Indonesia Employment Law Update: New Supreme Court Guidance on Compensation Pay and Balance of Contract Pay for Fixed-Term Employees

On 29 December 2023, the Supreme Court issued a circular letter that employers in Indonesia should take note of, as it concerns compensation pay and balance of contract pay for fixed-term employees.

Circular Letter No. 3 Year 2023 concerning the Implementation of the 2023 Supreme Court Meeting as a Guideline for the Role of Indonesian Courts (“SEMA No. 3”) is addressed to the heads of all district courts and courts of appeal in Indonesia.

This 12-page document contains new policies to be applied by courts in Indonesia when handling criminal, civil, religious, and military matters. It also contains a section on Labor Court policies, in particular, the issues of compensation pay and balance of contract pay for fixed-term employees.

Balance of Contract Pay

Under Article 62 of the Indonesian Manpower Law as amended, the balance of the contract must be paid to fixed-term employees who are terminated before the end of their fixed-term employment agreement.

The requirement to pay the balance of the contract is waived if the employment agreement is terminated:

1. because the employee passes away;
2. the terms of the employment agreement expire;
3. upon completion of a certain work;
4. upon a court decision and/or decision by the Labor Court or Supreme Court that is final and binding; or
5. upon a certain occurrence or situation as stated in the employment agreement, company regulation, or collective labor agreement that results in the termination of the employment relationship.

Compensation Pay

Under Article 61 (A) of the Manpower Law as amended, in the event a fixed-term employment agreement expires (i.e., the terms of the employment agreement expire or upon completion of a certain work), the employer must provide compensation pay to the employee.

This compensation pay is calculated as follows:

This compensation pay does not apply to foreign employees, according to Article 15 (5) of Government Regulation No. 35 Year 2021 (“GR 35”).

Further, according to Article 17 of GR 35, if one of the parties terminates the employment relationship before the termination period that is specified in the fixed-term employment agreement, the employer must provide compensation pay, the amount of which shall be calculated based on the fixed-term employment agreement period that has been completed by the employee.

Fixed-Term Employees and SEMA No. 3

In practice, many Indonesian fixed-term employees are terminated before their contract / fixed-term ends. At the same time, many employers do not pay (i) compensation pay for the service period completed or (ii) payment for the remainder of the agreed contract (balance of contract pay).

We believe this is the result of not reading the Manpower Law as amended and its implementing regulations carefully.

In SEMA No. 3, the Supreme Court’s issued policy for Labor Courts is as follows:

In Bahasa Indonesia:

Pekerja/buruh yang bekerja berdasarkan Perjanjian Kerja Waktu Tertentu (PKWT) dan diputus hubungan kerjanya sebelum jangka waktu berlakunya PKWT berakhir, berhak mendapatkan uang ganti rugi dan uang kompensasi dengan memperhatikan jangka waktu PKWT yang telah dijalaninya (vide: Pasal 62 Undang-Undang Nomor 13 Tahun 2003 juncto Pasal 17 Peraturan Pemerintah Nomor 35 Tahun 2021).

English translation:

Employees who work based on a fixed-term employment agreement (“PKWT”) and whose employment relationship is terminated before the period of the PKWT ends have the right to receive balance of contract pay and compensation pay taking into account the PKWT period they have served (vide: Article 62 of the Manpower Law as amended in conjunction with Article 17 of Government Regulation No. 35 Year 2021).

Conclusion

SEMA No. 3 was issued to provide legal certainty that fixed-term employees may receive balance of contract pay and compensation pay even if terminated before the end of their contract, subject to Article 62 of the Manpower Law as amended in conjunction with Article 17 of GR 35.

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