Challenges Encountered with Indonesia’s Rules and Requirements

for Terminations of Employment

Labor Conference Law, 9-10 April 2015Kuala Lumpur

by:Lia Alizia

Partner, Makarim & Taira S.

I. Laws and Their Changes

1. Law No. 13 of 2003 on Manpower (“Manpower Law”);

2. Law No. 2 of 2004 on The Settlement of Industrial Relations Disputes (“Law 2/2004”);

3. The Constitutional Court’s 2004 verdict invalidated Article 158 (and other relevant articles). Employers may not terminate employees forthwith for serious misconduct ("for cause");

4. The Constitutional Court’s 2012 verdict invalidated Article 164 (3) of the Manpower Law. Employers may only terminate employees if the company is closing down permanently (not temporarily);

5. The Constitutional Court’s 2012 verdict invalidated Article 169 (1) c of the Manpower Law. Employees may apply for termination of employment if their employer does not pay their salary on time for 3 consecutive months, even if the employer then pays on time.

II. Principles in Termination of Employment 1. Terminations should be prevented and are prohibited in

some cases. Termination should be for a reason deemed acceptable under the Manpower Law;

2. Termination procedures under Law No. 2 of 2004 must be followed;

3. The company/employer must first obtain approval from the Industrial Relations Court unless the employer and employee enter into a mutual termination agreement (“MTA”) which should then be registered with the Industrial Relations Court. Unilateral termination of employment is not allowed. If a party does not perform, the other party to the MTA may apply to the Industrial Relations Court for a writ of execution.

III. Types of Termination of Employment and Changes to the Termination Articles and Provisions of the Manpower Law

 A. Termination for Minor MistakesIf an employee commits an offence under the employment agreement, Company Regulations (“CR”) or CLA (“Collective Labor Agreement”), before terminating him/her, the employer must issue 3 consecutive warning letters unless stated otherwise in the employment agreement, CR or CLA. For example: poor performance, tardiness, etc.

B. Termination for Major Mistakes (serious misconduct /cause)Article 158 and other relevant articles on serious misconduct were revoked by the Constitutional Court in 2004. Employers can no longer immediately terminate employees without approval from the Industrial Relations Court for serious misconduct because Article 158 defines it as criminal conduct; therefore, a court's guilty verdict is required.

The Minister of Manpower and Transmigration (“MOM”) has issued 2 circular letters ie. Circular Letter No.SE-13/MEN/SJ-HK/I/2005 and Circular Letter No. B. 33/D-PHI/2-V/2005 which clarify terminations of employment for cause. If 'for cause' is changed to “for urgent reasons” termination is permissible. These urgent reasons are listed in Article 1603 o. of the Indonesian Civil Code. But the termination procedures as provided in Law No. 2 of 2004 should be followed.

C. Termination for Financial Reasons under the Manpower Law

1. Termination due to a change of status, merger, consolidation, acquisition/change of company ownership;

2. If the employer becomes insolvent;3. If the employer has suffered continuous losses for 2

consecutive years as proved by its public accountant audited financial reports for the last 2 years;

4. For redundancy (but Article 164 (3) on this matter was revoked by the 2012 Constitutional Court Ruling);

5. Other reasons for termination:i. Force majeure;ii. The demise of the employee;iii. The retirement of the employee;

iv. Termination because the employee has been ill for 12 consecutive months, as certified by a doctor;

v. Termination because the employee has been detained for more than 6 months for an alleged crime or has been found guilty by a criminal court;

vi. Termination for being absent for 5 days without leave, without prior notification, with a proper summons having been served twice (2x) by the employer;

vii. The employee terminates the employment due to the employer's:

a. abuse, severe insult or threat against the employee;

b. persuading or directing the employee to engage in unlawful conduct;

c. failure to pay the agreed salary on time for 3 months;in relation to the Constitutional Court’s 2012 verdict invalidated Article 169 (1) c.: employees may apply for termination of employment if their employer does not pay their salary on time for 3 consecutive months, even if the employer then pays on time;

d. failure to comply with its obligations to the employee;e. directing the employee to do work beyond the agreed

term; orf. forcing the employee to do work which is harmful to

the employer’s life, safety, health or decency while that type of work is not described in the employment agreement.

