When your company is exploring the possibility of scaling internationally, Indonesia presents an exciting growth opportunity. Its tremendous workforce and enviable access to large, lucrative Asian markets can lead to valuable connections and profits.
However, the nuances of labor law can be confusing, even for the savviest companies. That’s why we’ve prepared this guide to hiring employees in Indonesia — so you can make informed personnel decisions that will add value to your company year after year.
What to know before hiring in Indonesia
Before your company can begin building teams in Indonesia, you’ll need to become familiar with topics like contracts, wages, benefits, and working hours. You should also know the makeup of the workforce, some recent labor law changes, and the languages spoken throughout the country. Let’s examine these topics in more detail.
1. Contracts and termination
Indonesia does not have at-will employment, so hiring new employees requires signing employment contracts. Terminating employees also requires paying severance.
Contracts in Indonesia may be indefinite contracts or fixed-term contracts that run for a certain time or until the completion of a specific job. Each contract should specify the job duties, compensation, benefits, and termination requirements. Fixed-term contracts can run for a maximum of five years in total.
Indonesian law requires companies to write all fixed-term employment contracts in Indonesian. The law does allow for bilingual agreements. However, if inconsistencies exist between the terms of the contracts in two languages, the terms of the Indonesian agreement will prevail.
Notice of resignation is required per Indonesian labor law. For regular employees, the mandatory notice period is a minimum of 14 days and a minimum of 7 days during the probationary period.
For fixed-term contracts, if one of the parties terminates the employment relationship before the expiration of the period stipulated in the Perjanjian Kerja Waktu Tertentu (PKWT), or the term of the employment agreement, the employer must provide the compensation outlined in Government Regulation No. 35, 2021. The rate is based on the PKWT period worked.
For regular or indefinite contracts, termination may trigger severance. The calculation is based on the termination background and the employee’s length of service.
2. Payroll and taxes
Companies must pay payroll taxes into Indonesia’s universal social security system. That system encompasses a central healthcare program, an occupational injury fund, a retirement savings fund, a pension benefits program, and a death benefits fund. Plans are in place for a centralized employee benefits program in the future.
Here is the breakdown of required company and employee contributions per month:
- Health insurance: 1 percent from the employee and 4 percent from the employer
- Occupational injuries: 0.24 percent to 1.74 percent from the employer
- Retirement savings: 2 percent from the employee and 3.7 percent from the employer
- Pension benefits: 1 percent from the employee and 2 percent from the employer
- Death benefits: 0.3 percent from the employer
Your employees must also pay their income taxes each year. Income tax rates in Indonesia operate on a progressive tax scale. They range from 5 percent for employees earning up to IDR₹50 million to 30 percent for employees making more than IDR₹500 million.
3. Wages and working hours
The typical Indonesian workweek consists of 40 hours, either seven hours a day for six days a week or eight hours a day for five days a week. Overtime is permissible as long as employees receive 150 percent of their usual pay for the first hour and 200 percent for all hours after that. The maximum overtime is four hours per day or 18 hours per week.
Indonesian employees must receive a minimum of 12 paid vacation days per year, along with 14 public holidays. The paid vacation leave includes the days of “cuti bersama,” or collective leave days, which change every year according to government decree.
Unlike workers in many countries, employees in Indonesia are not entitled to a specific number of sick days each year. Employees who are out sick receive 100 percent of their usual salaries unless the length of their illness exceeds four months. At that point, companies can reduce sick employees’ pay subsequently every quarter up to 25 percent of their usual wages.
However, Indonesian employees should receive specific maternity and paternity leave. Mothers can take three months of paid maternity leave, half before the child’s birth and half afterward. Fathers can take two days of paid paternity leave. Parents are also entitled to paid family leave on certain occasions, such as the baptism or marriage of a child.
4. Job market and workforce
The workforce in Indonesia is a large one. The World Bank reports that the total labor force is currently about 134 million people out of a total population of about 273 million people. That is the fourth-largest workforce in the world, behind only those in China, India, and the U.S. International companies can tap into that vast labor potential to power their new operations.
Higher education is less common in Indonesia than in some other parts of the world. Indonesia is one of the G20 countries that work together to address international economic issues. Among those 20 countries, the average percentage of young adults who have attained a degree beyond high school is 38 percent. However, in Indonesia, only 16 percent of young adults have completed some form of tertiary education.
If your company requires a postsecondary degree for its employees, you may need to invest significantly in your recruiting process. Consider targeting recent college graduates specifically, for example.
Indonesia is home to more than 800 languages. The official language is Indonesian, colloquially known as Bahasa Indonesia. Most Indonesians speak Indonesian, so it acts as a lingua franca for the country. However, Indonesian is relatively few Indonesians’ first language. Only about 20 percent of locals speak Indonesian as their primary language.
Javanese is one common first language in Indonesia. Still, only around 30 percent of Indonesians speak Javanese as their primary language. The rest of the population speaks a tremendous array of first languages, including Sundanese, Madurese, Minang, Banjar, and Bali, among many others.
When your company is interviewing and hiring new employees in Indonesia, be aware that your new teams may bring an impressive diversity of languages to the table. This diversity can be a tremendous strength for your company, enhancing your ability to communicate with Indonesians from multiple linguistic backgrounds.
6. Ongoing labor law reforms
Your company should be aware that new Indonesian labor laws may affect your hiring. In 2020, Indonesia made international news with the passage of its Omnibus Law on Job Creation, or “Undang-undang Cipta Kerja.” This law aimed to reform the hiring process to make Indonesia a more attractive place for global business investment and growth.
The law reduced some of the regulations that governed hiring workers. It abolished the minimum wage and reduced severance pay requirements for companies. It increased the permitted overtime and reduced the amount of time employees must have off each week. It also eased the restrictions on outsourcing jobs and hiring expatriate employees.
