Sources of regulation
Several pieces of legislation and regulations comprise the law on termination
of employment in Indonesia. Act
No. 13 of 2003 concerning Manpower (“the 2003 Act”) consolidated the existing
termination law and most of the rest of the current labour law. While the
2003 Act did not explicitly repeal the Termination of Employment in Private
Undertakings Act, 1964 (“TEPU”), it covers much of the same ground and reflects
relatively recent changes in Indonesian labour administration. The second
major piece of Indonesian labour legislation is Act No. 2 of 2004 concerning
the Industrial Relations Dispute Settlement (the 2004 Act), which declares
the TEPU as “no longer suitable with the needs of the society”, but still
applicable, as long as its provisions are not contradicting the new legislation.
Scope of legislation
The 2003 Act, Chapter XII “Termination of Employment”, stipulates in Art.
150 that the provisions concerning termination of employment under this act
cover termination of employment that happens in a business undertaking which
is a legal entity or not, a business undertaking owned by an individual,
by a partnership or by a legal entity, either owned by the private sector
or by the State, as well as social undertakings and other undertakings which
have administrators/officials and employ people by paying them wages or other
forms of remuneration.
Contracts of employment
An employment contract may be made for a specified time or for an unspecified
time (Art. 56, the 2003 Act). A fixed term contract is based on a term or
the completion of a certain job. A work agreement for a specified time which
is not made in writing is deemed concluded for an indefinite duration (Art.
57 (2), the 2003 Act). A work agreement for a specified time cannot be made
for jobs that are permanent by nature. In addition, this kind of employment
contracts may be made for a period of no longer that two years and can only
be extended one time that is not longer that one year (Art. 59, the 2003
Act).
Fixed-term contracts cannot stipulate a probation period (Art. 58 (1), the
2003 Act). Contracts for an unspecified
period of time can stipulate a probation period, but for no longer than three
months (Art. 60, the 2003 Act).
Termination of employment
Contracts of employment can terminate (Art. 61, the
2003 Act), not at the initiative of the employer, by:
- the
worker’s death (see also Art. 166, the 2003 Act), or
- the
expiry of a fixed-term contract;
- a
court decision;
- in certain
situations prescribed in the work agreement, the company regulations or
the collective labour agreement (Art. 61, the 2003 Act).
If either party in a fixed-term contract terminates the
employment relationship prior to the expiration of the agreement, the party
who terminates the contract is obliged to pay compensation to the other party
on the amount of the worker’s wages until the expiration of the agreement
(Art. 62, the 2003 Act).
Art. 169 of the 2003 Act specifies the
conditions under which a worker can submit an application for termination
of employment and still receive severance pay. According to this provision,
a worker can submit such an application if the employer is:
- physically
or verbally abusing the worker;
- ordering
or persuading the worker to commit illegal acts;
- not
paying wages promptly for three consecutive months or more;
- remiss
in his or her obligations to the worker;
- instructing
the worker to perform duties outside of his or her contractually assigned
job; or
- assigning jobs
that endanger life, safety, health and morality of the worker, if such
a job has not been specified in the work contract.
The termination of employment in case of the worker’s
retirement is dealt with by Arts. 154 (c) and 167 of the 2003 Act.
Workers who participate in an illegal strike are to
be considered absent. If, after two notifications from the employer to come
back to work, they continue to strike, these workers will be considered to
have resigned (Decision No. 232/MEN/2003 of the Minister of Manpower and
Transmigration of Indonesia concerning The Legal Consequences of Illegal
Strikes, Art. 6).
Dismissal
Art. 151(1) of the 2003 Act states that employers,
as well as workers and trade unions, “must make all efforts” to prevent the
termination of employment. The 2003 Act also stipulates that the employer
must negotiate his/her intention to terminate with the employee’s trade union,
or with the employee him/herself, if he/she does not belong to a trade union. If
the negotiation does not result in an agreement, then the employer must receive
permission to terminate the employment contract of the worker from the institution
for the settlement of industrial relation disputes (ISIRD). The 2004 Act
provides for various dispute settlement procedures (see below).
The 2003 Act specifies the conditions under which a worker may not be terminated. Art.
153(1) prohibits a termination if:
- the
worker is ill, which must be validated in writing by a physician, as long
as the worker is not absent for a period greater than twelve consecutive
months;
- the
worker is fulfilling State obligations, as prescribed in valid legislation;
- the
worker is fulfilling religious obligations;
- the
worker is getting married;
- the
worker is pregnant, giving birth, having a miscarriage, or breast-feeding
a baby;
- the
worker is related to another worker, unless such a termination is required
by collective bargaining agreement;
- the
worker is involved with a trade union;
- the
worker has reported a crime committed by the employer;
- it
is due to discrimination on any basis; or
- the worker
is disabled or ill because of a work-related incident, and the period of
recovery cannot be determined.
The 2003 Act also specifies the conditions under
which permission is not needed (Art. 154). An employer does not need permission
to dismiss his/her worker when:
- terminating
the employment of probationary employees;
- the
employee has offered a written resignation;
- a
contract for a specified period of time expires;
- a
worker retires according to company regulations or collective agreements;
or
- the worker
has died.
