Indonesian businesses still face challenges amid pro-employer labour reforms
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National Monument in Jakarta, Indonesia
Shani Alexander
Shani Alexander, Senior reporter

One year after the introduction of a controversial law that critics argue damages labour rights, Indonesia’s employers are busy rewriting work-related policies and renegotiating contracts with employees and their unions.

Indonesia is South-East Asia’s most populous country and largest economy. However, it ranks 73rd in the World Bank’s Ease of Doing Business index. Businesses have long complained that bureaucracy hinders investment in Indonesia and that employees wield too much power across key industries.

Earlier labour laws have been criticised by businesses for broadly defining “employment”, thereby extending protections to a large number of workers and making the management of labour forces burdensome to businesses.

Describing its recent reforms as a “massive regulatory simplification”, the government in Jakarta has high hopes that its overhaul of existing laws will change the perception that Indonesia is too pro-worker, increasing outside investment and creating millions of new jobs in the process.

Enacted in November 2020 amid a wave of worker protests, the Omnibus Law on Job Creation amended or revoked 79 existing laws.

The most significant pro-employer reforms allow for the extension of fixed-term employment agreements from three to five years, greater flexibility in terminating permanent employees, and halving severance pay.

The Omnibus Law also abolishes the sectoral minimum wage – set by certain labour-intensive industries including food, tobacco, textiles, leather, and furniture – in favour of one determined by local provinces.

One year on, how are employers responding to these reforms?

“The amendments have been well received by employers especially because they provide greater flexibility over the termination of employment of permanent employees, and lower severance pay,” says Indra Setiawan, a partner in ABNR’s labour and employment practice.

The reintroduction of gross misconduct as grounds for termination is seen as another key pro-employer reform, advises Yolanda Hutapea, a partner at Widyawan & Partners.

Gross misconduct was removed from the Manpower Law in 2004 after it was deemed to be against the Indonesian constitution. With its reintroduction, employers must set out in an employment contract the scope and conditions for terminating an employee.

However, the concept of unilateral termination is essentially still not recognised in Indonesia. Therefore, the Omnibus Law does not change the fundamental principle of employment termination in Indonesia; that, in general, terminations should be mutually agreed by employees and employers, explains Hutapea.

Union power

With Indonesia’s four major unions vehemently opposed to the new law, amending existing collective labour agreements, most notably those regarding severance pay, will be a challenging undertaking for employers.

“We are seeing companies revising internal policies and renegotiating their agreements with labour unions,” says Narendra Adiyasa, a partner at Hiswara Bunjamin & Tandjung. “Naturally, most employees want to stick to collective agreements established before the law change, and which are more friendly to them.”

“Most labour unions are against the amendment that will reduce the monetary benefits of employees upon termination,” agrees Lia Alizia, managing partner at Makarim & Taira S Counsellors of Law. “Any amendments to collective labour agreements will require negotiations and agreement with labour unions.

Another significant impact of the law for employers is the removal of severe restrictions on using outsourced workers to carry out certain jobs.

Previously, employers were only able to outsource supporting activities or non-core work such as cleaning services, security, catering for employees, and support services in the mining and oil sectors. Plans to outsource core work required permission from the Ministry of Labour.

The new outsourcing rules are more lenient and there is less paperwork for employers to review to mitigate the risks associated with outsourcing, according to Alizia.

Employees’ interests

That the new law also reduces workers’ days off from two to one per week, and allows businesses to replace full-time employees with cheaper contract workers, has led critics to argue that the reforms undermine employees’ rights.

Despite the criticism, the government has introduced some positive reforms for workers, such as increasing the allowable working overtime to a maximum of four hours in one day and 18 hours a week, up from three hours per day and 14 hours per week.

The government has also introduced a new unemployment benefit scheme as part of the existing national manpower social security programme. The new scheme will be made available for employees who lose their jobs, allowing them to claim cash for up to six months, access to information on the labour market, and provide job training.

A new requirement to pay compensation to a fixed-term employee upon the expiry of their contract has also been introduced. However, this pro-employee reform is causing some confusion among employers.

As Setiawan explains: “Most employers are questioning the new obligation to pay compensation to fixed-term employees/non-permanent employees at the end of the contract, even when they are terminated due to misconduct or resign voluntarily. Previously, this obligation did not exist.” 

So, overall, have Indonesia’s reforms done what they intended?

“While it is still too early to determine the precise impact of the reduction in the mandatory severance package in encouraging greater investment, and therefore job creation, it is undoubtedly the case that these changes have improved the competitiveness of Indonesia as a destination for investment,” observes Hutapea.

“The full positive potential of the changes is only likely to unfold once the impacts of the pandemic begin to ease,” she adds. “There are early signs that investors are taking these changes into account in their investment decisions, particularly in labour-intensive industries.”