28 Aug 2019
Unease as Manpower Ministry Targets Non-Resident Foreign Directors for Breaches of Expatriate-Employment Rules

A. Requirement for Non-Resident Foreign Directors to Comply with Expatriate-Employment Rules

Despite the Government’s evident commitment to improving Indonesia’s ease-of-doing-business ranking, old habits clearly die hard. In recent months, we have been receiving an increasing number of queries from clients that are experiencing difficulties related to non-resident foreign directors. These difficulties have arisen following the issuance of Minister of Manpower Regulation No. 10 of 2018 (“Reg. 10/2018”),[1] which eliminates a previous exemption from the normal expatriate-employment rules for non-resident foreign directors and commissioners. This exemption was expressly incorporated in Minister of Manpower Regulation No. 35 of 2015,[2] which was revoked and superseded by Reg. 10/2018.

From what clients have been telling us, it appears that Ministry of Manpower inspectors have recently been warning companies with non-resident foreign directors that the expatriate-employment rules must be complied with in the case of such individuals. If not, fines and other sanctions may be imposed by the Ministry. For the foreign directors involved, the consequences could be even more serious as they may potentially be liable to immigration sanctions, which could involve detention and deportation.

It seems that the inspectors have been confining their efforts thus far to non-resident foreign directors and have not been targeting non-resident foreign commissioners. However, it should be remembered that the question of who is and who is not targeted comes entirely within the discretion of the Ministry of Manpower. Consequently, there is no guarantee that the Ministry will not require non-resident foreign commissioners to comply with the expatriate-employment rules at some point in the future.

In view of the above, it is crucial that companies with non-resident foreign directors and commissioners be aware of this issue and take whatever steps as may be necessary to comply with the expatriate-employment rules for such individuals so as to avoid running into difficulties with the manpower and immigration authorities.

It should be noted that these concerns do not affect shareholding non-resident foreign directors and commissioners as Reg. 10/2018 expressly provides that such individuals are exempt from the expatriate-employment rules, subject to the provisions of the laws and regulations in effect. In this regard, the recently issued BKPM Regulation No. 5 of 2019[3] stipulates that the individual concerned should have a “shareholding of at least IDR 1 billion or equivalent in United States dollars, as stated in the deed“ (kepemilikan saham paling sedikit Rp1.000.000.000,00 (satu miliar Rupiah) atau yang setara dalam mata uang dollar Amerika Serikat yang tercantum dalam akta).[4] Unfortunately, no guidance is given as to precisely which deed is being referred to here.

Further, Reg. No. 5 of 2019 expressly provides that should a shareholding foreign director/commissioner fail to satisfy the minimum shareholding threshold of Rp 1 billion, then the normal expatriate employment rules must be complied with.

B. Current Expatriate Employment Regime

Reg. 10/2018, which entered into force on 11 July 2018, was issued as an implementing regulation for Presidential Regulation No. 20 of 2018 (“PR 20/2018”),[5] the purpose of which is expressly stated as being to bring the rules governing the employment of expatriates into line with the Government’s efforts to boost investment.

Given the avowed objective of PR 20/2018, as well as its substance, it was initially assumed that it would result in a major liberalization of Indonesia’s expatriate-employment rules as it appeared to significantly simplify the previous regime. Under the previous regime, a prospective employer of an expatriate had to first prepare an Expatriate Manpower Employment Plan (Recana Penggunaan Tenaga Kerja Asing / “RPTKA”) and submit it to the Ministry of Manpower for approval. Following approval of the RPTKA, the employer then needed to apply to the Ministry for a separate Expatriate Employment Permit (Izin Mempekerjakan Tenaga Kerja Asing / “IMTA”). Thus, obtaining approval for the employment of an expatriate was a two-step process.

By contrast, going by the letter of PR 20/2018, it appeared that under the new regime, all the employer would have to do was to obtain the Ministry’s approval for the RPTKA and that the approved RPTKA would then automatically double up as an IMTA. As PR 20/2018 makes no provision for the assessing of an RPTKA prior to its approval, it was assumed by many that the RPTKA approval process would be more or less automatic.

