COVID-19 has had a devastating effect on many businesses around the world and Indonesia, although the number of confirmed COVID-19 cases are very low in comparison to its vast population, is affected the same way as other countries. Many companies have experienced a sharp drop in revenue while their fixed costs have largely remained at the same level.

For many companies, a large portion of these fixed costs are employee salaries. It is thus not surprising that there had already been many layoffs at the beginning of the global pandemic: as early as 20 April 2020, there were reports that well over 1 million employees had been laid off by their employers as a result of COVID-19. By May, this number had exceeded 3 million and it has since grown even further.

Despite these high numbers in lay-offs, it must be remembered that dismissing employees in Indonesia is very complicated. Many of the lay-offs we have seen over the last months were not in accordance with applicable laws. As such, in July 2020, there reports that an online media organization had illegally dismissed 100 employees made it to the news.

Reports like this one may lead to challenges of the dismissals in court, resulting in a lot of costs for the employer. Additionally, they often bring very bad publicity to employer. We therefore strongly advise that you adhere to the below principles when you consider laying off employees in your Indonesian company:

Dismissal as the last resort only

Labour law is a complicated matter in Indonesia. Contrary to many other countries, only termination with cause exists. Generally, the laws provide that termination should be avoided by all means and when it cannot be avoided, the employer and the employee shall attempt to negotiate a plan for the discontinuation. ^[1] In general, an employer may only unilaterally terminate an employment relationship if it has obtained a prior order from the Industrial Relations Court (IRC). ^[2] Until then, the employment relationship continues with all mutual obligations still in place in principle.

Only dismissal for good cause

At-will termination of an employment agreement does not exist in Indonesia. Any dismissal must contain be with cause. The causes can be summarized as follows: ^[3]

(a) The employee commits a grave act of misbehaviour within the working environment. ^[4] This includes actions against the law as well as actions which make the employer lose trust in the employee, such as the employee being drunk at work or consuming drugs;

(b) The employee repeatedly violates (i) a provision regulated in the working agreement; (ii) a corporate rule; or (iii) the collective working agreement and is handed three warning letters within a period of six months; ^[5]

(c) The employee is detained for at least six months for suspicion of having committed a crime; ^[6]

(d) The employer does not want to keep the employee following a corporate restructuring (e.g. merger, fusion, etc.); ^[7] or

(e) The worker has been absent for work at least five consecutive working days without a proper reason and despite already having been summoned twice by the employer reasonably and in writing. ^[8]

Dismissal is never a cheap way out

The above shows that dismissing employees is very complicated. The reasons are very narrow and workers are given a lot of protection. The fact that the courts will, on average, rather side with the employee than the employer does not help.

To make matters worse, even when there is a clear ground for dismissal, this typically means that some form of severance pay, etc. is still true. Even in the most unusual circumstances, this can result in additional costs: as such, when an employee is dismissed because s/he is detained for the suspicion of having committed a crime outside of work, the employer must pay a certain percentage of the wage to the employee’s dependants. This can be up to 50% of the wages for a period of six months. ^[9]

Negotiation is the preferred way – and SLF can act as your trusted advisor

In light of the difficulty to lower one’s costs by dismissing employees, we highly recommend that you consider negotiating deals with your employees instead of attempting to dismiss them. A mutual agreement to terminate the employment agreement (perjanjian bersama) avoids the complex, time-consuming process of dismissing an employee and will save you a lot of costs on the way.

Since the outbreak of COVID-19, Schinder Law Firm has been advising several foreign-invested and local companies regarding their downsizing and this has often resulted in very favourable deals for the employers.

For employers, there is a huge benefit in getting the help of a law firm to assist them with the negotiation process: employees often understand the severity of the situation when they meet their employer’s lawyers as opposed to someone from their employer. They may also find it harder to negotiate with their boss and feel resentment.

We have thus observed that employees are much readier to agree on the termination of their employment agreement when a lawyer is involved. With a lawyer involved, many employees are willing to agree on unpaid leave for a limited amount of time and this can greatly decrease the pressure on your cash flow. Alternatively, when someone negotiates on your behalf, the terms are usually better than when you engage directly in the negotiation with your employees.

That said, there are instances where the full dismissal process is required or when more creative legal solutions are necessary to terminate the employment agreement. As a leading full service firm for foreign investors to Indonesia, we have been involved in several court cases ultimately resulting in dismissal of the employee and successfully devised creative legal solutions to dismiss an employee.

If you would like to learn more on what actions you can do to lower your HR costs with our assistance, feel free to write to us at info@schinderlawfirm.com.