Indonesia: Update on outsourcing

In our April e-bulletin, we provided an update on recent regulatory developments in Indonesia that limit outsourcing by companies by restricting the occupations in which outsourcing may be implemented. Here we consider how Ministry of Manpower Regulation 19 of 2012 (Regulation 19) restricts companies outsourcing and subcontracting parts of their activities.

Regulation 19 sets out the general principle that only activities which are not “core” activities of a company in Indonesia may be contracted out to a third party service provider. Regulation 19 does not provide any definition of “core” activities; rather it states that each relevant industry association must prepare a flowchart showing the “core” business activities in the relevant industry. To date, we are not aware of any such industry flowcharts having been issued. If a broad view of what constitutes “core” activities is taken, a company would only be permitted to outsource a very limited number of internal functions.

The Indonesia Outsourcing Association (ABADI) has recently lodged a judicial review application against Regulation 19 and employers are hopeful that the outcome of this case may provide further clarity on its application.

Outsourcing service contracts must be registered with the Ministry of Manpower.

Action for employers

We encourage companies in Indonesia to consider whether their current outsourcing or subcontracting of functions may be contrary to the new rules and to provide input to their relevant industry associations in preparing the flowchart for core/non-core activities.

Article written by David Dawborn, Partner and Narendra Adiyasa, Senior Associate at HBT, Jakarta.