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The Ins and Outs of Employment Termination in Indonesia

The Ins and Outs of Employment Termination in Indonesia

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We’ve all been there, right? We have found ourselves on both sides of the table. As employers, we know we need to let someone go, but we aren’t truly sure what terminating will actually cost us. As employees, we want out from under a company, but we aren’t sure how far reaching the consequences will be. No doubt, employment matters in general, and the termination of employees in particular, can often be both complex and confusing in Indonesia. Indeed, for the unwary Employer, they can also have significant impact both in terms of time and cost. Likewise, it is important for personnel to have a certain amount of background knowledge on Indonesian employment issues prior to entering into (and certainly before terminating) any employment relationship.

Indonesian Law Number 13 Year 2003 on Manpower (the "Manpower Law") is fully effective since it was enacted on 25th of March 2003. The Manpower Law contains specific provisions on termination of employment, and it amends but does not replace the principal existing regulation which governs the employment relationship termination. This existing regulation is namely Minister of Manpower Decree No. Kep-150/Men/2000 dated on 20th of June 2000 on the Settlement of Working Relationship Severance and the Stipulation on Severance Monies, Service Monies and Compensation in Private Companies, (as amended, "Decree 150/2000").

The Manpower Law, which was subject to much lengthy and vociferous debate and negotiation, contains several provisions favorable to Employers in respect to controversial entitlements given in Decree 150/2000 upon voluntary resignation and dismissal for serious offences. However, the compromise given to Employees in exchange includes greater entitlements upon termination for longer-serving Employees.

The other main legislative change in the field of employment termination is the passing of Law Number 2 Year 2004 concerning The Industrial Relations Dispute Settlement ("Law Number 2/2004"). Although Law Number 2/2004 was approved and enacted on 14th of January 2004, its implementation was delayed for a year, and it has only been effective since 14 January 2006.

Manpower Law stipulates four types of termination compensation which are applicable to permanent employees upon termination of their employment agreement: “Severance pay”, “Long service pay”, “Separation pay”, and “Compensation rights pay”. In this article, we want to explain the exact meaning of each type of termination compensation and how each termination compensation is calculated based on the prevailing provisions in the relating regulations. The goal is to take the guess work out of the process and enable all involved to make quicker, more informed decisions.

As previously mentioned, the settlement and compensation for an employment relationship termination can be divided in 4 types of compensation:

    1. Severance pay (uang pesangon) is a gift of money from employers to employees as a result of the termination of employment (Article 1(f) of Minister of Manpower Regulation Number PER-03/MEN/1996 concerning Completion of Termination of Employment and Determination of Severance Pay, Services Pay and Compensation in Private Company (PER-03/MEN/1996).

    2. Long service pay (uang penghargaan masa kerja) is a gift of money from employers to employees as a reward based on years of service (Article 1(f) Decree 1996 jo. article 1(7) of Minister of Manpower Decision Number Kep-150/Men/2000 regarding Completion of Termination of Employment and Determination of Severance Pay, Long Service Pay and Compensation in a Company).

    3. Compensation rights pay (uang penggantian hak) is the gift of money from employers to employees to compensate for annual leave which has not been taken yet, long leave, return travel expenses to the location of original hire, medical facilities, housing facilities, and others (Article 1(f) PER-03/MEN/1996).

    4. Separation pay (uang pisah) is a voluntarily award provided by the employer to the employee as compensation for the employee’s service to the employer.


A. General :

    1. The basic policy of Indonesian labor law is that dismissal of an Employee should be prevented or even in some cases prohibited. While this seems unreasonable and archaic, the general principle is that the relevant authorities must approve of every termination of employment.

    2. Exceptions to the general principle of approval being required to terminate an employment relationship include the following:
    • termination during a probation period;
    • voluntary written resignation from the Employee;
    • retirement of the Employee;
    • expiry for the first time of an Employee’s fixed term employment contract (see section III below); and
    • death of the Employee.

    3. Dismissal of an Employee is prohibited if the reason for dismissal relates to the following:
    • activities of the Employee in labor union;
    • the Employee reporting any illegal action by the Employer to the authorities;
    • ideology, religion, race, gender, physical condition, marital status, etc. of the Employee;
    • the Employee being ill continuously for less than 1 year as stated in a physician’s certificate;
    • the Employee becomes permanently disabled or sick for work-related reasons and the healing period is unpredictable an employee;
    • the Employee being on State duty;
    • the Employee is required to carry out religious duties as approved by the authorities;
    • reasons of marriage, pregnancy, birth or miscarriage for female workers;
    • for female workers, the feeding of their babies;

B. Negotiation:

    Before dismissing an Employee, the first important step is to hold "bipartite" negotiations between the Employer and the labor union (or the Employee if the Employee is not a member of a labor union). The Labor Union must be registered with the Manpower Department.