Under the 2003 Act (Art. 158), an employer may terminate the employment
of a worker for “grave wrongdoings”, such as:
- theft;
- fraud;
- intoxication,
or consumption of other addictive substances;
- indecency
or gambling at work;
- harassment
of fellow co-workers;
- abuse
of the employer or his or her family;
- persuading
others at work to break the work rules;
- reckless
or deliberate damage to life or property;
- divulging
trade secrets; or
- committing other
wrongdoings that warrant a five-year or greater prison sentence.
Accusations of the “grave mistakes” must be supported
by:
- apprehending
the worker red-handed;
- an
admission of guilt by the worker; or
- evidence to
the act, and a confirmation of the evidence by at least two people.
In case the worker violates the provisions specified
in the employment contract, the company regulations, or the collective agreement,
the employer may terminate the worker, after the issuance of the first, second
and third warning letters consecutively (Art. 161, the 2003 Act).
Article 160(3) of the 2003 Act permits the employer
to terminate the worker if the employee has been unable to work for over
six months because of the legal proceedings brought against him or her. However,
if the court decides that the worker is not guilty, the employer must reemploy
the worker.
Article 168 of the 2003 Act permits the employer to terminate
the worker if the labourer has been absent from work for five or more consecutive
workdays, and has not explained to the employer the reason for the absence
and provided evidence.
Section 3 of the TEPU regulates “mass dismissals,” which are defined as
dismissals in an undertaking where the employer has terminated the employment
of ten or more workers within a period of one month, or has affected a series
of terminations indicative of an intention to achieve mass dismissal. Although
the TEPU has not been explicitly repealed, the 2003 Act does not refer to
“mass dismissals.”
Should the nature of the employer change, either through a merger, a fusion,
or a change in ownership, the employer is given considerable leeway to terminate
his/her workers. Under such circumstances, the employer may terminate his/her
workers if:
- the
workers are not willing to continue their employment (Art. 163(1), the
2003 Act);
- the
employer is not willing to accept the workers to work in the new enterprise
(Art. 163(2), the 2003 Act);
- the
enterprise closes down because of losses for two consecutive years, or
because of force majeure ( Art. 164, the 2003 Act); or
- the enterprise goes
bankrupt (Art. 165, the 2003 Act).
Notice and prior procedural safeguards
The rather unusual system of termination of employment under Indonesian
law means that the employer may not terminate employment merely by giving
notice. Indonesian law requires no notice provisions because the employer
does not have the right to dismiss workers without the authorisation given
by the ISIRD.
Where the employer believes that termination of employment cannot be avoided,
the employer must discuss his or her intention to terminate with the workers’
organization concerned, or with the non-unionised worker directly (Art.
151, the 2003 Act), with a view to reaching agreement. If no consensus
is reached, the employer has to make a request for cessation (termination)
of employment to the ISIRD, giving written reasons for the request (Art.
152, the 2003 Act). Thereafter, the employer may only dismiss the worker
after having obtained a permit from the ISIRD. A permit may be granted if
it is clear that the discussion required by the law has taken place and failed
to produce agreement.
The 2004 Act provides for five dispute settlement
procedures: bipartite settlement, mediation, conciliation, arbitration and
an Industrial Relations Court.
Further elucidation on the nature of the discussion expected between employer
and worker appears in a 2005 Circular of the Minister of Manpower, which
advises that termination can be avoided by “increasing efficiency of production
cost, reducing wage or worker-labour in the managerial level, reducing overtime,
offering earlier retirement to workers/labour already fulfilling the requirements,
or by temporary laying off workers/labour by turns.”[1]
Art. 161(1) of the 2003 Act further requires that employers issue three
warnings within six months of each other for violations of the work rules,
of the bargaining agreement, or of the individual contract. After the third
warning, Art. 161(1) states that an employer may apply for a dismissal
permit.
Article 168 of the 2003 act permits the employer to terminate
the worker if the labourer has been absent from work for five or more consecutive
workdays, and has not explained to the employer the reason for the absence
and provided evidence. The dismissal is possible provided that employer has
properly summoned the worker twice in writing, and by qualifying the worker
as resigning.
Severance pay
Art. 156 (1) of the 2003 Act states that the employer
has to pay the dismissed worker severance pay and/or a sum of money as a
reward for service rendered during his/her employment, and compensation pay
for rights and entitlements.
Severance pay is calculated at a base rate of one month’s wages for each
year of service, up to a maximum of nine months pay. The payment for reward
of service consists in adding one month’s pay for every three years of employment,
starting with two month’s pay for 3 years, up to a maximum of 10-months wages
for 24 years of service.
Art. 156(3) of the 2003 Act also requires compensation
pay, which must include:
- entitlements
to paid annual leaves that have neither been expired nor been used;
- costs
of transporting the worker and his/her family to the place where they resided
before the worker was recruited and accepted the job;
- compensation
for housing allowance, medical and health care, at a rate of 15% of the
severance pay and reward pay, for those who are eligible for such compensation;
and
- other compensations
that are required by employment contract or by collective agreement.
