Employment in Indonesia: Types and Regulations

The landscape of Employment in Indonesia is governed by key labor laws, including Law No. 13 of 2003 on Manpower, Government Regulation No. 35 of 2021, and amendments introduced by the Job Creation Law (UU Cipta Kerja) No. 6 of 2023. These laws define various types of employment relationships, each with its own rights, obligations, and legal implications. Employers must understand Employment in Indonesia to ensure compliance, minimize labor disputes, and fostering positive workplace dynamics. Similarly, employees benefit from knowing their rights and entitlements under each category. This article provides an in-depth exploration of the diverse the types of employment in Indonesia, highlighting their legal nuances and practical implications.

The Main Types of Employment in Indonesia

Under Indonesia legal system, Indonesian labor laws differentiate between two main types of Employment in Indonesia: Permanent Employment (PKWTT) and Fixed-Term Employment (PKWT).

1. Permanent Employment (PKWTT – Perjanjian Kerja Waktu Tidak Tertentu)

A Permanent Employment Agreement (PKWTT) is indefinite-term contract that does not have a fixed expiration date. It is typically used for positions that are part of a company’s core business operations. Employees under PKWTT contracts enjoy the full employee benefits and are entitled to:

• Severance pay if terminated.
• Health and social security benefits as mandated by BPJS Kesehatan and BPJS Ketenagakerjaan.
• Career development opportunities within the company.
• Religious holiday allowance (THR).
• Termination protections, requiring employers to follow strict legal procedures before dismissing employees.

PKWTT contracts can be in written or verbal form, but written contracts are strongly recommended to avoid legal disputes.

2. Fixed-Term Employment (PKWT – Perjanjian Kerja Waktu Tertentu)

Fixed-Term Employment Agreement (PKWT) is a contract-based employment with limited tenure and specific conditions. Under Government Regulation No. 35 of 2021, PKWT contracts are subject to the following conditions:

• They can be established for a maximum of five years, including contract extensions.
• Employees are entitled to compensation when their contract ends, even if it is not renewed.
• Health and social security benefits as mandated by BPJS Kesehatan and BPJS Ketenagakerjaan.
• Entitled for Religious holiday allowance (THR) based on the working period.
• PKWT is commonly used for seasonal work, short-term projects, or specialized roles.
• Unlike PKWTT employees, PKWT employees are not entitled to severance pay upon contract expiration.

Employers must register PKWT contracts with the manpower institution to ensure compliance.

Read more our article: THR Payment Indonesia: Employer Guide to Rules, Calculation & Compliance

Others Types of Employment in Indonesia

1. Outsourcing (Alih Daya)

Outsourcing allows companies to engage third-party service providers. It is usually use to make a company grow faster in term of business strategy while the employees protection will be ensured and taken care by the outsourcing company. According to the Job Creation Law, outsourcing agreements must meet the following criteria:

• Employees remain under the employment of the outsourcing company, or could be adjustable under the client company.
• The outsourcing company is responsible to ensure salary payments, benefits, and employee protections.
• Employees must receive BPJS social security and other labor rights as per legal requirements.
• New provisions under Job Creation Law also provide more certainty related to the protection of employees right which is the protection guaranteed by the outsourcing company.

Improperly structured outsourcing arrangements can result in legal disputes, where employees demand recognition as direct employees of the hiring company.

2. Daily Employee

Daily employees are hired on a day-to-day basis, typically for manual or unskilled labor. This category includes:

• Employees are usually paid at the end of each working day or could be adjustable based on both parties (employer and employee) agreement under the employment agreement.
• Daily employees are entitled to the same benefits as contract employees including compensation based on their period of works.
• Employees usually works under one company.

While cost-effective for businesses, the use of daily employees must be carefully managed to avoid legal pitfalls.

3. Freelance

Freelancers work on a project basis. It is actually almost same with a concept of daily employees but not limited in a company. They could work with more than one company as e freelancer. Unlike others concept of employees, freelancers:

• Have no fixed working hours and can take multiple projects from different clients.
• Are not entitled to severance pay, job security, or employee benefits.
• Typically work under a service agreement (perjanjian jasa) rather than a labor contract. However it still possible to use contract agreement following applicable labor law in Indonesia.
• Must handle their own tax and social security contributions independently.

Freelancing is increasingly popular in creative industries, IT, content creation, and consulting services. However, companies hiring freelancers should ensure clear contract terms to avoid potential misclassification disputes.

3. Part Time Employment

Part-time employees work fewer hours than full-time employees and are often hired to meet specific business needs. Key aspects include:

• Part-time employees typically work less than 40 hours per week.
• They are entitled to pro-rated benefits, including social security and THR, based on their working hours.
• This arrangement benefits both employers and employees, offering cost savings for businesses and work-life balance for employees.

4. Remote Work

With the rise of digital technology, remote work has become increasingly common in Indonesia. While not explicitly regulated under labor law, remote work arrangements should be formalized through employment contracts or company policies. It is possible to use whether Permanent Agreement or Contract Agreement. Considerations include:

• Clear guidelines on working hours and availability.
• Remote employees are entitled to the same benefits as in-office employees.
• Employers may provide tools and reimbursement for work-related expenses.

Remote work offers flexibility and access to a broader talent pool but requires robust communication and management systems.

5. Internship

An internship program is a structured training arrangement where individuals develop job skills within a company. It was regulated by Minister of Manpower Regulation No. 36 of 2016 until now is revoked and substituted by Minister of Manpower Regulation No. 6 of 2020, which states that:

• Internship are not classified as employees but must receive a training certificate.
• Companies must provide allowances, though they are not obligated to provide full salaries.
• Companies must make internship agreement with internee to protect the internee rights.
• The program duration must be specified, the longest duration is twelve months.
• Companies whose implement internship have obligation to report the result of internship to the manpower institution and the amount of internee not more than 20% from total amount of employees in a company.

Internship benefit both employers and trainees by fostering skill development and workforce readiness.

6. Business Partnership (Kemitraan)

Certain businesses, such as ride-hailing platforms, online marketplaces, and retail franchises, engage employees as business partners rather than employees. This setup differs from traditional employment because:

• Partners are self-employed and generate income based on commission or revenue-sharing agreements.
• They do not receive fixed salaries, employee benefits, or labor law protections.
• Companies usually provide business support, such as branding, technology access, and operational guidance.
• Because of Business Partnership is differs from others employees which is define in labor law, the concept of works shall be different.

For Business Partnership model, we suggest you to consult with the legal expert to determine what kind of works that suitable with this concept. It is also to ensure that your company will comply with the applicable laws in Indonesia.

Key Considerations for Employers

When hiring employees under any type of Employment in Indonesia, companies must ensure:

• Compliance with Indonesian labor laws to prevent disputes or penalties.
• Properly structured contract that outline rights, obligations, and dispute resolution mechanisms.
• Clear distinction between employment and partnership models to avoid legal misclassification.
• Know ABC of the right and obligation as an employer to comply with Indonesian legal system.

Kusuma & Partners assists you with comprehensive consultation related to Labor & Employment in Indonesia, ensuring legal interests while complying with all legal requirements.

Conclusion

Understanding Employment Regulations in Indonesia is essential for businesses to maintain legal compliance, operational efficiency, and workforce stability. By choosing the right type of employment contract, employers can optimize labor costs while protecting employees rights.

For professional legal assistance with Labor & Employment in Indonesia, contact us today.

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“DISCLAIMER: This content is intended for general informational purposes only and should not be treated as legal advice. For professional advice, please consult us.