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Understanding Expatriate Employment Contracts under Indonesian Law

Updated: May 4


Introduction to Indonesian Employment Law


Indonesian employment law is regulated under Law No. 13 of 2003 on Employment (as lastly amended through Law No. 6 of 2023 on Job Creation) (“Labor Law”). This law is known for its stringent nature, which is often perceived as highly pro-labor. This protective stance is rooted in the broader legal principle under the Indonesian constitution, which aims to protect the welfare and rights of its citizens.

 

For companies operating within Indonesia, there are instances when hiring expatriates is necessary due to the absence of required expertise in the local labor market. For example, a company may need to bring in a foreign technician to perform regular maintenance on specialized equipment located within Indonesia.

 

Given the law's protective stance towards local employees, the process of hiring expatriates is more complex than employing local Indonesian citizens. Companies must fulfill specific prerequisites before hiring expatriates, such as securing approval for the expatriate utilization plan (RPTKA) and obtaining the necessary residence permits (ITAS). Additionally, there are various conditions and regulations that companies must adhere to when employing expatriates.

 

In this article, we will provide an introductory brief for Indonesian companies and expatriates aiming to navigate the complexities of expatriate employment in Indonesia.


Eligibility for Employing Expatriates in Indonesia


Who is Considered an Expatriate in Indonesia?

Under Indonesian Labor Law, expatriates are legally known as “Foreign Manpower” or "Tenaga Kerja Asing".

 

This refers specifically to foreign nationals who are granted the legal right to work in Indonesia through the relevant visas and work permits. This group generally includes professionals, skilled workers, or those in managerial positions who may be employed due to a lack of local expertise or to meet the specific needs of the employer.

 

In contrast, employees, referred to under Indonesian Labor Law as "Pekerja" or "Buruh", encompass any individuals engaged in compensated employment relationships. This broad category covers all workers who receive remuneration and are afforded various protections under the law, including wage protection (pelindungan upah) and rights to rest (hak istirahat).

 

Although expatriates and local employees are initially distinct, expatriates, theoretically speaking, may be considered "pekerja" once they engage in an employment contract with an employer that includes receiving wages or other forms of compensation in Indonesia.

 

From this point, despite their original classification under specific visas or work permits, expatriates become subject to the same general employment regulations that protect all workers in Indonesia, such as entitlement to fair wages and safe working conditions.


Importance of Differentiating Managerial Role from Employees

As discussed, expatriates encompass broad types of roles who can either work in or outside a company, including professionals, skilled workers, or those in managerial positions. It then becomes crucial to differentiate those expatriates who will assume the managerial position and those who will resume the standard employee position.

 

Under Indonesian Labor Law, individuals in managerial roles, such as Chief Executive Officer (CEO), Financial Director, or Marketing Director, are considered part of the managerial hierarchy and are viewed as part of the company's key structure instead of as standard employees.

 

To ensure that those in managerial positions do not inadvertently receive the rights and obligations designated for typical employees, their agreements, in practice, are normally crafted as "service agreements" rather than employment contracts, to emphasize their distinct legal status within the company. This distinction helps in clarifying their roles and the specific legal entitlements applicable to them, thereby preventing misunderstandings related to employment rights and benefits.


What is Considered as “Working” in Indonesia for Expatriates?

Under Indonesian law, "working" includes activities constituting a formal employment relationship. Typically, in this relationship, there will be an agreement between an employer and a worker, which includes elements such as labor, wage, and adherence to directives.

 

In practice, this definition extends to any activities conducted by foreigners within Indonesian territory that result in monetary compensation. For instance, attending a seminar as a speaker and receiving financial compensation is classified as temporary work, and thus could be subject to a specific immigration stay permit.

 

Who is Considered an “Employer” of Expatriates in Indonesia?

