Speech by Lia Alizia, Partner at Makarim & Taira S., given in Labour Law Seminar held by Legal Plus Sdn. Bhd (www.legalplus.com.my) on Apr 10, 2015.

1. Challenges Encountered with Indonesia’s
Rules and Requirements for Terminations
of Employment
Labor Conference Law, 9-10 April 2015
Kuala Lumpur
by:
Lia Alizia
Partner, Makarim & Taira S.

2. I. Laws and Their Changes
1. Law No. 13 of 2003 on Manpower (“Manpower Law”);
2. Law No. 2 of 2004 on The Settlement of Industrial
Relations Disputes (“Law 2/2004”);
3. The Constitutional Court’s 2004 verdict invalidated
Article 158 (and other relevant articles). Employers
may not terminate employees forthwith for serious
misconduct ("for cause");

3. 4. The Constitutional Court’s 2012 verdict invalidated
Article 164 (3) of the Manpower Law. Employers may
only terminate employees if the company is closing
down permanently (not temporarily);
5. The Constitutional Court’s 2012 verdict invalidated
Article 169 (1) c of the Manpower Law. Employees may
apply for termination of employment if their employer
does not pay their salary on time for 3 consecutive
months, even if the employer then pays on time.

4. II. Principles in Termination of Employment
1. Terminations should be prevented and are prohibited in
some cases. Termination should be for a reason deemed
acceptable under the Manpower Law;
2. Termination procedures under Law No. 2 of 2004 must be
followed;
3. The company/employer must first obtain approval from the
Industrial Relations Court unless the employer and
employee enter into a mutual termination agreement
(“MTA”) which should then be registered with the Industrial
Relations Court. Unilateral termination of employment is not
allowed. If a party does not perform, the other party to the
MTA may apply to the Industrial Relations Court for a writ of
execution.

5. III. Types of Termination of Employment and
Changes to the Termination Articles and
Provisions of the Manpower Law
A. Termination for Minor Mistakes
If an employee commits an offence under the
employment agreement, Company Regulations (“CR”)
or CLA (“Collective Labor Agreement”), before
terminating him/her, the employer must issue 3
consecutive warning letters unless stated otherwise in
the employment agreement, CR or CLA. For example:
poor performance, tardiness, etc.

6. B. Termination for Major Mistakes (serious misconduct
/cause)
Article 158 and other relevant articles on serious misconduct
were revoked by the Constitutional Court in 2004. Employers
can no longer immediately terminate employees without
approval from the Industrial Relations Court for serious
misconduct because Article 158 defines it as criminal
conduct; therefore, a court's guilty verdict is required.
The Minister of Manpower and Transmigration (“MOM”) has
issued 2 circular letters ie. Circular Letter No.SE-13/MEN/SJ-
HK/I/2005 and Circular Letter No. B. 33/D-PHI/2-V/2005
which clarify terminations of employment for cause. If 'for
cause' is changed to “for urgent reasons” termination is
permissible. These urgent reasons are listed in Article 1603 o.
of the Indonesian Civil Code. But the termination procedures
as provided in Law No. 2 of 2004 should be followed.

7. C. Termination for Financial Reasons under the
Manpower Law
1. Termination due to a change of status, merger,
consolidation, acquisition/change of company
ownership;
2. If the employer becomes insolvent;
3. If the employer has suffered continuous losses for 2
consecutive years as proved by its public accountant
audited financial reports for the last 2 years;
4. For redundancy (but Article 164 (3) on this matter was
revoked by the 2012 Constitutional Court Ruling);
5. Other reasons for termination:
i. Force majeure;
ii. The demise of the employee;
iii. The retirement of the employee;

8. iv. Termination because the employee has been ill for 12
consecutive months, as certified by a doctor;
v. Termination because the employee has been
detained for more than 6 months for an alleged crime
or has been found guilty by a criminal court;
vi. Termination for being absent for 5 days without leave,
without prior notification, with a proper summons
having been served twice (2x) by the employer;
vii. The employee terminates the employment due to the
employer's:
a. abuse, severe insult or threat against the
employee;
b. persuading or directing the employee to engage in
unlawful conduct;

9. c. failure to pay the agreed salary on time for 3 months;
in relation to the Constitutional Court’s 2012 verdict
invalidated Article 169 (1) c.: employees may apply
for termination of employment if their employer does
not pay their salary on time for 3 consecutive months,
even if the employer then pays on time;
d. failure to comply with its obligations to the employee;
e. directing the employee to do work beyond the agreed
term; or
f. forcing the employee to do work which is harmful to
the employer’s life, safety, health or decency while
that type of work is not described in the employment
agreement.

