Labor Laws and Regulations

Contract

There are two main types of employment contracts

Common to both Fixed-Term (PKWT / Pekerja Waktu Tertentu) and Indefinite term (PKWTT / Pekerja Waktu Tidak Tertentu) contracts

Language

Contracts must be written in the Indonesian language using the Latin alphabet. If a foreign language version is used as well, the Indonesia version is the legally binding version. For Foreign Investment Companies (Perusahaan Modal Asing / PMA), they usually use bilingual contracts.

Mandatory terms

Specific for Fixed term (PKWT / Pekerja Waktu Tertentu) contracts

Mandatory terms

Cannot include a probation period

Minimum contract duration

Not specified

Maximum contract duration

Total of 5 years

Probation

Not allowed

Type of work

• Work that can be completed in a short period of time
• Seasonal work
• Work related to new products that are in trial or experimentation

Registration with manpower ministry

The contract must be registered with the Indonesian Ministry of Manpower within three days after signing.

Specific for Indefinite term (PKWTT / Pekerja Waktu Tidak Tertentu) contracts

Mandatory terms

• Can include a probation period
• Up to three months

Probation

• Up to three months
• Once the probationary period is over, the employer must issue a letter to the employee that they are now a permanent employee.
• Probationary period conditions are outlined in the employment contract. They usually allow both parties to terminate the contract in one to four week notice, without the employee having the right for a severance pay.
• A common mistake is to not to track the end date of the probationary period. It’s important to set up internal practices where the direct supervisors must make a decision of whether to keep the employee or not after the probationary period.

Minimum wage

There is no national minimum wage in Indonesia. Instead, each of the 33 provinces set its own minimum wage. Employers must comply with these rates based on the location of their employees.

*Please note that each province has many cities, and each city has its own Minimum Wage (Upah Minimum Kota / UMK), reflecting local economic conditions and differences in the cost of living. Therefore, the UMK in each city may be higher than the Provincial Minimum Wage (UMP), and the applicable minimum wage to follow is the UMK.
*Last update June 2025.

Minimum Wage Calculation

1. Upah Minimum Provinsi (UMP) and Upah Minimum Kabupaten/Kota (UMK)

   • In Indonesia, the minimum wage is determined annually at two regional levels: provincial (UMP) and district/city (UMK). The UMP is set by the provincial governor, while the UMK is established by the regent or mayor and usually reflects higher wages adjusted to local economic conditions.
   • The minimum wage is calculated based on factors such as inflation, economic growth, cost of living, and labor productivity. For 2025, the government has set a uniform increase of 6.5% on the previous year’s minimum wage.

2. Monthly vs. Daily Minimum Wage

   • The regional UMR can be expressed as a monthly wage or a daily wage, depending on local regulations.
   • To calculate the daily minimum wage, divide the monthly UMR by the standard number of working days per month (usually 25 to 31 days).

3. Calculation Example
   For example, if the monthly UMR is IDR 4,000,000 and there are 25 working days in a month:

   • Daily Minimum Wage = IDR 4,000,000 / 25 days = IDR 160,000 per day

Working hours

Normal working hours

Normal working hours in Indonesia are 40 hours per week, which can be divided into eight hours per day for five working days or seven hours per day for six working days.

Rest Days

Daily Rest Periods: Employees are entitled to a minimum rest period of at least 30 minutes after every four consecutive hours of work. This rest period is not considered working time.

Overtime

Overtime working hours

Overtime working hours is 4 hours per day and 18 hours per week, which does not apply to public holidays. The overtime payment is based on the employee’s monthly wage. Every hour, the calculation is applied, which is 1/173 times the monthly wage.

Public holidays and annual leaves

*Usually it applies to Civil Servants (PNS/ASN). Private companies have autonomy to set their own policy about offering collective leave to employees.
**Annual leaves can only be carried over for six months from the time it is accrued.

Sick leave

Sick leave

Workers are entitled to sick leave with medical documentation, at the following pay rates:

• Full pay for the first four months of sick leave;
• Three-quarters pay for the next four months;
• Half pay for the following four months; and
• One-quarter pay until the employer terminates employment

Menstruation leave

Women are also entitled to two days’ paid leave during menstruation.

Maternity / paternity leave

*Although the Manpower Act proposes this leave be taken in two parts (one-and-a-half months before delivery and one-and-a-half months after), in practice, many employers allow pregnant employees to take their three months consecutively after childbirth.

Family leave

Termination

Payroll and Statutory Contributions

Payroll

Payment

Salaries must be paid in Indonesian currency, and paid in full in each period and per date of payment of wages. The period of payment of salaries should not be more than one month.

Payslip

Employers are legally obligated to provide employees with itemized pay slips.

Record Keeping

Employers are required to maintain accurate payroll records, including wage details, deductions, and contributions, for compliance and reporting purposes for a period of at least 5 years. Automated payroll systems are recommended to streamline processes and ensure compliance.

Wage deduction

Late payment

From the fourth to the eighth day: If the wages are delayed, starting from the fourth day until the eighth day after the due date for wage payment, the employer will be subject to a penalty of 5% of the wages that should have been paid for each day of delay.

After the eighth day: If the wages remain unpaid after the eighth day, an additional penalty of 1% will be imposed for each subsequent day of delay, with the provision that the penalty for one month may not exceed 50% of the total wages that should have been paid.