More recently, Indonesia passed a new law known as Government Regulation No. 35 (GR35). In contrast to the omnibus law, this law makes changes to employment contracts in Indonesia to increase some worker protections.
GR35 requires a company to pay compensation to employees with fixed-term contracts who are terminated, even for voluntary resignation. The company must also compensate its employees when it extends their contracts or when the contracts expire.
Labor law reform in Indonesia is currently ongoing, so companies may want to pay close attention to the news so they can respond to new developments.
The cost of hiring an Indonesian employee
The cost of hiring an employee in Indonesia will be different from company to company and industry to industry. However, as you budget for hiring-related expenses, you can expect to encounter direct and indirect costs like these:
- Business registration expenses
- Job announcements
- Hours spent managing recruitment and hiring
- Payroll taxes
- Direct compensation
Because healthcare intertwines with Indonesia’s social security system, companies do not generally need to budget for providing separate health insurance benefits for employees. However, they must enroll all employees, including expatriates, in social security through their payroll processes.
One essential item to include on your list of employment costs is the 13-month bonus, known in Indonesia as the Tunjangan Hari Raya (THR). The THR is an annual allowance given to employees before their major religious holidays.
For Muslims, who make up 88 percent of the Indonesian population, that holiday is Eid al-Fitr. For Catholics and Protestants, it is Christmas. Many companies simplify the bonuses by paying all their Muslim employees before the start of Eid al-Fitr and all their non-Muslim employees before the start of the Christmas holiday.
The THR is mandatory under Indonesian law. Failure to pay it can result in fines and the restriction or suspension of business operations. Companies must give the THR to all employees, no matter their contract status, and they must pay it in Indonesian rupiah.
The amount of the THR varies with the length of the employee’s service. Employees who have worked for their employers for at least 12 months generally receive the equivalent of one month’s salary. Employees who have worked for less than 12 months receive a prorated bonus.
Hiring practices in Indonesia
Hiring someone in Indonesia may be very similar to hiring someone in your home country. Still, you’ll want to follow the local hiring practices as much as possible. That way, you can make your candidates feel comfortable working with your company. Here are a few best hiring practices to keep in mind:
- Use the local languages: To ensure clarity and meaningful communications, your company should use the local language, especially in contracts and other formal documentation. In most cases, you should use Indonesian, since most Indonesians can speak it. If your company operates in a region where one of Indonesia’s many other languages predominates, you might use that language instead.
- Consider translation services: If your company needs assistance communicating in Indonesia’s hundreds of languages, engaging translation services is an excellent strategy. Professionals fluent in the local languages can help you connect with your employees and convey essential information.
- Use the local currency: You’ll want to use the local currency to increase clarity for your Indonesian employees as well. Using Indonesian rupiah for pay and bonus amounts ensures your employees understand what their compensation will be.
What does a company need to hire employees in Indonesia?
One of the first steps to hiring in Indonesia is to establish your company’s presence formally. If your company plans to set up a subsidiary in Indonesia, you will need to complete several required tasks:
- Paying the fees to reserve your company name
- Applying for approval of the deed for your establishment
- Getting your company deed and other documents notarized
- Paying state revenue fees for legal assistance
- Registering your business formally
- Obtaining a registration certificate
- Obtaining a tax ID number
- Applying to health insurance and social security programs
Meeting these requirements can be time-consuming and expensive. For this reason, many companies work with a global employment platform to reduce their setup obligations. An employment platform like Globalization Partners expedites your company’s operations in Indonesia and allows you to start building new teams much faster, without setting up a subsidiary.
Hiring remote employees in Indonesia
If the distance between Indonesia and your home country precludes extensive travel, you may need to build new teams remotely. Below are a few tips for getting the most value out of that process:
- Communicate beforehand: If you have an interviewing team, be sure to discuss your interviewing strategies ahead of time. Determine who will speak when and who will ask what questions so you can present a coordinated, professional front.
- Use technology to your advantage: Companies now have more technological tools than ever for remote communications. Figure out what platform works best for your company, and be sure you can operate it proficiently before using it for interviews.
- Promote convenient scheduling: Your company can save time and enhance its professional image by using convenient scheduling tools. Instead of sending dozens of emails back and forth, consider using a scheduling platform that allows you to list potential interview times. Then candidates can choose the times that best suit their schedules.
Additional tips for hiring in Indonesia
Here are a few final tips to help you streamline your company’s processes as you build Indonesian teams:
- Determine whether you’re permitted to hire expatriate workers: Though the law in this area has been changing, Indonesia tends to prioritize hiring Indonesian nationals over expatriates. Historically, international workers could not work in certain sectors, including health and safety, supply chain management, and quality control. Be sure your industry will permit you to hire expatriates before doing so.
- Check with Collective Bargaining Agreements (CBAs): In Indonesia, CBAs often mandate wages and bonuses. Check for CBAs for your industry to determine how they influence employee compensation.
- Invest in strong, welcoming onboarding: When your Indonesian employees first arrive for work at your company, they will not know what your company culture is like. They may not know what you expect from them or what type of atmosphere they will encounter. Be sure your onboarding process clarifies your company’s mission, expectations, values, and norms. You should also help your employees get to know one another and feel like integral parts of your team.
Simplify international team building with Globalization Partners
When you’re ready to hire employees in Indonesia, work with Globalization Partners.
Leverage our comprehensive AI-driven platform to streamline your team-building processes. Through our technology, you leave local compliance regulations and laws in the hands of legal and HR experts, giving you more time to set your company up for success and longevity in Indonesia.
Learn more about how to hire in Indonesia with our platform, and request a proposal.