10. Practical problems with implementing provisions
of the Manpower Law:
a. few provisions are not clear and are open to
interpretation;
b. every MOM official applies his/her own policy;
c. lack of knowledge of MOM officials, especially those in
the remote areas;
d. different policies applied by different MOM officials to
terminations of employment.

11. IV. Preparation for a Termination of
Employment
A. Negotiations in bipartite meetings
For up to 30 working days as of the
commencement of the negotiations. (ie the
first bipartite meeting)
B. Mediation or Conciliation (tripartite
meetings)
For mediation, up to 30 working days.

12. Practical problems in bipartite meetings/mediation:
a. the employee does not show up despite proper invitations
from the employer;
b. the employee refuses to sign the minutes;
c. the employee does not come to work without notice;
d. the employee induces other employees to take action, eg
strike, demo;
e. the employee does not return the employer’s property until
the dispute is settled;
f. the employee may demand far more than the legal minimum
to settle the termination amicably;
g. the employee may object to his/her suspension.

13. C. Industrial Relations Court
a. The panel of judges should issue its ruling
within 50 working days of the first hearing. If
either party does not accept the decision, it may
appeal to the Supreme Court.
b. An injunction can be sought before a ruling is
issued the employer pays no salary until the
termination dispute is settled.
D. Appeal to the Supreme Court
Within 30 working days of receipt of the appeal.

14. Practical problems with legal proceedings in the
Courts:
a. strict evidentiary requirements for Court action;
b. judges have their own interpretations of or views on serious
misconduct;
c. the employee may resort to other actions to try to get the
employer to drop the case;
d. the courts often fail to meet the deadline due to the backlog
of cases;
e. corruption is still a major concern in litigation in Indonesia;
f. the employee still has to be paid during the termination
process which increases the cost of termination.

15. V. Calculation of Severance Pay, the Service Period
Recognition Payment and Compensation
Severance Pay
Service period less than 1 year 1 month's salary
Service period 1 year or more but less than 2 years 2 months' salary
Service period 2 years or more but less than 3 years 3 months' salary
Service period 3 years or more but less than 4 years 4 months' salary
Service period 4 years or more but less than 5 years 5 months' salary
Service period 5 years or more but less than 6 years 6 months' salary
Service period 6 years or more but less than 7 years 7 months' salary
Service period 7 years or more but less than 8 years 8 months' salary
Service period 8 years or more 9 months' salary

16. "Long" Service Pay (Service Period Recognition
Payment)
Service period 3 years or more but less than 6 years 2 months' salary
Service period 6 years or more but less than 9 years 3 months' salary
Service period 9 years or more but less than 12 years 4 months' salary
Service period 12 years or more but less than 15 years 5 months' salary
Service period 15 years or more but less than 18 years 6 months' salary
Service period 18 years or more but less than 21 years 7 months' salary
Service period 21 years or more but less than 24 years 8 months' salary
Service period 24 years or more 10 months' salary

17. Compensation
1. Untaken annual leave that not yet forfeited;
2. Transportation costs for the Employee and his/her
immediate family back to the place of recruitment, if
applicable;
3. Housing, medical treatment and medication allowance
equal to 15% of the Severance Pay and Service Period
Recognition Payment if the Service period fulfills the
requirement;
4. Other matters specified in the employment agreement,
CR or CLA.
“Salary” for calculating the employee's entitlements
consists of the basic salary plus permanent and regular
fixed allowances and includes the value of any benefits
(e.g. uniforms) provided free of charge.

