The Indonesian Government has recently issued an important government regulation regarding remuneration (Government Regulation No. 78 of 2015 – “Regulation 78”). Regulation 78 aims to create a standard formula for the determination of minimum wages across all regions in Indonesia, and sets out a minimum wage formula in this regard. Regulation 78 also sets out clarifications to wage components and the obligation to pay wages in Rupiah.

Minimum Wages

Regulation 78 provides a formula that must be used in calculating minimum wages – previous regulations did not specify such a formula. The minimum wage is to be determined by the relevant governor by way of a decree or regulation using this formula. Economic growth and inflation rates are used in the formula to determine the minimum wage.

For example, if the 2015 minimum wage in Jakarta is set at IDR 2.7 million, and assuming that the inflation rate stands at 5%, while economic growth is estimated at 5%, then the following year’s minimum wage is calculated using the above formula:

New Minimum Wage = IDR 2,700,000 + [IDR 2,700,000 x (5% + 5%)]

= IDR 2,700,000 + [IDR 2,700,000 x 10 %]

= IDR 2,700,000 + IDR 270,000

= IDR 2,970,000

In practice, the minimum wage may be higher than the above. Although Regulation 78 sets out the applicable formula, Jakarta’s minimum wage for 2016 has been set (at the time of writing) at IDR 3,100,000.

Wage Components

Regulation 78 clearly differentiates between wages and non-wage income. The non-wage income is divided into several forms such as bonuses, facility compensation, and service pay for certain lines of business. Further, Regulation 78 clearly states that a bonus may be given upon company’s profit.

This provision in particular will clarify the common questions in practice on whether bonus must be considered in calculating severance payments in the event of termination.

Obligation to pay wages in Rupiah

Regulation 78 explicitly sets out that any wage payments should be paid in Rupiah currency. However, to date, it is unclear whether this obligation will also extend to expatriates who are hired by or working for foreign investment companies.

Payment of wages in the event of bankruptcy

Adopting Indonesian Constitutional Court Decision No. 67/PUU-XI/2013, Regulation 78 provides that, in the event of bankruptcy, payable wages to employees must be prioritised.

Sanctions

Regulation 78 provides administrative sanctions for non-compliance (i.e. failing pay religious celebration allowances, failing to draft and announce wage scales to employees, failing to pay wages on time, etc.) in the form of written warnings, limitation of business activity, cessation of part of or all production tools, and cessation of business activity. These administrative sanctions replace the criminal sanctions which were previously adopted in past regulations.

Transitional Provisions

Employers who have not yet determined wage scales must determine such wage scales within two years of the enactment of Regulation 78.