INDONESIA: KEY EMPLOYMENT ISSUES WHEN HIRING AN EMPLOYEE WITHOUT A LOCAL ENTITY

It is theoretically possible for a foreign entity to engage an employee to perform work in Indonesia. While the employment will generally be subject to employment laws in Indonesia, the specific circumstances of the engagement will determine that. This update sets out the key employment issues to consider.

Whether Indonesian employment law applies to the employment relationship

Indonesia’s primary employment legislation, Law No. 13 of 2003 on Manpower (as amended by Government Regulation In Lieu of Law No. 2 of 2022), defines an "employment relationship" as a relationship between an employer and an employee based on an employment agreement. Depending on the specific arrangements in place (including where the employing entity is registered, the nature of work the individual performs and where this work occurs), Indonesian employment law generally applies to all individuals working in Indonesia, including foreign employees.^[1]

If Indonesian employment law applies, the employer must ensure that it complies with the minimum statutory requirements. These include minimum wage, religious holiday allowances, social security (Badan Penyelenggara Jaminan Sosial or BPJS), working hours, overtime, annual leave, sick leave, maternity leave and all other types of statutory leave, public holidays, and termination payments.

As regards BPJS, it is unclear whether BPJS contributions from an overseas entity without a presence in Indonesia can be accommodated. In practice, a local payroll provider may need to be engaged to deal with payroll and BPJS matters.

However, as the employing entity is based overseas, there is a risk that the employment laws in the jurisdiction where the employing entity operates will apply in addition to the Indonesian employment laws. This would mean that the employee may claim benefits and entitlements under Indonesian law and under the foreign law. Risks may be minimised by clearly stating in the employment contract that (i) Indonesian law governs the employment relationship, (ii) the employee’s place of work is in Indonesia, and (iii) the employee is only required to perform Indonesia-related work.

Considerations for foreign employees

Employees must have the right to live and work in Indonesia in accordance with the employment and immigration laws. If they are Indonesian citizens and/or already have the right to work in Indonesia, this issue falls away. Foreign nationals will need to obtain the right to live and work in Indonesia before the employment may commence. This may be difficult when the employer does not have a local entity since the work permit application requires a local sponsor.

Key Takeaways

When considering hiring an employee in Indonesia without a local entity, employers should consider these key issues:

• whether Indonesian employment law applies;
• whether the employment arrangement complies with statutory requirements under Indonesian law; and
• immigration considerations for foreign nationals.

Business registration, tax and other corporate and regulatory issues may arise, depending on the specific arrangements in place. That all falls outside the scope of this article.

If compliance with Indonesian employment law poses an issue, an alternative arrangement may be to engage the individuals in an independent contracting arrangement, but this may only be suitable for individuals who already have the right to work and live in Indonesia.

^[1] There may be exceptions. For instance, the Indonesia’s Supreme Court in Case No. 214K/Pdt.Sus-PHI/2020 found that, on the specific facts of that case, the secondees (who were Australian) were properly employed (and paid a salary) by the Australian home entity based on an international employment contract, and were assigned to provide services through a secondment arrangement to the Indonesian entity. The court found that the employment relationship was governed by Australian law, and that the Indonesian Industrial Relations Court therefore had no jurisdiction over a claim brought by the secondees over their entitlements to termination pay upon termination of the secondment.