18. Reason for Termination Manpower Law
Article
Entitlement
Serious mistakes (revoked by the Constitutional Court through its ruling
in 2004)
158 (3) + 156 (4) COMP
Serious mistakes but the Employee’s function does not directly
represent the Employer’s interest (Non-Staff) (see above)
158 (4) + 156 (4) SEP AS PER EA, CR OR CLA + COMP
Criminal action against the Employee + guilty/6 months inability to work
properly
160 (7) SPR + COMP
Minor mistakes, etc. 161 (3) SEVE + SPR + COMP
Voluntary resignation 162 (1) COMP
Voluntary resignation but the Employee’s function does not directly
represent Employer’s interest (Non-Staff)
162 (2) SEP AS PER EA, CR OR CLA + COMP
Change of, status, ownership, a merger etc. and the Employee
terminates
163 (1) SEVE + SPR + COMP
Change of status, ownership, a merger etc. and the Employer
terminates
163 (2) 2 X SEVE + SPR + COMP
Employer closes down due to continuous losses or force majeure. 164 (1) SEVE + SPR + COMP
Efficiency/redundancy/downsizing (revoked by the Constitutional Court
through its ruling in 2012)
164 (3) 2 X SEVE + SPR + COMP
Employer’s bankruptcy 165 SEVE + SPR + COMP
Death of employee 166 2 X SEVE + SPR + COMP
Retirement age (ie 55 years old) 167 2 X SEVE + SPR + COMP (if no pension
program is provided)
Employee absent for 5 days (Staff & Non-Staff) 168 (3) SEP AS PER EA, CR OR CLA + COMP
Employer’s actions – guilty 169 (2) 2 X SEVE + SPR + COMP
Employer’s actions – not guilty 169 (3) COMP
Long-term illness of Employee 172 2 X SEVE + 2 X SPR + COMP
SEP = separation money (uang pisah) EA = employment agreement
SEVE = severance payment CR = company regulation
SPR = service period recognition CLA = collective labor agreement
COMP = compensation

19. VI. Preparations before Taking any
Disciplinary Action
1. Collect and review evidence or documents indicating the
minor violations.
2. Check any legal basis and violations committed under the
employment contract, CR or CLA.
3. Ensure proper warning letter is drafted and issued properly.
4. Prepare arguments to rebut arguments presented by the
employee.
5. Decide the timing and at least 2 company representatives
serving the warning letter to the employee. No expatriate
should be involved.
6. Prepare for worst case scenario, e.g. employee files a claim
to MOM.

20. VII. Highlighted Issues When the Company
Serves a Warning Letter to the Employee
1. Explain the purpose of the warning issued to the employee
and the legal basis.
2. Explain the company’s expectations and make sure the
employee understands.
3. Present any document or evidence describing or evidencing
the violations.
4. Give employee opportunity to respond to charge.
5. Ask Employee to sign warning letter as acknowledgment.
6. Prepare minutes of discussions during meeting for records.

21. VIII. Post Disciplinary Action
1. Closely monitor the development or progress of the
Employee.
2. Regularly document both good and bad performance.
3. Regular performance evaluations should be fair and
honest.
4. As soon as a performance or discipline problem occurs,
start documenting your communications with the
Employee.
5. A progressive disciplinary procedure is best: oral
warnings, written warnings that the job is in jeopardy
and then if necessary, termination.
6. Inform the Employee that his/her job is in jeopardy in
writing.

22. IX. Planning Terminations of Employment
1. Consult HR and the Law before taking any action.
2. Do you have clear and sufficient grounds for
termination? If not, a mutual termination agreement is
the best option.
3. Collect and review all evidence.
4. Is any internal investigation required?
5. Avoid using the resignation procedure. Why?
6. The criteria for dismissing an employee must be clear.
7. Follow the termination procedure by the book.

23. 8. Consult the local MOM on its policy.
9. Offer at least the termination package required
under the prevailing laws.
10. Prepare for a worst case scenario, e.g. a civil
lawsuit filed by the employee(s).
11. Are your manpower permits and licenses valid and
complete?
12. Do you have any irregularities (tax, immigration,
etc.) which the employee(s) may know about and
could exploit?

24. X. Practical Common Errors in Drafting
Employment Contract
1. A clause allowing termination by notice or salary in lieu of notice is not
permitted in Indonesia;
2. Copying from Foreign Law Contracts, eg garden leave;
3. Lack of knowledge: severance and entitlements: incorrect calculation;
4. Not including the legally required provisions, eg. type of work for a
fixed term employment;
5. Renewable probation periods;
6. Not linking contract to Codes, Policies, etc;
7. Language and governing law;
8. Illegal fixed term employment;
9. Referring to a specific law, eg Article 1266 of the Indonesian Civil
Code;
10. Not updating contracts from time to time.