Terminating Employees In Indonesia: A Complete Guide To Legal Compliance, Severance Pay, And PP 35/2021
Navigating the landscape of human resources and labor law in Indonesia requires a deep understanding of local statutory requirements. Historically, Indonesia has maintained one of the most worker-protective legal frameworks in Southeast Asia. While the enactment of the Omnibus Law on Job Creation (Law No. 11 of 2020, amended by Law No. 6 of 2023) and its implementing regulation, Government Regulation No. 35 of 2021 (PP 35/2021), aimed to introduce greater flexibility, terminating employees in Indonesia remains a highly regulated and legally sensitive process.
For multinational corporations and local enterprises alike, executing a termination—locally known as Pemutusan Hubungan Kerja (PHK)—without strict adherence to statutory procedures can lead to protracted disputes, costly litigation at the Industrial Relations Court (Pengadilan Hubungan Industrial or PHI), and substantial financial penalties. Understanding the legal grounds, procedural steps, and exact severance calculations is vital for mitigating operational risks.
Understanding the Legal Framework of Employment Termination in Indonesia
The primary legislation governing labor relations in Indonesia is Law No. 13 of 2003 on Manpower, which has been significantly modified by the Job Creation Law (Law No. 6 of 2023). Under this modernized framework, the government introduced PP 35/2021 to clarify the specific mechanisms of employment termination, fixed-term employment contracts (PKWT), outsourcing, and working hours.
Despite these regulatory reforms designed to streamline business operations, unilateral termination by an employer is still generally prohibited. Indonesian labor law operates on the principle that all parties must make every effort to prevent termination. When termination becomes unavoidable, the employer must provide a justifiable, legally recognized reason and follow a rigid statutory notification process.
The Impact of the Omnibus Law and PP 35/2021
Prior to the Omnibus Law, employers practically had to obtain approval from the industrial relations institution before terminating an employee. Under the updated provisions of PP 35/2021, the process has shifted toward a notification-based system. Employers are now permitted to issue a formal termination notice directly to the employee, detailing the grounds and the calculation of severance benefits.
However, this does not mean employers have at-will termination capabilities. The notification must be backed by valid, legally recognized reasons. If the employee rejects the termination, the dispute must still go through a mandatory dispute resolution process, beginning with bipartite negotiations, proceeding to tripartite mediation, and potentially ending in the Industrial Relations Court.
Legitimate Grounds for Terminating Employees in Indonesia
Under PP 35/2021, an employer can only initiate termination under specific, predefined circumstances. Each ground carries distinct financial consequences, directly altering the multiplier used to calculate severance pay.
- Business Restructuring and Efficiency: This includes mergers, acquisitions, consolidations, or corporate spin-offs. Whether the company continues operations or downsizes dictates the severance multiplier.
- Force Majeure or Financial Loss: Companies experiencing continuous losses for two consecutive years, facing bankruptcy, or closing due to force majeure can legally terminate workers under reduced severance obligations.
- Employee Misconduct and Warning Letters: If an employee violates the employment agreement, company regulations (Peraturan Perusahaan), or the Collective Labor Agreement (Perjanjian Kerja Bersama), the employer may terminate them. This typically requires the issuance of three consecutive warning letters (Surat Peringatan 1, 2, and 3), each valid for a maximum of six months, unless specified otherwise.
- Urgent Offenses (Serious Misconduct): Under the current framework, immediate termination without warning letters is permissible for urgent offenses, such as fraud, theft, assault, or leaking confidential company secrets, provided the employment agreement or company regulations explicitly define these offenses and the necessary proof is secured.
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Step-by-Step Process for Legal Termination (PHK) in Indonesia
To ensure legal compliance and avoid costly industrial disputes, employers must systematically execute the statutory termination workflow outlined in PP 35/2021.