Practical problems with implementing provisions of the Manpower Law:

a. few provisions are not clear and are open to interpretation;

b. every MOM official applies his/her own policy;c. lack of knowledge of MOM officials, especially

those in the remote areas;d. different policies applied by different MOM

officials to terminations of employment.

IV. Preparation for a Termination of Employment

A.Negotiations in bipartite meetingsFor up to 30 working days as of the commencement of the negotiations. (ie the first bipartite meeting)

B.Mediation or Conciliation (tripartite meetings)For mediation, up to 30 working days.

Practical problems in bipartite meetings/mediation:

a. the employee does not show up despite proper invitations from the employer;

b. the employee refuses to sign the minutes;c. the employee does not come to work without notice;d. the employee induces other employees to take action,

eg strike, demo;e. the employee does not return the employer’s property

until the dispute is settled;f. the employee may demand far more than the legal

minimum to settle the termination amicably;g. the employee may object to his/her suspension.

C. Industrial Relations Court a. The panel of judges should issue its ruling

within 50 working days of the first hearing. If either party does not accept the decision, it may appeal to the Supreme Court.

b. An injunction can be sought before a ruling is issued the employer pays no salary until the termination dispute is settled.

 D. Appeal to the Supreme Court

Within 30 working days of receipt of the appeal.

Practical problems with legal proceedings in the Courts:

a. strict evidentiary requirements for Court action;b. judges have their own interpretations of or views on

serious misconduct;c. the employee may resort to other actions to try to get

the employer to drop the case;d. the courts often fail to meet the deadline due to the

backlog of cases;e. corruption is still a major concern in litigation in

Indonesia;f. the employee still has to be paid during the termination

process which increases the cost of termination.

V. Calculation of Severance Pay, the Service Period Recognition Payment and Compensation

Severance PayService period less than 1 year 1 month's salary

Service period 1 year or more but less than 2 years

2 months' salary

Service period 2 years or more but less than 3 years

3 months' salary

Service period 3 years or more but less than 4 years

4 months' salary

Service period 4 years or more but less than 5 years

5 months' salary

Service period 5 years or more but less than 6 years

6 months' salary

Service period 6 years or more but less than 7 years

7 months' salary

Service period 7 years or more but less than 8 years

8 months' salary

Service period 8 years or more 9 months' salary

"Long" Service Pay (Service Period Recognition Payment) Service period 3 years or more but less than 6 years

2 months' salary

Service period 6 years or more but less than 9 years

3 months' salary

Service period 9 years or more but less than 12 years

4 months' salary

Service period 12 years or more but less than 15 years

5 months' salary

Service period 15 years or more but less than 18 years

6 months' salary

Service period 18 years or more but less than 21 years

7 months' salary

Service period 21 years or more but less than 24 years

8 months' salary

Service period 24 years or more 10 months' salary

Compensation

1. Untaken annual leave that not yet forfeited;2. Transportation costs for the Employee and his/her immediate

family back to the place of recruitment, if applicable;3. Housing, medical treatment and medication allowance equal

to 15% of the Severance Pay and Service Period Recognition Payment if the Service period fulfills the requirement;

4. Other matters specified in the employment agreement, CR or CLA.

“Salary” for calculating the employee's entitlements consists of the basic salary plus permanent and regular fixed allowances and includes the value of any benefits (e.g. uniforms) provided free of charge.

Reason for Termination Manpower Law Article

Entitlement

Serious mistakes (revoked by the Constitutional Court through its ruling in 2004)

158 (3) + 156 (4)

COMP

Serious mistakes but the Employee’s function does not directly represent the Employer’s interest (Non-Staff) (see above)

158 (4) + 156 (4)

SEP AS PER EA, CR OR CLA + COMP 

Criminal action against the Employee + guilty/6 months inability to work properly

160 (7) SPR + COMP

Minor mistakes, etc. 161 (3) SEVE + SPR + COMP

Voluntary resignation 162 (1) COMP

Voluntary resignation but the Employee’s function does not directly represent Employer’s interest (Non-Staff)

162 (2) SEP AS PER EA, CR OR CLA + COMP

Change of, status, ownership, a merger etc. and the Employee terminates

163 (1) SEVE + SPR + COMP

Change of status, ownership, a merger etc. and the Employer terminates

163 (2) 2 X SEVE + SPR + COMP

Employer closes down due to continuous losses or force majeure.