Art. 157(1) of the 2003 Act specifies how wages
should be used to calculate severance, reward for service, and compensation
pay. The calculation is based on a worker’s basic wage and all forms of
fixed allowances provided to him/her. For workers whose wage is based on
a daily calculation, the one-month wage equals 30-times the daily wage (Art.
157(2)). When calculating severance and reward pay for employees whose wage
is based on piece-rates or commission, the wage rate used is the average
daily wage for the past twelve months, as long as the resulting wage is not
less than the provincial or district’s minimum wage (Art. 157(3)). When
the wage depends on the weather and is calculated as a piece-rate, the rate
used is equal the employee’s average wage for the past twelve months (Art.
157(4)).
In addition, workers are entitled to get different severance pay packages
based on the characteristics surrounding the termination of their employment.
Should an employer terminate a worker because that worker is involved with
legal proceedings lasting over six months, than the employer must pay that
worker reward pay and compensation pay (Art. 160, the 2003 Act).
Should a worker be terminated for violating the terms of his
or her employment, he or she is nevertheless compensated with severance pay,
reward pay, and compensation pay. (Art. 161(3), the 2003 Act),
If a worker resigns, he or she is entitled to compensation
pay under some conditions (Art. 162, the 2003 Act).
The 2003 Act stipulates that workers receive the standard severance,
compensation, and reward pay:
- if
the business changes and the workers do not wish to remain employed (Art.
163(1));
- if
the business closes because of losses for two years or force majeure (Art.
164); or
- if the
business goes bankrupt (Art. 165).
The 2003 Act also
provides that workers are entitled to get twice the standard severance
pay, the standard reward pay, and compensation pay for unused entitlements:
- the
business changes and the owner does not wish to keep the current workers
employed (Art. 163(2));
- the
worker dies (in this case, the severance, compensation, and reward pay
go to the worker’s heirs) (Art. 166);
- the
worker enters pensionable age, but the employer does not include him
or her in a pension program (Art. 167(5)); or
- the worker requests for the settlement of a dispute involving
employer’s malice or negligence, as specified in Art. 169(1), which results
in termination of employment (Art. 169(2)).
A worker who enters
pensionable age will receive different severance packages depending upon
the retirement benefits the employer offers. According
to Art. 167(1) of the 2003 Act, if the employer terminates a worker
because the worker has entered pensionable age, and if the employer has
entered the worker in a retirement program, then the worker is not entitled
to severance pay, reward pay, or compensation pay. Art. 167(2) specifies that
“if the retirement benefit that they get as a single lump-sum payment at
retirement as a result of their participation in a pension program” is
less than twice the amount of standard severance pay, reward pay, and compensation
pay. If the employer has included the worker in pension program whose
premiums are paid in part by the worker and in part by the worker, then
Art 167(3) provides that the severance pay shall count towards the employer’s
contribution.
Under Art. 168(3) of the 2003 Act,
if a worker is terminated because he/she has been absent five consecutive
workdays without explanation, then the worker will receive compensation
for unused entitlements and detachment money, which is regulated by work
agreements, collective bargaining agreements, and employer rules and regulations.
If a worker commits a grave wrongdoing
as defined in Art. 158(1) of the 2003 Act, he or she may only
be entitled to compensation pay for unused entitlements.
Avenues for redress
Any dismissal for the reasons
prohibited by Art. 153 of the 2003 Act, is declared null and void
by law. The worker must be reinstated by his/her employer.
The 2003 Act refers to the institution for the settlement
of industrial relation disputes (ISIRD) for terminating worker’s employment
contracts. The 2004 Act provides for various dispute settlement bodies and
procedures, namely: bipartite settlement, mediation, conciliation, arbitration
and an Industrial Relations Court.
Article 3 of the 2004 Act elaborates on the procedures to be taken in
the event of a dispute over termination of employment. This provision requires
that industrial disputes first be resolved through bipartite bargaining within
30 days of commencement of negotiations. If the negotiations fail, at least
one or both of the parties can file the dispute to the local manpower office,
which will offer both parties the opportunity to settle the dispute through
conciliation (Article 4).
If the worker does not accept the dismissal for “grave
wrongdoings”, he/she may file a suit to the ISIRD (Art. 159, the 2003 Act).
Article 5 of the 2004 Act states that, should conciliation
not yield a result, one of the parties can file a legal petition to the Industrial
Relations Court. Article 100 specifies
that the Council of Judges will make a verdict regarding the dispute, and
base their decisions of the laws, existing agreements, customs, and justice
in passing the agreement. If the employee wishes to appeal the decision
of the Industrial Relations Court, he or she must file an appeal within
seven working days to the Supreme Court (Art. 110, the 2004 Act).
Further information
[1] Circular of the Minister of Manpower and Transmigration No. SE.643/MEN/PHI-PPHI/IX/2005.
Business News No. 7285-7286/16-11-2005
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