Terminating an employee in Indonesia
There is no lawful termination here that involves paying somebody until Friday and wishing them well. Severance is set by statute, scales with service, and is multiplied by a factor that depends on the ground you rely on.
Ending an employment relationship in Indonesia costs money by default, and the amount is set by statute and your contract can only raise it. Companies arriving from at-will jurisdictions get caught by this hardest, because there is no version of a lawful termination here that involves paying somebody until Friday and wishing them well.
The framework is PP No. 35 of 2021, implementing the Job Creation Law. It sets out which grounds are valid, what process you must follow, and what you owe on the way out. Getting the process wrong costs more than the payment itself, because a termination found to be invalid can mean reinstatement with back pay.
The three payments
Severance pay (uang pesangon) is the first component and it scales with length of service, running from one month of wages below a year of service up to a maximum of nine months at eight years or more. The basic pattern is one additional month for each completed year until the ceiling.
| Completed service | Severance |
|---|---|
| Under 1 year | 1 month |
| 1 to under 2 years | 2 months |
| 2 to under 3 years | 3 months |
| 3 to under 4 years | 4 months |
| 4 to under 5 years | 5 months |
| 5 to under 6 years | 6 months |
| 6 to under 7 years | 7 months |
| 7 to under 8 years | 8 months |
| 8 years or more | 9 months |
Long service pay (uang penghargaan masa kerja) is the second, and it only starts at three years of service. From there it runs from two months of wages up to a ceiling of ten months for very long tenures. An employee at seven years therefore attracts both eight months of severance and three months of long service pay, which is eleven months of wages before the third component.
Compensation of rights (uang penggantian hak) is the third and covers what the employee has accrued and not taken, principally untaken annual leave and any contractual entitlements owed. The housing and medical component that used to add 15 percent was removed by the Job Creation Law and no longer applies.
Wages for all of this means basic salary plus fixed allowances, so a package weighted toward fixed allowances raises the severance exposure along with it.
The multiplier is the part of this that surprises people most. PP 35/2021 applies a factor to the table above depending on why the employment ended, ranging from half the standard entitlement to double it. Efficiency, closure, merger, misconduct and retirement all carry different factors, and the same employee on the same salary with the same tenure can cost very different amounts depending on the ground you rely on, so establish the ground before you calculate anything at all.
Fixed-term contracts work differently
A fixed-term contract (PKWT) sits outside the severance framework entirely and has its own compensation rule under PP 35/2021. The employer owes a compensation payment at the end of the term, calculated at one month of wages for twelve months of continuous service and pro-rated below that, available to anybody with at least one month of service.
This is why misclassifying an indefinite role as fixed-term is expensive. Indonesian law restricts when a fixed-term contract may be used and for how long, and a contract that fails those tests is treated as indefinite from the start, which brings the full severance framework with it retroactively.
Process matters as much as arithmetic
Termination requires a valid ground, and performance or misconduct both need documenting before you rely on them. Warnings should exist in writing, dated and acknowledged by the employee. A performance case built after the decision has been made reads exactly like what it is.
The employer must notify the employee and set out the reason, and the parties are expected to attempt bipartite negotiation. Where that fails the matter can escalate through mediation and to the industrial relations court. Most disputes settle, and they settle better when the paperwork was in order from the beginning.
Resignation sits outside this whole framework and follows different rules entirely. An employee who leaves voluntarily has no severance entitlement, though they may be owed separation pay (uang pisah) if your contract, company regulations or collective agreement provide for it. That amount is whatever you wrote down, so write it down deliberately.
How to keep the cost predictable
Provision for severance from the first month of employment. An engineer at four years of service represents five months of wages in severance alone before long service pay enters the picture, and discovering that during a restructuring is the wrong moment.
Keep performance records continuously, throughout the good years as well as the difficult ones. The documentation that makes a termination defensible has to predate the decision, and it costs nothing to maintain while somebody is doing well.
Never improve the statutory terms in a contract without pricing it. The statutory figures set a floor and your contract can raise it, so a clause promising double severance is enforceable at double.
What we do
We run the whole process as the legal employer: establishing the ground, drafting the notice, calculating all three components against the correct multiplier, handling the negotiation, and making the final settlement. The administrative risk sits with us because the employment relationship does.
Everything above is general information about how the framework operates. Specific terminations turn on their own facts and you should take Indonesian legal advice on any individual case. Send us the situation and we will tell you what it is likely to cost before you commit to anything.
