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Discontinuing employment

i Dismissal

In general, individual employment terminations or dismissals are regulated under Law No. 13/2003, but the procedure for the termination of an employment relationship is regulated in the Industrial Relations Law.

Law No. 13/2003 provides for two kinds of employment termination:

  1. termination without cause (where the employee is not at fault); and
  2. termination with cause (where the employee is at fault).
Termination without cause

Termination without cause is triggered by the following circumstances:

  1. the employer's change of ownership or change of status, or the employer's merger or consolidation;
  2. the employer closing down owing to continual loss, force majeure or efficiency;
  3. bankruptcy;
  4. the employee's resignation;
  5. the employee's retirement; or
  6. the employee's death.
Termination with cause

Termination with cause is triggered by the following circumstances:

  1. the employee's violation of the employment contract or company regulation; or
  2. the employee's gross wrongdoing or commission of a major fault.

The decision of the Constitutional Court of Indonesia in Case No. 012/PUU-I/2003, dated 26 October 2004, declared the provision in relation to committing a major fault as being in contravention of Article 27(1) of the 1945 Indonesian Constitution, with the result that it is not applicable to an employee's termination.

The subsequent Circular Letter of Manpower Minister No. SE.13/MEN/SJ-HK/I/2005 provides that such termination can only be carried out if a final and binding verdict confirming the employee's wrongdoing has been obtained from a criminal court judge.

All employment termination plans (except where the termination is caused by the resignation of the employee) require the IRC's approval, in the form of a decision. In addition, the employer is obliged to give notification of the termination plan and discuss it with the respective trade union or employee (if the employee is not a member of a trade union, or if there is no trade union in the company). The employee can be rehired by the employer after the employment termination (normally if the termination is without fault).

The labour laws and regulations do not contain a notice period requirement for an employment termination. However, owing to the requirement for prior discussion between parties, mentioned above, in practice one month's notice should be given. However, the employer may pay a certain sum of money in lieu of the notice, as long as it is agreed to by the employee concerned.

Under Law No. 13/2003, employees whose employment is terminated (except in the event the termination is caused by their resignation or commission of a major fault) are eligible for severance pay from the employer. The formula for the severance amount is discussed below.

The often cumbersome and costly procedures for an employment termination have tended to make employers opt for an amicable settlement instead as this is often more advantageous to both the employer and the employee. A mutually agreed, amicable employment termination settlement must be made in the form of a written agreement and the agreement must be registered with the IRC.

ii Redundancies

The labour regulations do not contain provisions on redundancies. As discussed in subsection i, in general, an employer who wishes to terminate the employment of its employees must obtain the approval of the IRC. As such, an employer may terminate an employee's contract by simply giving him or her notice, followed by the procedure for the termination of an employment relationship as regulated in the Industrial Relations Law.

Owing to the absence of specific regulations on these matters, mass lay-offs or collective dismissals are governed under Articles 163 to 165 of Law No. 13/2003 concerning employment termination owing to the employer's merger or acquisition, closing down, downsizing or rationalisation, or bankruptcy. For mass or individual employment terminations, a consultation or discussion with the employee or the trade union is required before the termination.

The termination pay, or severance package, is calculated on the basis of the worker's:

  1. monthly wages;
  2. period of service; and
  3. allowances and benefits, such as leave, medical and housing entitlements.
Severance pay

The formula for severance pay is one month's wages for each year of service with a maximum of nine months' wages. The calculations are outlined in the table below.

Length of serviceSeverance pay
Less than 1 year1 month's wages
1 year or more but less than 2 years2 months' wages
2 years or more but less than 3 years3 months' wages
3 years or more but less than 4 years4 months' wages
4 years or more but less than 5 years5 months' wages
5 years or more but less than 6 years6 months' wages
6 years or more but less than 7 years7 months' wages
7 years or more but less than 8 years8 months' wages
8 years or more9 months' wages
Service appreciation pay (merit allowance)

Service appreciation pay is calculated starting with two months' wages for the first three years of service, followed by an additional one month's wages for every three years of service thereafter, up to a maximum of 10 months' wages for 24 years of service. The calculations are outlined in the table below.

Length of serviceService appreciation pay
3 years or more but less than 6 years2 months' wages
6 years or more but less than 9 years3 months' wages
9 years or more but less than 12 years4 months' wages
12 years or more but less than 15 years5 months' wages
15 years or more but less than 18 years6 months' wages
18 years or more but less than 21 years7 months' wages
21 years or more but less than 24 years8 months' wages
24 years or more10 months' wages
Compensation

Law No. 13/2003 defines compensation as cash compensation for the following benefits and allowances:

  1. annual leave (or long leave) that has not expired and has not been taken: an employee becomes entitled to annual leave after having worked for 12 consecutive months;
  2. relocation expenses: to return the employee and his or her family to the place from which the employee was recruited;
  3. medical and housing allowance: this is stipulated to be 15 per cent of the total severance pay and service appreciation pay, if any;
  4. compensation for other benefits: provided under the respective employment agreement, the company regulations or the collective labour agreement; and
  5. other compensation amounts as determined by the IRC: in general, based on the special arrangements between the employer and employee.
Calculation of severance allowance

For the calculation of severance pay, service appreciation pay and compensation, the monthly wage is defined as:

  1. the basic wage (gross salary);
  2. any kind of allowance granted to the employee and his or her family periodically and regularly; and
  3. the cost price of rations supplied by the employer to the employee free of charge or, if supplied at a discount, the difference between the cost price and the price at discount.
Severance package

The amount and type of severance to be paid to the employee vary, depending upon the basis of the dismissal or termination.

If the dismissal is because of the employee's violation of the terms of the employment agreement, he or she is entitled to the standard severance pay, service appreciation pay and compensation.

If the dismissal is not because of the employee's fault but for other reasons, such as the employee reaching the pension age (where the employer does not include the employee in a pension programme), the employee's death or the employer's rationalisation or redundancy scheme, the employee is entitled to twice the amount of severance pay plus the standard service appreciation pay and compensation.