Fixed-term or permanent employment in Indonesia
A fixed-term contract here is capped at five years in total, counting every extension. Past that it converts to permanent employment with seniority backdated to day one, so the term you expect a role to run is worth deciding before you make the first offer.
We employ every one of our clients' staff on a fixed-term contract, a PKWT (Perjanjian Kerja Waktu Tertentu), normally for one or two years at a time. That is a deliberate choice with a hard ceiling attached to it, and the ceiling is the thing to plan around before you make your first offer.
The limit is five years, and it is measured in time
Article 8 of PP No. 35 of 2021 sets a maximum total duration of five years for a time-based PKWT. Where the work is unfinished as a term expires, the contract may be extended by agreement, and the number of extensions is not capped. What is capped is the total: the original term plus every extension together cannot exceed five years.
That distinction matters as soon as you start planning a term. One-year contracts give you five successive terms, and two-year contracts give you two plus two plus a final year. Either shape reaches the same wall at the same moment, so choosing between them is a question of administrative rhythm and review points, with no effect at all on how long you can keep somebody on fixed terms.
PP 35/2021 also removed the older concept of renewing a contract after a break in service. The regulation now recognises only the making of a PKWT and the extension of one, so a gap in employment no longer resets any clock.
Past five years the contract must convert to permanent employment, a PKWTT (Perjanjian Kerja Waktu Tidak Tertentu), and Article 8(3) is the part that catches people out: the employee's length of service is counted from the start of the original fixed-term relationship, so conversion begins no new clock of its own. Somebody converting after five years arrives as a permanent employee with five years of accrued seniority, which drives every severance calculation from that day forward.
Why we do not employ permanently
Ending a permanent contract in Indonesia requires one of the grounds set out in PP 35/2021 together with the statutory severance package. There is no termination for convenience, so the fact that a client no longer wants a role filled is not by itself a lawful basis for ending somebody's employment.
That leaves an Employer of Record holding a permanent employee it has no mechanism to release when the client's engagement ends. We would be carrying an open-ended obligation on behalf of a company that has stopped paying us for it. A fixed-term contract ends on its own terms, and both sides can see the date from the beginning.
The consequence for you follows directly from that constraint on us. If your Indonesian team is a permanent part of how your business operates and you expect those people to stay beyond five years, an Employer of Record is a way to start and not a destination. Our guide on incorporating covers the alternative, and transferring employees from us into your own entity preserves their continuity of service.
Three rules that catch people out
A PKWT cannot carry a probation period. Article 12 of PP 35/2021 makes any probation clause in a fixed-term contract void by operation of law, and the time worked still counts as service. Companies used to a three-month probation on every hire find this counter-intuitive, and writing one in achieves nothing except a defective contract.
A PKWT may only be used for work that is not permanent in nature. Article 4(2) prohibits it for permanent work, and Article 5(1) sets out what qualifies: work expected to be completed within a period that is not too long, seasonal work, or work connected to a new product, a new activity or an additional product still in trial. A contract that fails those tests can be treated as permanent from the outset, which is the same exposure as running past five years. This is the one area where we take Indonesian legal advice on how a role is characterised, and we will tell you if a brief looks difficult to fit.
Every PKWT must be in writing and registered with the labour authorities, online within three working days of signing, or in writing with the district office within seven where the online system is unavailable. We handle the registration, and it is one of the reasons a contract cannot be backdated to suit a start date.
What is owed at the end of a term
Statutory severance applies to permanent contracts and a fixed-term one attracts none of it. What a PKWT carries instead is uang kompensasi, set out in Articles 15 and 16 of PP 35/2021, at one month of wages for each twelve months of service and pro-rated below that. Anybody with at least one month of continuous service qualifies.
Article 15(2) makes it payable at the end of the PKWT, and the regulation's own explanatory note defines that as the moment the term expires or the work finishes. It falls due on ordinary expiry, so it is a cost of every year of employment and not a contingency.
Article 15(4) requires it at the end of the term preceding an extension and again at the end of the extension itself, and the payments cannot be rolled up and settled once at the finish. A five-year engagement built from one-year terms therefore produces five separate payments. Under Article 17, where either party ends the relationship before the agreed date, the employer still owes it on the period actually served, so an early exit changes the amount and never the obligation.
Two exceptions apply. It does not reach foreign nationals employed on a PKWT, and converting somebody to permanent employment during a live term triggers nothing at that moment, because the relationship never breaks and their service accumulates into the permanent contract.
All of it sits inside the figures on our cost tables, so the annual cost you see already carries it.
How to contract for the term you expect
Work backwards from how long you think the role will exist. An engagement you expect to last two or three years fits comfortably inside a fixed-term structure and needs no more thought than choosing the review points you want.
An engagement you expect to outlast five years needs a decision before year five, and making it in year four beats making it in month fifty-eight. Either the employee converts to permanent, which means somebody has to be willing to hold that obligation and it will not be us, or the employment transfers to an entity of your own. Both routes work perfectly well and both of them take planning.
Everything here is general information about how the framework operates. Individual contracts turn on their own facts and you should take Indonesian legal advice on any specific arrangement. Tell us the expected term when you brief a role and we will contract it to fit.