164 (1) SEVE + SPR + COMP

Efficiency/redundancy/downsizing (revoked by the Constitutional Court through its ruling in 2012)

164 (3) 2 X SEVE + SPR + COMP

Employer’s bankruptcy 165 SEVE + SPR + COMP

Death of employee 166 2 X SEVE + SPR + COMP

Retirement age (ie 55 years old) 167 2 X SEVE + SPR + COMP (if no pension program is provided)

Employee absent for 5 days (Staff & Non-Staff) 168 (3) SEP AS PER EA, CR OR CLA + COMP

Employer’s actions – guilty 169 (2) 2 X SEVE + SPR + COMP

Employer’s actions – not guilty 169 (3) COMP

Long-term illness of Employee 172 2 X SEVE + 2 X SPR + COMP

SEP = separation money (uang pisah) EA = employment agreementSEVE = severance payment CR = company regulationSPR = service period recognition CLA = collective labor agreementCOMP = compensation

VI. Preparations before Taking any Disciplinary Action

1. Collect and review evidence or documents indicating the minor violations.

2. Check any legal basis and violations committed under the employment contract, CR or CLA.

3. Ensure proper warning letter is drafted and issued properly.4. Prepare arguments to rebut arguments presented by the

employee. 5. Decide the timing and at least 2 company representatives

serving the warning letter to the employee. No expatriate should be involved.

6. Prepare for worst case scenario, e.g. employee files a claim to MOM.

VII. Highlighted Issues When the Company Serves a Warning Letter to the Employee

1. Explain the purpose of the warning issued to the employee and the legal basis.

2. Explain the company’s expectations and make sure the employee understands.

3. Present any document or evidence describing or evidencing the violations.

4. Give employee opportunity to respond to charge.5. Ask Employee to sign warning letter as

acknowledgment. 6. Prepare minutes of discussions during meeting for

records.

VIII. Post Disciplinary Action

1. Closely monitor the development or progress of the Employee.

2. Regularly document both good and bad performance.3. Regular performance evaluations should be fair and honest. 4. As soon as a performance or discipline problem occurs, start

documenting your communications with the Employee.5. A progressive disciplinary procedure is best: oral warnings,

written warnings that the job is in jeopardy and then if necessary, termination.

6. Inform the Employee that his/her job is in jeopardy in writing.

 IX. Planning Terminations of Employment

1. Consult HR and the Law before taking any action. 2. Do you have clear and sufficient grounds for

termination? If not, a mutual termination agreement is the best option.

3. Collect and review all evidence.4. Is any internal investigation required? 5. Avoid using the resignation procedure. Why? 6. The criteria for dismissing an employee must be

clear.7. Follow the termination procedure by the book.

8. Consult the local MOM on its policy. 9. Offer at least the termination package

required under the prevailing laws.10.Prepare for a worst case scenario, e.g. a civil

lawsuit filed by the employee(s).11.Are your manpower permits and licenses

valid and complete?12.Do you have any irregularities (tax,

immigration, etc.) which the employee(s) may know about and could exploit?

X. Practical Common Errors in Drafting Employment Contract

1. A clause allowing termination by notice or salary in lieu of notice is not permitted in Indonesia;

2. Copying from Foreign Law Contracts, eg garden leave;3. Lack of knowledge: severance and entitlements: incorrect

calculation;4. Not including the legally required provisions, eg. type of work for a

fixed term employment;5. Renewable probation periods;6. Not linking contract to Codes, Policies, etc;7. Language and governing law;8. Illegal fixed term employment;9. Referring to a specific law, eg Article 1266 of the Indonesian Civil

Code;10. Not updating contracts from time to time.