Running and growing a business requires you to have the right people from the beginning. Hence, you need to know the different employment types in Indonesia to decide which one will best serve your business. The workforce regulations by the Indonesian Manpower Law protect the rights and interests of both workers and employers. The Manpower Labor Law can and does change frequently, and employers must be familiar with current regulations and how they affect hiring practices.
However, we need to know what types of worker is common in Indonesia. Employees and independent contractors are two typical workers for company employment in Indonesia. To hire depends much on your business requirements, risk tolerance, and current financial and business circumstances.
Employees
Employees are hired full-time or part-time in a company. They can also serve at a company on a permanent, temporary, flexible, or fixed-term basis. However, the company will still specify a minimum number of work hours, which they have to comply with.
In return, employers will have to provide employees with a guaranteed monthly salary and other employment benefits. If an employee wants to quit their position in a company, they give the company a particular amount of notice before officially leaving. Based on the employment contract, both employers and employees carry their obligations, rights, responsibilities.
For example, employers will have to take on potential financial responsibilities risks, including monthly salary, minimum wage, social insurance, tax deduction, paid holidays, labor protection, pension, and termination compensation. An employer and employee relationship are between superior and subordinate governed by labor laws.
Independent contractors
In Indonesia, businesses also refer to self-employed individuals or consultants as independent contractors. Independent contractors either have their independent companies or are sole traders who do businesses with employers in service and product provisions.
However, they are usually more flexible and their working hours can be arranged and agreed upon in advance, depending on the project they are involved in. Their income is based on the profits they get from the services or products they sell. Self-employment tax applies to independent contractors. Unlike full-time employees, if you hire an independent contractor, you cannot generally control how they will complete your project. You can only control the outcome once the project is completed. A company and independent contractor relationship are between contracting parties governed by contract law and other applicable legislation.
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Temporary i.e. fixed-term contract (PKWT)
Fixed-term contracts are signed for a specific amount of time. Here are the requirements for the fixed-term contract (PKWT):
Maximum duration of five years.
No probationary period is allowed.
Contract must be signed in the Indonesian language. Bilingual contracts are standard for foreign employees. If the employment contract is in English, it’s automatically considered an indefinite contract (more on that below).
Contract must be registered with the Indonesian Ministry of Manpower within three days after signing.
Permanent or indefinite term contract (PKWTT)
Permanent contracts are the most common types of employment contracts in Indonesia. As the name suggests, they don’t specify an end date for the employment. A permanent employment contract can include an up to three-month probationary period. Once the probationary period is over, the employer must issue a letter that they are now a permanent employee.
Probationary period conditions are outlined in the employment contract. They usually allow both parties to terminate the agreement in one to four weeks of notice without the employee having the right to severance pay. A common mistake is not to track the end date of the probationary period. It’s essential to set up internal practices where the direct supervisors must decide whether to keep the employee after the probationary period.
Freelance or daily work contracts
Freelance, or daily work, contracts are considered temporary employment contracts (PKWT). The critical difference is that the employee cannot work for more than 21 days per calendar month. The everyday use case for freelance contracts is hiring temporary staff for seasonal or temporary assignments. However, the HR department must track the number of days the freelancer works for your company – if they exceed the 21 days per month, they automatically become permanent employees.
Regarding agreement, all contracts must be written in Indonesian. They can be written with both Indonesian and an English translation, but contracts must have an Indonesian version to be legally binding.
An employment contract is pivotal for both employees and independent contractors in Indonesia. Many businesses don’t fully understand that an employment contract has a legally binding effect on an employment relationship through terms and conditions. Drafting an employment contract is a law, security, and protection for both employees and employers.
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