February 12, 2021


INDONESIA: Draft regulation could result in a significant drop in severance pay

BY Bob Herrera-Lim

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The Indonesian government is set to soon issue a regulation — possibly even by next week — that would cover the use of short-term labor contracts and may, based on the drafts available so far, result in significant reductions in the amount of separation pay for workers when a company is undergoing financial distress. The draft was first released on 29 January, but Finance Minister Sri Mulyani Indrawati said on Thursday that the president may have already signed it or could do so soon.

Labor unions could turn out into the streets in protest, as they did during the approval of the Omnibus Law on Job Creation, which is the legal basis for the implementing regulation. However, they may first wait for their challenge to the validity of the Omnibus Law to be decided by the Constitutional Court. Hearings on the issue are expected to start in April. There is still a chance the government may tone down the draft to reduce union resistance.

Foreign firms have long complained of the country’s mechanism for computing separation pay, which are the highest in the region, and the changes are likely to be viewed positively by investors. The 2003 Labor Law had mandated severance pay and service rewards for separated workers, plus an additional 15% for the cost of relocation. The total compensation could reach up to 22 months for regular cases, and even 32 months for special cases when the job loss was due to mergers and acquisitions, redundancy and retirement.

The Omnibus Law, which was approved in November, removes both the 15% bonus for relocation and additional benefits mandated for special cases. In the chart below, the blue and orange bars indicate the number of months’ worth of separation pay that an employee was entitled to under the 2003 law, for both standard and special cases.

The changes are greatest when the downsizing is due to financial losses that result in closure, bankruptcy, downsizing, consolidation or suspension of debt payments, and this can be seen with the red bars. For instance, a worker that had been with the company more than 24 years was previously entitled to 32 months separation pay total if he or she had to leave the company due to bankruptcy or downsizing as a result of financial losses. The new regulation reduces that to 9.5 months. Employees separated for “regular” reasons would under the new regulation be entitled to twice the amount indicated by the red bars.

INDONESIA: Draft regulation could result in a significant drop in severance pay 1

On temporary worker contracts, the regulation allows a temporary contract to have a maximum of five years but can be renewed without limit. It will also entitle the worker to compensation of one month for every year worked if he loses his job, either due to the expiration of the contract or early dismissal. This contrasts with the current rules, which prohibit extensions beyond a single contract but denies the worker job-loss compensation.

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