The eligibility to employ expatriates is restricted to certain types of business entities and organizations. According to Indonesian Labor law, only entities established under Indonesian law or those that meet specific legal criteria can hire expatriates. These entities are required to compensate their expatriate employees, either through wages or other forms of remuneration. The types of entities permitted to employ expatriates include:

  1. Government Institutions and Foreign State Representatives: Including embassies, consulates, and international organizations operating within Indonesia.

  2. Foreign Commercial and Company Representatives: Such as foreign trade offices, foreign company representative offices, and foreign news agencies active in Indonesia.

  3. Foreign Private Companies Operating in Indonesia: Foreign businesses engaged in commercial activities within the country.

  4. Legal Entities Registered in Indonesia: Including corporations (Perseroan Terbatas) and foundations (Yayasan), as well as foreign business entities registered with the appropriate Indonesian authorities.

  5. Social, Religious, Educational, and Cultural Institutions: These sectors are also entitled to hire expatriates.

  6. Impresario Service Businesses: Companies managing the affairs of entertainers or public figures.

  7. Other Business Entities as Permitted by Law: Including professional service firms like law and public accounting firms, regulated by specific Indonesian laws.

 

Individuals or small and medium enterprises (UMKM) are prohibited from employing expatriates under Indonesian law.


Requirements for Employing Expatriates in Indonesia


Employing expatriates in Indonesia involves specific legal requirements and documentation as mandated by law.


Necessary Documents

  1. Expatriate Utilization Plan (Rencana Penggunaan Tenaga Kerja Asing or “RPTKA”): Every employer who wishes to hire expatriates must initially secure an RPTKA approved by the Ministry of Manpower. This plan outlines the roles and responsibilities assigned to expatriates, work location, etc., to ensure they fill positions that cannot be readily occupied by Indonesian nationals.

  2. Limited Stay Permit (Izin Tinggal Sementara or “ITAS”): All expatriates employed in Indonesia must possess an ITAS, which is an immigration stay permit issued by the Indonesian government. This document is important as it legally authorizes the expatriate to live and work in Indonesia for a specified period.

  3. Expatriate Employment Contract: Under Indonesian Labor Law, expatriates can be employed under a fixed-term employment contract (Perjanjian Kerja Untuk Waktu Tertentu or “PKWT”). These contracts must specify the duration of employment and the specific position to be filled, ensuring that the expatriate's competencies align with the job requirements. The formulation of these contracts must adhere to regulations concerning PKWT under the Labor Law.


Restrictions and Prohibited Positions for Expatriates

Indonesian Labor Law explicitly sets restrictions on expatriates from assuming any personnel management (or human resources) related positions.

 

Under the Minister of Manpower’s Decree No. 349 of 2019, some of these prohibited roles include among others:

  1. Personnel Director.

  2. Industrial Relation Manager.

  3. Human Resource Manager.

  4. Personnel Development Supervisor.

  5. Personnel Recruitment Supervisor.

  6. Personnel Placement Supervisor.

  7. Employee Career Development Supervisor.

  8. Personnel Data Administrator.

  9. Personnel and Careers Specialist.

  10. Career Advisor.

Rights and Obligations


Rights of Expatriate Employees in Indonesia

As previously explained, while in general expatriates, are primarily considered specialists or experts, they will be regarded as "pekerja/buruh" (workers/employees) once they enter into an employment relationship with an employer in Indonesia.

 

Consequently, the rights afforded to expatriates generally align with those granted to local workers. These rights among others include:

  1. Wages: This encompasses minimum wages and overtime pay. It is important to note that according to Indonesian law, certain employee categories, particularly those in senior management who perform planning, executing, and controlling company operations and receive higher compensation, may not be eligible for overtime pay.

  2. Religious Holiday Allowance: This is a non-wage benefit paid before religious holidays, the timing and rights of payment of this allowance are based on the religion of each worker. Additionally, companies must adhere to their company regulations when applying this allowance to expatriates.

