Compensation Payment on the Change of Employment Agreement in Indonesia

The implementation of the Job Creation Law (“Omnibus Law”), which was enacted in 2020, has made a significant change to the law and regulation in Indonesia, including the Company Law, Investment Law in Indonesia, and the Indonesian Labor Law. The Job Creation Law makes it easier to attract foreign investment to Indonesia. Following to the Job Creation Law, the Government of the Republic of Indonesia has enacted Government Regulation No. 35 of 2021 on Fixed Term Employment, Outsourcing, Working Hours and Rest Times and Termination (“GR 35/2021”).

According to article 15 of GR 35/2021, it has been stipulated that for a Fixed Term Employment Contract (“PKWT”), the Employee is eligible to received compensation payment when the employment agreement has been ended. This provision has led a question for the Employer who intends to continue hiring the employee from the fixed term to an Indefinite Term Period Employment Contract. Since the fixed term contract shall be ended prior to renewing the contract on indefinite term basis, most employers wonder if they must pay the compensation payment as provided under the Article 15 of GR 35/2021.

Pursuant to that question, Article 15 GR 35/2021 stipulates the following:

  1. Employers shall be required to provide compensation money to Workers/Laborers whose employment relationship is based on PKWT.
  2. The provision of compensation money shall be made upon the expiration of the PKWT.
  3. The compensation money as referred to in paragraph (1) shall be provided for Workers/Laborers who have worked for no less than 1 (one) month continuously.
  4. In case the PKWT is extended, the compensation money shall be provided upon the expiration of the PKWT period before the extension, and for the period of PKWT extension the next compensation money shall be provided after the extension of the PKWT period is expired or completed.
  5. The compensation money shall not apply to foreign workers who are employed by the employer in an employment relationship based on PKWT.

Therefore, every PKWT worker who has worked for at least one month continuously, whose PKWT period has ended (expired or extended), is entitled to get compensation money from the company. In conclusion, the compensation money is given every time the PKWT period ends, including in the event of a PKWT extension, where the compensation money must be paid by the company before the extension is carried out. After the PKWT extension expires, the employee is entitled to receive compensation money for the extension of the PKWT.

How Schinder can Help

Schinder Law Firm is a leading corporate law firm in Indonesia, practicing Indonesian Company Law, Indonesian Investment Law and Indonesian Employment Law. Our team of corporate lawyers in Indonesia and investment lawyers has forged a reputation for assisting various clients across the globe. As Indonesian business lawyers, we have extensive experience providing legal consultancy services. In the employment law practice area, we have been entrusted by a dozen multinational companies to represent them in various employment disputes and have been appointed as a permanent legal consultant to help them deal with daily legal matters.

Author: Budhi Satya Makmur

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