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What are the Types of Employment Contracts in Indonesia?

Updated: May 29

Overview of Employment Contracts


Definition of Employment Contracts

Employment contracts are agreements between workers and employers outlining the terms of employment, rights, and obligations of both parties. They serve as a legal foundation for the employment relationship and ensure mutual understanding and adherence to agreed terms.


Legal Framework Governing Employment Contracts in Indonesia

The employment relationship in Indonesia is governed by various laws and regulations, mainly by Law No. 13 of 2003 on Employment (as lastly amended through Law No. 6 of 2023 on Job Creation) (“Indonesian Labor Law”) and Government Regulations No. 35 of 2021 on Fixed-Term Employment Agreements, Outsourcing, Working Time and Rest Periods, and Termination of Employment (“GR 35/2021”). These laws stipulate the requirements and conditions under which employment contracts are made and enforced, to ensure the protection and fairness for both employers and employees.


Types of Employment Contracts in Indonesia


Permanent Employment Contracts


Features and Conditions

A permanent employment contract, or "Perjanjian Kerja Waktu Tidak Tertentu" (or “PKWTT”), is an agreement made between an employer and an employee without a specified end date. This type of contract is regulated under Indonesian Labor Law and includes key elements such as the names and addresses of the parties, job description, work location, wage details, and terms of employment.

 

According to Article 51 of the Indonesian Labor Law, PKWTT can be made either in written or oral form. The essential conditions for a valid employment contract include mutual agreement, legal capacity to perform work, the specified job, and compliance with public order, morality, and legal provisions (Article 52 of Indonesian Labor Law).

 

If PKWTT is made orally, the employer is required to issue a letter of appointment to the worker. This letter must include at least the following information: the name and address of the worker, the start date of employment, the type of job, and the amount of wages.

 

Rights and Obligations

PKWTT encompasses various rights and obligations for both parties. Employers are responsible for ensuring the necessary conditions and costs for implementing the employment contract (Article 53 of Indonesian Labor Law). The written contract must at least include details such as company name and address, employee details, job title, workplace, wage and payment method, working conditions, contract duration, and signatures of both parties (Article 54 of Indonesian Labor Law).

 

Employers by law are prohibited from withdrawing or altering the contract unilaterally, except with mutual consent (Article 55 of Indonesian Labor Law). Additionally, PKWTT can stipulate a probation period of up to three months, during which the employee must be paid at least the minimum wage (Article 60 of Indonesian Labor Law).


Fixed-Term Employment Contracts


Features and Conditions

A fixed-term employment contract, or "Perjanjian Kerja Waktu Tertentu" (or “PKWT”), is an agreement with a defined duration for the completion of a specific project. These contracts must be made in writing and follow the regulations set out in Indonesian law (Article 57 of Indonesian Labor Law).

 

Fixed-term contracts cannot include probationary periods (Article 58 of Indonesian Labor Law) and are only valid for work that is temporary in nature, such as one-time projects, seasonal work, or work related to new products or activities still in the trial phase (Article 59 of Indonesian Labor Law).


This type of employment contract is the type that can be applied when employing foreign workers in Indonesia.

 

Rights and Obligations

The rights and obligations under fixed-term contracts are clearly defined and include specific conditions about the scope and duration of work. Employers must provide compensation to workers upon the termination of the contract, provided the employment has lasted for at least one month continuously (Article 15 of GR 35/2021). The amount of compensation depends on the length of employment, calculated proportionally (Article 16 of GR 35/2021). Please be advised that this provision concerning compensation is not applicable to foreign employees (tenaga kerja asing or “TKA”).

 

Furthermore, any early termination of the contract by either party obligates the employer to provide compensation based on the duration of the contract already completed by the worker (Article 17 of GR 35/2021).


Key Considerations in Indonesian Employment Contracts

 

Mandatory Clauses in Indonesian Employment Contracts 

Both permanent and fixed-term contracts must include mandatory clauses such as the employer's and employee's details, job description, workplace, wage details, working conditions, contract duration, and signatures of both parties. These clauses ensure clarity and mutual understanding between the parties involved.

 

Employment contracts specify conditions under which they can be terminated, including the expiration of the contract term, completion of the project, mutual agreement, or other stipulated conditions. Upon termination, employees are entitled to severance pay as per the regulations, especially in the case of fixed-term contracts. In case there is a dispute concerning employment termination, then the employers must follow the procedure of employment termination in Indonesia as regulated under the law.

 

Common Pitfalls and How to Avoid Them

Common pitfalls in employment contracts include unclear job descriptions, inadequate wage details, and failure to comply with mandatory legal requirements.

 

Unclear job descriptions, inadequate wage details, and failure to comply with mandatory legal requirements can have significant consequences for both employers and employees. For employers, non-compliance can result in legal disputes, penalties, and damage to their reputation. They may face lawsuits or fines from regulatory bodies, which can be costly and time-consuming. Additionally, unclear job descriptions can lead to misunderstandings and dissatisfaction among employees, affecting productivity and workplace morale. For employees, inadequate wage details and lack of clarity in job roles can result in unfair treatment, underpayment, and job insecurity. It can also limit their ability to seek legal redress for grievances.

 

To avoid these issues, both employers and employees should seek legal advice when drafting and reviewing contracts to ensure compliance with all applicable laws and regulations.


Freelance or Independent Contractor Agreements

 

Freelance or independent contractor agreements differ from employment contracts as they are not governed by the same labor laws and do not provide the same level of protection and benefits to the worker. Freelance and independent contractor agreements, considering their nature, fall under service provision agreements between entities. However, employers must be cautious when drafting these agreements. If not prudently drafted, the authorities might interpret them as fixed-term employment contracts (PKWT). If this occurs, the agreement will need to comply with PKWT regulations.

 

Conclusion


Summary of Key Points

Employment contracts in Indonesia are categorized into permanent and fixed-term contracts (PKWTT and PKWT), each with specific features, conditions, rights, and obligations. These contracts are essential for defining the employment relationship and ensuring compliance with labor laws.

 

Importance of Legal Advice in Drafting Employment Contracts

Legal advice is crucial in drafting employment contracts to ensure they meet all legal requirements and protect the interests of both parties. Employers and employees are encouraged to consult legal professionals to avoid common pitfalls and ensure fair and lawful employment practices.

 

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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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