unconstitutional”.

Amending or repealing 78 statutes in the economic field, the Omnibus Law was hailed as the most significant legal reform in Indonesia since the adoption of the Civil Code in 1847 (see our newsletter here). Since its enactment, the Government has issued at least 49 Government Regulations, 7 Presidential Regulations, and more than 50 Ministerial Regulations to implement the Omnibus Law in many sectors, including in the field of manpower (here and here), foreign direct investment (here and here), and trade (here), to name but a few.

The Court has concluded that the Omnibus Law is conditionally unconstitutional on procedural grounds. In short, it argues that the lawmaking process did not follow mandatory procedures, including in relation to public participation. Indeed, legal experts voiced concern some time ago about the legality of the lawmaking process, which some described as a “rushed job”.

The Indonesian Legislature – under heavy pressure from labor unions and environmental organizations to vote down the Omnibus Bill – precipitously approved the legislation a few days ahead of schedule in order to avoid major demonstrations that were planned. Even after it was passed by the Legislature, several “official” versions of the law continued to circulate, all of which contained typos and inaccurate references, raising further questions about the validity of the lawmaking process.

The Court has declared the Omnibus Law conditionally unconstitutional: it sets a deadline of two years for lawmakers to redo the legislative process in accordance with prevailing laws and regulations as well as the basic principles on lawmaking. The Court is not explicit about what “redoing the legislative process” means, but based on the Legislative Process Law, this would imply that the Government and lawmakers should go through the five prescribed stages of the lawmaking process again, i.e. drafting, redacting, deliberation, enacting and gazetting, including the conducting of an academic study, public hearings, and the possibility of amendment or even rejection should the Government be ultimately unable to secure majority backing in the Legislature. Should they fail to complete this by 25 November 2023, the Omnibus Law will be deemed unconstitutional (in effect, null and void).

This would mean that the legislation in effect prior to its amendment by the Omnibus Law would then be reactivated as originally enacted.

Until such time as the Court’s requirements have been fulfilled, the Government is ordered to refrain from taking any actions/formulating any policies that are strategic or have a broad impact, or issuing any new implementing regulations related to the Omnibus Law. The first part of this order in particular is vague and prone to differing interpretations. Given that the Court’s decision was reached by the narrowest possible majority (a 5 to 4 majority), it appears that the justices steered a middle path by declaring the Omnibus Law conditionally unconstitutional rather than striking it down outright, which would have had very serious ramifications indeed.

Although not entirely unexpected, this news did come as a shock to both the Government and the local and international business community. Sixteen petitions challenging the constitutionality of the Omnibus Law had been submitted to the Court, which had reached a verdict in three of these, and in another thirteen cases last Thursday. Only in the present case did the Court decide that the petition was partially admissible.

This is the first time in the history of the Court, established in 2003 following the amendment of Indonesia’s 1945 Constitution, that it has granted a petition to declare a law unconstitutional based on arguments not related to the substance but instead on procedural grounds.

The decision raises an inevitable follow-up question: what next?

In short, the decision appears to have the following implications:

• As discussed above, the Omnibus Law is deemed to be conditionally unconstitutional, which means that for the time being the law continues in force. It will only formally be deemed unconstitutional if lawmakers fail to redo the legislative process by 25 November 2023;

• Equally, implementing regulations, including all of those in our newsletters (referred to above), will continue to remain in effect, at least until 25 November 2023;

• There will a moratorium on new implementing regulations related to the Omnibus Law. The impact of this may be limited, as the Government has been expeditious since the enactment of the Omnibus Law in issuing implementing regulations, and most regulations mandated by the Omnibus Law are now in place. However, there are still quite a few technical regulations that need to be issued, and it can be expected that the Court’s order will lead to delays in the implementation of certain important initiatives as part of the Omnibus Law, such as that of the risk-based licensing system;
  
  The Court has no powers to enforce its decisions, and it is even questionable if it can impose orders on the Government. Time will tell if the Government is going to comply with thecourt’s order to refrain from taking any actions/formulating any policies that are strategic or have a broad impact, or issue any new implementing regulations related to the OmnibusLaw. And if so, whether there will be a moratorium on the publication of new regulations, or it will even stop issuing new licenses until a new Omnibus Law is in place;
  
• If lawmakers manage to redo the legislative process by 25 November 2023 in accordance with prevailing laws and regulations as well as basic principles on lawmaking, the Omnibus Law would then be deemed constitutional and the law and its implementing regulations would continue to remain valid;

• If lawmakers fail to redo the legislative process by 25 November 2023 in accordance with prevailing laws and regulations, as well as basic principles on lawmaking, the President could decide to issue an Emergency Regulation in Lieu of Law (“Perppu”), which can initially be passed without the Legislature’s approval. However, this regulation will still need to be ratified into law by the Legislature. Further, such a move may be seen as an effort to circumvent the Court’s decision;

• If lawmakers fail to redo the legislative process by 25 November 2023 in accordance with prevailing laws and regulations, as well as basic principles on lawmaking, and the President does not issue a Perppu, the Omnibus Law will become unconstitutional and the law and its implementing regulations would no longer be valid, and legislation applicable before its amendment by the Omnibus Law will reapply;

• Decisions of the Constitutional Court do not have retroactive effect. This means that decisions taken by the Government, or for that matter, businesses (e.g., termination of employees, and doing so in accordance with the new severance formula), based on the Omnibus Law and its implementing regulations in the period since enactment of the law/regulations and before 25 November 2023, will continue to remain in effect, even if lawmakers fail to redo the legislative process by 25 November 2023.

ABNR Commentary

Considered one of the landmark achievements of “pro-investment” President Jokowi, and enacted just a year into his second term, the Omnibus Law was expected to put Indonesia in the spotlight of foreign investors. This was badly needed, as the country’s reputation as a friendly place for foreign direct investment was quickly eroding, particularly in comparison to its regional peers.

The Omnibus Law was not as pro-investment as some had wished and expected, particularly not in the field of manpower reforms, and concern was expressed about the environmental impact of the deregulation agenda that the Omnibus Law promoted; nevertheless, the Omnibus Law received generally positive media coverage.

The enthusiasm was slightly dimmed when regulations to implement the Omnibus Law were published. Some did not result in any significant reform or even appear to water down or undo the reforms that could be expected from the Omnibus Law. Even today, though, the Omnibus Law is still considered to be a positive development among foreign investors. Indeed, our practice has seen an uptick in new foreign investment-related projects, which may partly be a result of the Omnibus Law.

This could all change with this decision of the Constitutional Court. The Omnibus Law and its implementing regulations will remain in effect for the time being, but it is by no means certain if lawmakers would be able to redo the legislative process. President Jokowi has a solid coalition, which holds a large majority in legislature, but the parties are under great pressure from civil society to give more weight to labor and environmental interests.

As time runs down before the presidential and legislative elections, scheduled for February 2024, the more we can expect parties to feel pressurized to listen to these voices. Thus, while the Court decision may ultimately not affect the validity of the Omnibus Law and the implementing regulations currently in place, it will unavoidably create fresh uncertainty, which is always bad for business.

We hope that lawmakers and the Government will take swift action to address the uncertainty while paying due attention to prevailing laws and regulations, as well as the basic principles of lawmaking.

By partner Mr. Kevin Omar Sidharta (ksidharta@abnrlaw.com), senior foreign counselMr. Theodoor Bakker (tbakker@abnrlaw.com), and foreign counsel Mr. Gustaaf Reerink (greerink@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.