This assumption turned out to be unduly optimistic as the Ministry of Manpower clearly had other ideas. This quickly became apparent with the issuance of Reg. 10/2018, which stipulates that a “Suitability Assessment” (Penilaian Kelayakan) must be conducted before an RPTKA may be approved.

Further, Reg. 10/2018 imposes a new obligation on a prospective employer that is not stipulated in PR 20/2018, namely, the requirement to submit an application for what is termed a “Notification” (Notifikasi) after the RPTKA has been approved. This notification is defined as an “approval for the employment of an expatriate that is issued by the Director General of Manpower Supervision and Expansion of Employment as the basis for the issuance of a temporary residency permit (Izin Tinggal Terbatas / ITAS).” Following submission of the Notification application, it must be verified and approved by the Ministry. Should approval not be granted, the expatriate may not be employed.

The imposition of the RPTKA assessment obligation and the Notification requirement by Reg. 10/2018 means that, in reality, the current regime governing the employment of expatriates differs little in substance from the previous regime. Essentially, the Notification requirement is broadly similar to the previous IMTA requirement. While different terminology may be employed, the end result is basically the same – an employer has to secure an additional approval on top of the RPTKA approval before employing an expatriate. As is often the case with legislation, it is what is inside the bottle rather than the label on the bottle that really counts.

Thus, the current expatriate-employment regime in Indonesia (excluding immigration requirements) may be summarized as follows:

a. Prospective employer submits RPTKA for approval to the Ministry

b. The Ministry conducts an assessment of the RPTKA

c. Upon approval of the RPTKA, the prospective employer submits an application for a Notification to the Ministry

d. Following a verification process, the Ministry will either approve or reject the Notification application

e. It is only after the Notification application has been approved that the expatriate may be officially employed

It should be noted that in addition to the rules set out in PR 20/2018 and Reg. 10/2018, the employment of expatriates in particular economic sectors, such as the oil & gas and the financial-services industries, is subject to additional requirements.

C. ABNR Commentary

It is difficult to understand the Ministry of Manpower’s rationale in revoking the exemption from the expatriate-employment rules for non-resident directors and commissioners given that Reg. 10/2018 was issued as an implementing regulation for PR 20/2018, the avowed purpose of which is to bring the rules governing the employment of expatriates into line with the Government’s efforts to boost investment. With the country facing ever tighter competition for foreign investment from rivals such as Vietnam, requiring non-resident directors and commissioners to comply with the expatriate-employment rules seems particularly retrograde, especially in cases where the individuals involved rarely visit Indonesia or where they perform their duties remotely by video conferencing or other technological means. Consequently, it is to be hoped that the Ministry will reconsider this issue for the sake of both legal certainty and for improving Indonesia’s attractiveness as an investment location.

By Indra Setiawan (isetiawan@abnrlaw.com) and Aghniya Sabila (asabila@abnrlaw.com)

[1] Minister of Manpower Regulation No. 10 of 2018 on Procedures for the Employment of Expatriate Manpower (Peraturan Menteri Ketenagakerjaan No. 10 Tahun 2018 tentang Tata Cara Penggunaan Tenaga Kerja Asing)

[2] Minister of Manpower Regulation No. 35 of 2015 on the Amendment of Minister of Manpower Regulation No. 16 of 2015 on Procedures for the Employment of Expatriate Manpower (Peraturan Menteri Ketenagakerjaan No. 35 Tahun 2015 tentang Perubahan atas Peraturan Menteri Ketenagakerjaan No. 16 Tahun 2015 tentang Tata Cara Penggunaan Tenaga Kerja Asing)

[3] BKPM Regulation No. 5/2019 on the Amendment of BKPM Regulation No. 6/2018 on Guidelines and Procedures for Foreign Investment Licensing and Facilities (Peraturan BKPM Nomor 5 Tahun 2019 Tentang Perubahan atas Peraturan BKPM Nomor 6 Tahun 2018 Tentang Pedoman dan Tata Cara Perizinan dan Fasilitas Penanaman Modal)

[4] As of the date of publication, IDR 1 billion = USD 70,360

[5] Presidential Regulation No. 20 of 2018 on the Employment of Expatriate Manpower (Peraturan Presiden No. 20 tahun 2018 tentang Penggunaan Tenaga Kerja Asing)

This ABNR Legal Update and 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.