    Bipartite negotiation process must be settled within 30 calendar days from the commencement of negotiation. Anything agreed or disagreed upon should be recorded in the Minutes of Meeting and signed by both parties. The Minutes should contain all relevant information and other details. The Manpower Department provides a sample of a Minutes of Meeting. If a settlement consensus is reached, then a Mutual Agreement is drawn up and signed.

    Once signed, the Mutual Agreement together with relevant evidence must be registered by both parties with the Industrial Relations Court.

C. Resignation:

    The Employee can also give a voluntary written resignation to the Employer. For example, if an Employee wants to move to another company, he/she can voluntarily resign. By comparion, when the resignation process is initiated by the Employee, it’s not too complicated. The Employee will usually give a written resignation to the Employer 30 (thirty) days prior to his/her resignation becoming effective.

    As stated above, one of the most controversial provisions of Decree 150/2000, namely the entitlement of Employees who voluntarily (and properly) resign from employment to receive both service period recognition pay and compensation, has now been amended so that service period recognition pay is no longer payable.

    With regard to the payment of compensation upon resignation, there is still uncertainty as to how this is calculated in certain termination cases.

D. Conciliation by Independent Registered Conciliator

    Should the bipartite negotiations between the parties fail to reach any mutual agreement and termination is unavoidable, the Manpower Department will encourage both parties to settle the dispute through Conciliation. If the parties refuse to settle through Conciliation, the Manpower Department will hand over the dispute to a mediator.

    The parties must submit a written application to the conciliator for whom they have agreed upon from the list of conciliators published in the local office of the Ministry of Manpower.

    Within 7 working days of the application submission, the conciliator must conduct research on the dispute and must hold the first conciliation session by the 8th working day. This conciliation should take place within 30 days after receipt of the application.

    The conciliator then will issue a recommendation to settle the dispute to both parties. If both parties agree to the recommendation from the conciliator, within 3 days after the recommendation is agreed, the conciliator must assist the parties in preparing a mutual agreement. The mutual agreement must then be registered at the Industrial Relations Court.

    If one of the parties does not accept the recommendation from the conciliator, the party can file a lawsuit with the Industrial Relations Court.

E. Mediation by the Manpower Department:

    If the bipartite negotiation process between the parties fails to reach any agreement and the parties refuse the conciliation process, the relevant officials at the Ministry of Manpower will bring the dispute to mediation.

    Within 7 days of receipt of a request for mediation, the intermediary officer from the local office of the Manpower Department should conduct research on the case and immediately commence the mediation process; this also should be completed within 30 days.

    The mediator will issue a recommendation to settle the dispute to both parties. If both parties agree with the recommendation from the mediator, within 3 days since the recommendation is agreed, the mediator must assist the parties in preparing a mutual agreement. The mutual agreement must then be registered at the Industrial Relations Court.

    If one of the parties does not accept the mediator’s recommendation, the party can file a lawsuit with the Industrial Relations Court.

F. Industrial Relations Court Process

    Any lawsuit filed at the competent Industrial Relations Court must be accompanied by the Minutes of mediation or conciliation process. The plaintiff may at any time revoke its claim before the defendant gives its response. Within 7 working days after receiving the claim, the Chairman of the District Court must determine the Board of Judges, which consists of 1 (one) chairman of the board and 2 (two) other judges as its members. The Board of Judges shall be responsible for verifying the content of the claim(s) and if there is any deficiency, the judges may request the plaintiff to improve his or her claim.

    A decision from the Industrial Relations Court on disputes or rights of a termination of employment can be appealed to the Supreme Court within 14 (fourteen) working days after the court has notified both parties of its decision. The Registrar of the Industrial Relations Court should submit all documents pertaining to the dispute to the Chairman of the Supreme Court within 14 (fourteen) working days after receiving the request of final appeal ("Cassation"). The settlement proceeding at the Supreme Court will be governed by the procedural requirements set out under Law Number 14 Year 1985 concerning the Supreme Court and that settlement should be completed within 30 (thirty) working days from the receipt of the Cassation request.

    A decision of the Industrial Relations Court regarding disputes or rights of a termination of employment will become binding on the parties if there is no written request of cassation submitted by any party to the registrar of the Industrial Relations Court during the following period:

      a. 14 (fourteen) days after the decision is read for a party attending the hearing; or
      b. 14 (fourteen) days after receipt of notification of the decision for a party who does not attend the hearing.

    The Industrial Relations Court’s decision regarding a dispute on interests and disputes among labor unions in a company will be a final and permanent decision. In closing, understanding the intricacies of these laws is vital in making the important decision to terminate employment. Neither side of the table wants to feel hindered or helpless. Information is the key to empowering both sides.

    Jakarta, 23 February 2018

The Ins and Outs of Employment Termination in Indonesia