Yes, but they must comply with local labor law and work with licensed local providers
Outsourcing has become a widely adopted strategy for companies seeking operational efficiency and cost reduction. In Indonesia, outsourcing arrangements are common — but often misunderstood. For foreign and domestic companies alike, outsourcing may seem like a straightforward solution, but beneath the surface lie several legal and regulatory complexities that, if not addressed properly, can expose businesses to serious compliance risks. Failure to comply with Indonesian labor and outsourcing regulations can lead to severe penalties, contract disputes, and reputational damage. Thus, understanding these “hidden traps” is crucial for any company considering or currently engaging in outsourcing activities.
Crucially, these regulations aim to provide legal certainty for all parties—employers, outsourcing providers, and outsourced workers—while promoting business flexibility.
Despite regulatory efforts, several “traps” can ensnare unsuspecting companies:
Some companies are unable to distinguish between direct and indirect outsourced concept. Direct outsourced is a concept where the contract of the employee is under the company itself, while indirect outsourced the contract of the employee is under the outsourcing company. Direct outsourced most likely used for core position and indirect outsourced most likely used for non-core position.
It is of course the scheme, rights, and obligation between both concepts are different. Understand both concepts will make your company avoid unnecessary costs and make the environment of industrial relation fairer for both the employee and the employer.
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Many outsourcing arrangements in Indonesia are vulnerable to disputes due to weak contractual structures or failure to adhere to employment compliance norms. Common issues include:
Labor unions are increasingly scrutinizing outsourcing practices, especially in sectors where outsourced employees operate side-by-side with permanent employees.
Transfer of Undertaking Protection of Employment (TUPE) Clauses: The Job Creation Law and GR No. 35/2021 emphasize job security for outsourced workers. In cases where an outsourcing contract changes providers, the new outsourcing company must continue the existing employment agreements without interruption, often requiring TUPE clauses to protect worker continuity. Neglecting this can result in legal claims.
The legal onus isn’t solely on the client company. The outsourcing provider itself must be a legally established entity with the appropriate business licenses and a track record of compliance with Indonesian labor laws. Partnering with an unverified provider is a major risk.
It is also included data privacy and confidentiality while outsourcing functions involving sensitive data, companies must ensure that the outsourcing provider adheres to Indonesia’s data privacy regulations. Breaches can lead to reputational damage and legal penalties.
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The Indonesian government continues to reform labor regulations, especially following the Constitutional Court’s review of the Omnibus Law. With increasing focus on worker protection and fair employment practices, companies should anticipate stricter enforcement on outsourcing violations.
Moreover, regulatory authorities are expected to introduce digital supervision systems and more stringent licensing reviews. Businesses that proactively adapt to these changes and maintain high compliance standards will enjoy greater legal certainty and reputational advantage in Indonesia’s competitive labor market.
At Kusuma & Partners, we have assisted multinational companies, local enterprises, and joint ventures in navigating Indonesia’s complex outsourcing landscape. Our team understands that outsourcing is not merely an operational decision—it is a strategic legal move that must be underpinned by a strong compliance framework and risk mitigation plan.
We recognize that many companies face uncertainty in differentiating between direct and indirect outsourcing, interpreting TUPE obligations, and drafting contracts that fully comply with Law No. 13 of 2003, the Job Creation Law, and relevant Manpower Regulations.
Our legal team offers:
Outsourcing in Indonesia offers significant cost and efficiency benefits, but non-compliance can be costly. Companies must navigate labor laws carefully, engage only licensed providers, and ensure fair treatment of outsourced workers. Companies — particularly foreign investors and multinational groups — must take a strategic, well-advised approach to outsourcing, grounded in a strong understanding of Indonesian labor law and regulatory frameworks.
Our firm specializes in Labor and Employment Law, ensuring full compliance with Indonesian regulations. We provide strategic legal guidance, manage regulatory approvals, and protect our client’s interests at every stage. With extensive experience in Labor and Employment Law, we ensure a compliance, harmonize labor relation, and efficient action.
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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 with us.”
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