[Draft Termination Notice] ──> [Deliver to Employee (Min. 14 Days Prior)] │ ┌───────────────────────┴───────────────────────┐ ▼ ▼ [Employee Accepts] [Employee Rejects (Within 7 Days)] │ │ [Draft & Sign Mutual] [Bipartite Negotiation (Max. 30 Days)] [Agreement (PB)] │ │ ┌────────┴────────┐ [Register PB at PHI Court] ▼ ▼ [Settled] [Unsettled] │ │ [Draft & Sign PB] [Tripartite Mediation / Disnakertrans] │ ┌────────┴────────┐ ▼ ▼ [Accept Rec.] [Reject Rec.] │ │ [Draft & Sign PB] [File Lawsuit at PHI Court]
Step 1: Issuance of the Notification Letter
The employer must deliver a written notification letter (Surat Pemberitahuan PHK) to the employee at least 14 working days before the effective date of termination. If the employee is still within their probationary period, the notification must be served at least 7 working days prior. This letter must explicitly state the reasons for termination and detail the calculated severance pay, service appreciation pay, and compensation of rights.
Step 2: Response from the Employee
Upon receiving the notification, the employee has 7 working days to respond.
- If the employee accepts: The parties will draft and sign a Mutual Agreement (Perjanjian Bersama or PB). This agreement must then be registered with the relevant Industrial Relations Court (PHI) to make it legally binding and enforceable.
- If the employee rejects: The employee must submit a formal written rejection letter within the 7-working-day window, prompting the initiation of the dispute resolution process.
Step 3: Bipartite Negotiations
If a dispute arises, the employer and employee must conduct bipartite negotiations to find an amicable solution. This phase is legally mandated and must be completed within 30 working days from the start of negotiations. If an agreement is reached, a Mutual Agreement is signed and registered.
Step 4: Tripartite Mediation and Industrial Relations Court (PHI)
If bipartite negotiations fail, either party can register the dispute with the local Manpower Office (Dinas Tenaga Kerja or Disnakertrans). A government mediator will conduct tripartite mediation sessions and issue a written recommendation. If either party rejects the mediator’s recommendation, the final recourse is to file a formal lawsuit at the Industrial Relations Court (PHI).
Severance Pay Calculation Under Indonesian Law
When terminating employment, employers must calculate and disburse severance packages based on the formulas set forth in PP 35/2021. The total compensation package typically consists of three components:
- Severance Pay (Uang Pesangon - UP): Calculated based on the employee's years of service, up to a maximum of 9 months' salary.
- Service Period Appreciation Pay (Uang Penghargaan Masa Kerja - UPMK): Rewarded for long-term service, beginning after 3 years of employment, up to a maximum of 10 months' salary.
- Compensation of Rights (Uang Penggantian Hak - UPH): Covers unused annual leave, relocation costs (if applicable), and other benefits defined in the employment contract.
The statutory rates for these calculations are detailed below:
| Years of Service | Severance Pay (UP) | Service Appreciation Pay (UPMK) |
|---|---|---|
| Less than 1 Year | 1 Month Salary | 0 |
| 1 Year or more but less than 2 Years | 2 Months Salary | 0 |
| 2 Years or more but less than 3 Years | 3 Months Salary | 0 |
| 3 Years or more but less than 4 Years | 4 Months Salary | 2 Months Salary |
| 4 Years or more but less than 5 Years | 5 Months Salary | 2 Months Salary |
| 5 Years or more but less than 6 Years | 6 Months Salary | 2 Months Salary |
| 6 Years or more but less than 7 Years | 7 Months Salary | 3 Months Salary |
| 7 Years or more but less than 8 Years | 8 Months Salary | 3 Months Salary |
| 8 Years or more | 9 Months Salary | - |
| 8 Years or more but less than 12 Years | - | 4 Months Salary |
| 12 Years or more but less than 15 Years | - | 5 Months Salary |
| 15 Years or more but less than 18 Years | - | 6 Months Salary |
| 18 Years or more but less than 21 Years | - | 7 Months Salary |
| 21 Years or more but less than 24 Years | - | 8 Months Salary |
| 24 Years or more | - | 10 Months Salary |
Note: The actual payout of these amounts is subject to specific multipliers depending on the ground of termination. For instance, termination due to efficiency measures resulting from financial losses may warrant a 0.5x severance multiplier, whereas termination due to corporate acquisition without restructuring may require a 1x or even 2x multiplier depending on the specific circumstances and company policies.