  3. Health and Safety: Expatriates are entitled to work in a safe and healthy environment, as mandated by the Labor Law for all workers.

  4. Rest and Leave Rights: This includes paid leave and other forms of leave entitlements.

  5. Social Security and Health Insurance: Expatriates must be covered under the mandatory social security (BPJS Ketenagakerjaan) and health insurance (BPJS Kesehatan) if they work for more than 6 (six) months in Indonesia.


Employer's Obligations towards Expatriate Employees

Employers have specific obligations towards expatriates, which are crucial for maintaining compliance with Indonesian employment and immigration laws:

  1. Ensure that all immigration requirements for the expatriates are met.

  2. Employers must ensure that the expatriate works at the location specified in their RPTKA.

  3. Employers are required to pay into the compensation fund for expatriates' utilization (Dana Kompensasi Penggunaan Tenaga Kerja Asing or DKPTKA).

  4. Employers must appoint an Indonesian worker as a companion to the expatriate to facilitate the transfer of skills and knowledge.

  5. Employers must register the fixed-term employment contract (PKWT) of the expatriates with the Ministry of Manpower.


Key Components of an Expatriate Employment Contract


Mandatory Elements of the Expatriate Employment Contract

An expatriate employment contract in Indonesia must adhere to specific requirements to ensure its validity and enforceability under the Labor Law. As discussed above, since expatriate employees legally can only be employed for a certain period of time, their employment contract, therefore, shall be in the form of PKWT or fixed-term employment contract, and consequently subject to the regulatory requirements of PKWT under the Labor Law.

 

Below are the requirements for a valid PKWT under Labor Law:

  1. Written Contract: The employment contract must be drafted in writing.

  2. No Probation Period: The contract cannot include a probation period for the relevant employee.

  3. Company and Employee Details: The contract must specify the name, address of the company, and type of business; as well as name, gender, age, and address of the expatriate; job title or type of job.

  4. Workplace: The specific location where the work will be performed.

  5. Compensation: Details of the salary or wages and the method of payment.

  6. Terms of Employment: This includes the rights and obligations of both the employer and the employee.

  7. Contract Duration: The start date and the duration of the contract.

  8. Contract Issuance: The place and date where the contract is executed.

  9. Signatures: Signatures of all parties involved in the contract.

 

Governing Language

The expatriate employment contract can be drafted in both Indonesian and English (or in another language spoken by the relevant expatriate). However, legally the governing language of the contract, in case of any discrepancy or legal proceedings, shall be the one in Indonesian.


Termination Conditions

Under the Indonesian Labor Law, strictly speaking, the events that could trigger the termination of the employment are as follows:

  1. Death of the Employee: Automatically terminates the contract.

  2. Expiration of Contract Term: The end of the period as specified in the contract.

  3. Industrial Court Decisions: Any industrial court decision that stipulates the end of an employment contract which is final and binding.

  4. Specific Conditions: Any other specific circumstances outlined in the contract, company regulations, or collective labor agreement that would lead to the termination of employment. For example, a force majeur event.

 

Therefore, it is important for the parties to clearly outline the conditions of the employment termination to ensure both parties understand the scenarios that can end the employment relationship.

 

In the case where either party terminates the employment relationship before the end of the specified term, or for reasons not covered by the agreed termination clauses, the terminating party is required to pay compensation to the other party. This compensation should equal the wages that would have been earned by the employee up to the originally scheduled end of the contract term.


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END NOTE: This article is intended for informational purposes only and should not be construed as legal advice or a legal opinion. Specific cases require specific advice, and the content provided herein may not be applicable in all situations. Legal regulations and interpretations can vary widely and may change over time, necessitating consultation with legal experts. If you require specific legal advice or guidance, please contact a qualified legal professional. It is crucial to consult with legal experts before applying the information in this article to ensure compliance with current legal standards and requirements.


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Employment Lawyer Indonesia - Tampubolon Legal Solutions

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