Types of EMPLOYEE Termination Compensation in INdonesia
The type of termination compensation in Indonesia depends on the work contract between the company and the employee. There are three types of work contracts:
- Freelance agreement, where employees work and receive wages based on their attendance;
- Fixed term employment agreement, where employees work for a fixed period (for example 1 or 2 years) at a company; and
- Permanent employment agreement, for manpower working at the company for an undefined period of time.
The Manpower Law does not regulate a mandatory termination compensation for freelancers. Companies and freelancers are however free to agree on a termination compensation in the freelance agreement. The Manpower Law does set minimum termination compensations for fixed term employment agreements and permanent employment agreement, which we will further discuss below.
Read also: Hiring Employees in Indonesia: Manpower Company Obligations
Termination compensation: fixed term employment agreement
The Indonesian Manpower Law regulates a specific type of termination compensation for fixed term employment agreements. The purpose of this type of termination compensation is to prevent that the company or the employee terminates the agreement before the expiry date. Therefore, the Manpower Law requires the party who terminates the agreement to pay a compensation to the other party. There may thus be an obligation to pay compensation for either the employee or the company.
Company obligation to pay compensation
In case the company terminates the agreement before its expiry date, the company must pay a termination compensation to the employee. The amount of compensation is the amount of wages of the employee from the termination date until the expiry date of the fixed term employment agreement.
Example:
A company and an employee sign on 1 January an employment contract which will expire on 31 December of the same year. On 31 August, the company decides to terminate the employment relation of the employee due to poor performance – 4 months before the expiry date of the agreement. In this case the company must pay the employee a compensation of 4 times the monthly wage of the employee.
Obligation of employee to pay compensation
On the other hand, if the employee decides to terminate the employment agreement before it expires, the employee is liable to pay a compensation to the company. In such case the same formula applies, and the employee must pay the company a termination compensation in the amount of its wages from the termination date until the date of expiry of the agreement.
Termination compensation for foreign employees in Indonesia
Foreign employees fall under the category of fixed term employees under the Indonesian Manpower Law. As such, their termination compensation will depend on whether or not their employment ends before the expiry of their employment agreement or their work permit. In case foreigner terminate their contract before the expiry date, companies may also claim compensation to the foreigner.
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TERMINATION COMPENSATION: Permanent EMPLOYMENT AGREEMENT
The Manpower Law regulates different types termination compensations for permanent employees in Indonesia. The following types of termination compensations may apply depending on the reason of termination:
1. Severance payment
The severance payment is a general termination compensation, which companies usually must pay in case they decide to terminate the employment relationship. The calculation of the severance payment is as follows:
| Work period of employee in the company | Amount of severance payment |
|---|---|
| Less than one year | One month of wages |
| One year up to two years | Two months of wages |
| Two years up to three years | Three months of wages |
| Three years up to four years | Four months of wages |
| Four years up to five years | Five months of wages |
| Five years up to six years | Six months of wages |
| Six years up to seven years | Seven months of wages |
| Seven years up to eight years | Eight months of wages |
| Eight years or more | Nine months of wages |
2. Long service payment
The long service payment compensation rewards employees who are working for more than three years at the company. The calculation of this type of calculation is as follows:
| Work period of employee in the company | Amount of severance payment |
|---|---|
| Three years up to six years | Two months of wages |
| Six years up to nine years | Three months of wages |
| Nine years up to twelve years | Four months of wages |
| Twelve years up to fifteen years | Five months of wages |
| Fifteen years up to eighteen years | Six months of wages |
| Eighteen years up to twenty-one years | Seven months of wages |
| Twenty-one years up to twenty-four years | Eight months of wages |
| Twenty-four years or more | Ten months of wages |
3. Compensation payment
When the employment relationship ends, the company must pay compensation to the employee for the following items:
- Firstly, the remaining annual leave days at the date of termination of the employment agreement;
- Secondly, transportation costs which allow the employee to return to the place of hire;
- Thirdly, housing allowance and healthcare allowance, which are set at 15% of the severance pay and / or long service pay.
The company and the employee may also regulate specific compensations in the employment agreement. In addition, the company may regulate additional compensations company-wide in the company regulations or collective labor agreement.
4. Separation payment
Separation payments are paid to the employee only in case the employee resigns or when the employee is considered to have resigned from the company. The Manpower Law does not set the minimum amount of compensation for separation payment. Therefore, companies in Indonesia must regulate this in the employment agreement with the individual employee. Alternatively, the company can regulate the separation payment compensation in the company regulations or collective labor agreement.
Termination Compensation Calculation For Permanent Employees
The amount of termination compensation for permanent employees depends on the reason of termination of the employee. In the below matrix is an overview of the most common types of termination.
| Reason of Termination | Severance Payment | Long service payment | Compensation Payment | Separation Payment |
|---|---|---|---|---|
| Forced termination by company due to merger, acquisition or consolidation | Two times | One time | One time | None |
| Closure of company – not for financial reasons or force majeure | Two times | One time | One time | None |
| Employee enters pension age | Two times | One time | One time | None |
| Termination by company due to violations by employee | One time | One time | One time | None |
| Bankruptcy of company | One time | One time | One time | None |
| Resignation of employee | None | None | One time | Based on agreement |