Risks, Pitfalls, and Best Practices for Employers
Terminating employees in Indonesia without thorough legal preparation often results in unfavorable outcomes for businesses. One of the most common pitfalls is failing to document performance issues or misconduct adequately. If an employer terminates an employee for poor performance without first issuing formal warning letters (SP1, SP2, and SP3) spaced over appropriate legal intervals, the Industrial Relations Court will likely rule the termination invalid. This obligates the company to reinstate the worker and pay back-wages for the period of the dispute.
Another critical risk is miscalculating the severance package. Calculations must be based on the employee's comprehensive wage, which includes basic salary and any fixed allowances (such as fixed housing or transportation allowances). Excluding fixed allowances from the calculation can lead to claims of underpayment and invalidate mutual separation agreements.
To mitigate these risks, companies should:
- Maintain meticulous HR records, documenting every performance review, misconduct incident, and signed warning letter.
- Ensure that Company Regulations (Peraturan Perusahaan) are updated in accordance with the Job Creation Law and registered with the Ministry of Manpower.
- Draft clear and legally compliant Mutual Agreements (Perjanjian Bersama) and ensure they are registered with the PHI to prevent future legal claims.
- Consult localized labor law experts before delivering any formal termination notices to foreign or domestic staff.
Frequently Asked Questions (FAQs)
1. Can an employer terminate an employee immediately without notice in Indonesia?
No. Under PP 35/2021, employers are legally obligated to provide a written termination notice at least 14 working days prior to the effective date. Immediate termination is highly restricted and typically only viable in cases of proven, severe misconduct or urgent offenses defined explicitly in the company regulations or collective labor agreement.
2. Are foreign employees working in Indonesia entitled to severance pay?
Foreign workers in Indonesia are employed under fixed-term contracts (PKWT), as expatriates are not permitted to hold permanent positions (PKWTT). Under PP 35/2021, PKWT employees are not entitled to standard severance pay (UP and UPMK). However, they are entitled to compensation pay (Uang Kompensasi) upon the expiration or completion of their contract, calculated proportionally based on their length of service. If a PKWT is terminated prematurely by either party, the terminating party must pay compensation equal to the employee's salary for the remaining duration of the contract.
3. What happens if an employee refuses to sign a termination agreement?
If an employee rejects the termination notice, they must submit a formal rejection letter within 7 working days. The employer must then initiate bipartite negotiations. If no resolution is reached within 30 working days, the case must be submitted to the local Manpower Office (Disnakertrans) for tripartite mediation, and potentially to the Industrial Relations Court (PHI).
4. How are warning letters (SP) structured under Indonesian labor law?
Warning letters are categorized into SP1, SP2, and SP3. They must be issued sequentially unless the employee commits a major violation that warrants an immediate SP3 as defined by company regulations. Each warning letter remains legally valid for a maximum of six months. If the employee commits another violation within that six-month window, the employer can progress to the next warning level.
5. What is included in the Compensation of Rights (UPH)?
The Compensation of Rights (UPH) includes payment for accrued, unused annual leave, relocation costs to return the worker and their family to their point of origin (if applicable), and any other compensation items agreed upon in the employment contract, company regulations, or collective labor agreement.
Need Expert Assistance with Indonesian Employment Law?
Managing employment termination in Indonesia requires exact compliance to avoid costly legal liabilities and protect your brand's corporate reputation. Our team of experienced legal advisors and HR compliance experts specializes in Indonesian labor law, severance structures, and industrial dispute resolution. Whether you need assistance drafting company regulations, calculating severance packages, or managing mutual separation negotiations, we are here to support your business.
