Wages constitute one of the most fundamental elements in the employment relationship between employers and employees. A fair and transparent wage system not only supports employee welfare but also provides legal certainty for companies in managing their workforce. Under Indonesian labor law, the regulation of wage structures, wage scales, and wage components is governed by several statutory instruments that establish the legal framework for determining employee remuneration.
Legal Basis for Wage Structure and Scale
The obligation for employers to prepare a wage structure and wage scale is regulated under Law No. 13 of 2003 on Manpower, as amended by Law No. 6 of 2023 concerning the Stipulation of Government Regulation in Lieu of Law on Job Creation into Law.
Further implementing provisions relating to wage arrangements are stipulated under Government Regulation No. 36 of 2021 on Wages, as well as Ministry of Manpower Regulation No. 1 of 2017 on Wage Structure and Wage Scale.
Under these regulations, employers are required to prepare and implement a wage structure and wage scale that reflects the hierarchy of wages within the company. In preparing such structure, employers must take into account objective criteria, including job classification, position, length of service, education level, and employee competence.
A wage structure and wage scale represent a systematic arrangement of wage levels ranging from the lowest to the highest within an organization. Their primary purpose is to establish a fair, transparent, and proportionate wage system within the company.
The implementation of a wage structure and wage scale serves several important objectives, including:
- ensuring transparency and fairness in wage determination;
- promoting employee productivity and motivation;
- providing clarity in career progression and compensation development; and
- preventing discriminatory wage practices within the workplace.
Employers are also required to communicate the wage structure and scale to employees as part of the company’s internal employment policy.
Wage Components under Indonesian Regulations
Pursuant to Government Regulation No. 36 of 2021 on Wages, wages may consist of the following components:
- Basic salary without allowances, or
- Basic salary and fixed allowances, or
- Basic salary, fixed allowances, and non-fixed allowances, or
- Basic salary and non-fixed allowances.
These provisions demonstrate that Indonesian labor law provides a certain degree of flexibility for employers in designing wage structures, provided that the total wages paid comply with the applicable minimum wage regulations and other statutory requirements.
In general terms, basic salary refers to the primary remuneration paid to employees based on the level or type of work performed, as agreed in the employment agreement.
Fixed allowances are payments provided regularly and consistently to employees and are not dependent on attendance or specific performance conditions. By contrast, non-fixed allowances are payments that are conditional in nature or not provided on a regular basis, for example allowances linked to attendance or other specific conditions.
Where employers adopt a wage structure consisting of basic salary and fixed allowances, Indonesian labor law requires that the basic salary must constitute at least 75% of the combined amount of basic salary and fixed allowances. This requirement is intended to ensure that the principal portion of employee remuneration is reflected in the basic salary component.
Are Fixed Allowances Mandatory?
Under Indonesian labor regulations, fixed allowances are not mandatory in a wage structure. Companies may implement what is commonly referred to as a single wage system, in which wages consist solely of basic salary without additional allowances, provided that the total amount paid does not fall below the applicable minimum wage.
Accordingly, from a legal perspective, basic salary alone may serve as the basis for determining employee wage levels, as long as it complies with the applicable minimum wage requirements and other relevant wage regulations.
Nevertheless, in practice many companies provide allowances as part of their compensation strategy to enhance employee welfare and remain competitive in attracting and retaining qualified employees.
Closing Remarks
Wage structure and wage scale serve as essential instruments in ensuring fairness, transparency, and proportionality in wage determination within companies. Indonesian labor law requires employers to establish such structures based on objective criteria relating to job position, competence, and length of service.
At the same time, the composition of wages remains flexible. Employers may adopt a wage structure consisting solely of basic salary or a combination of basic salary and allowances, provided that the applicable minimum wage requirements are met. While fixed allowances are not legally mandatory, they are frequently implemented in practice as part of broader compensation and employee welfare policies.
A clear understanding of the legal framework governing wage structures and wage components is therefore essential for employers seeking to maintain compliant, fair, and sustainable industrial relations.
If you, a prospective client, have further inquiries about the topic discussed above, Schinder Law Firm is one of many corporate law firms in Indonesia that has handled numerous similar matters, with many experienced and professional corporate and civil lawyers in its arsenal, making it one of the top consulting firms in Indonesia. Feel free to contact us at info@schinderlawfirm.com for further consultation.
Author:
Budhi Satya Makmur