After one month: If the wages are still unpaid beyond one month, in addition to the penalties outlined in points (a) and (b), the employer will also be subject to an additional interest charge based on the highest prevailing interest rate at a government bank.

Religious holiday allowance (Tunjangan Hari Raya)

The Religious holiday allowance (Tunjangan Hari Raya / THR) is for both Fixed term (PKWT / Pekerja Waktu Tertentu) and Indefinite term (PKWTT / Pekerja Waktu Tidak Tertentu) contracts.

The THR payment is the equivalent of one month’s salary. All employees who have worked for the company for more than one month are eligible on both definite and indefinite terms. If the employee has worked less than a year, the payment is offered pro-rata for the number of months served.

When to pay

It should be paid prior to the main religious festival of the employee. The majority religion in Indonesia is Muslim, and the allowance is paid before Idul Fitri (end of Ramadan). For Christians and Catholics, the festival is Christmas. Hindus, Buddhists, and Confucian festivals are also respected, but in practice, many companies pay it before either the Muslim or Christian dates.

Maximum payment for Religious holiday allowance is 7 days before Religious Festive.

Income tax obligations from employers

Income Tax (PPh 21)

Calculation: Income tax (PPh 21) is calculated based on a progressive tax rate system, where the tax rates increase with higher income levels. The tax is deducted monthly from employees’ salaries. A tax resident without a taxpayer identification number (NPWP / Nomor Pokok Wajib Pajak) is subject to a higher tax rate of 20% from the normal tax rates.

Taxable Income: Taxable income includes regular salary, bonuses, allowances, and other benefits received by employees.

Tax Deduction & Withholding: Income tax in Indonesia is mostly paid by withholding by the employer. Employers are responsible for deducting PPh 21 from employees’ salaries and remitting the withheld tax to the tax authorities (Direktorat Jenderal Pajak).

Annual Tax Return: Employers must issue an annual tax return (SPT Tahunan PPh 21) summarizing the total income tax withheld and paid on behalf of employees.

Payment date

The monthly payment deadline is the 10th of the following month, and the monthly filing deadline is the 20th of the following month.

Starting January 1, 2025, Indonesia’s Directorate General of Taxes (DJP) has implemented a significant change to the monthly payment deadline for Withholding Tax Article 21 (PPh Pasal 21). Taxpayers are now required to remit their PPh 21 payments by the 15th of the following month, an extension from the previous deadline of the 10th.

Employers are required to submit a monthly income tax report (SPT Masa PPh 21) to the tax authorities (Direktorat Jenderal Pajak) detailing the income tax (PPh 21) withheld from employees’ salaries during the reporting period.

Withholding tax article 21 on salary is final and the tax withheld can be claimed as a tax credit in the employee’s annual personal income tax return.

Employers must file an annual income tax return summarizing the total income tax withheld (PPh 21) on behalf of employees for the entire calendar year. The deadline for submitting the annual tax return (SPT Tahunan PPh 21) is usually by the end of March of the following year.

Form 1721 A1/A2 (Income Statement for Employees)

• Employers are obligated to provide each employee with an annual income statement using Form 1721 A1 (for private employees)
• This form details the employee’s total income, deductions, taxable income, and PPh 21 tax withheld during the fiscal year. It serves as proof of income and taxes withheld for employees to use for their own tax reporting (if required).
• Employers must provide Form 1721 A1/A2 to employees no later than January 31st of the following year.

Reporting and Compliance

Employers are required to maintain accurate payroll records and prepare monthly reports detailing income tax deductions, social security contributions, and other relevant payroll information.

Reporting is done electronically through the tax reporting system (e-Filing) and BPJS online platforms.
Compliance with tax and social security regulations is essential to avoid penalties and ensure legal compliance.
Retention Period: While specific mandated retention periods can vary, it is generally recommended to keep payroll and benefits records for at least 10 years for tax and legal compliance purposes.

Mandatory benefits and social security

Social security in Indonesia encompasses various programs aimed at providing social protection and benefits to workers and their families. The main components of social security in Indonesia include the BPJS Ketenagakerjaan (Employment Social Security Agency) and the BPJS Kesehatan (Healthcare and Social Security Agency). Employers have specific obligations related to social security contributions and compliance. Here’s how social security works in Indonesia and the employer’s obligations:

BPJS Kesehatan (Healthcare and Social Security Agency)

Purpose: BPJS Kesehatan provides universal health coverage for Indonesian citizens, including formal sector workers and their dependents.

BPJS Kesehatan Premium 5% (4% paid by employer and 1 % paid by employee) of salary with maximum salary IDR 12.000.000 which mean maximum Premium IDR 600.000 per month

BPJS Ketenagakerjaan (Employment Social Security Agency)

Purpose: BPJS Ketenagakerjaan provides social security coverage for workers against employment-related risks such as work-related accidents, occupational diseases, and old-age benefits.

Employee Retirement Savings (JHT): Accumulates a portion of employee and employer contributions for employees to access upon retirement, resignation, or experiencing certain life events.

Pension Benefits (JP): Provides monthly pension payments after retirement, funded by employer contributions.

Death Benefits (JKM): Provides a lump sum payout to the employee’s family in case of death.

Work Accident Insurance (JKK): Covers medical expenses, disability compensation, and income replacement in case of work-related accidents or illnesses.