Why you cannot just use freelancers

Paying somebody as a freelancer does not make them a freelancer. Indonesian law decides that question by looking at how the working relationship actually operates, and the wording of your contract carries very little weight against the facts of what happens day to day.

PP No. 35 of 2021 defines an employment relationship as one carrying three elements: pekerjaan, upah and perintah, meaning work, wage and command. Wage is present whenever you are paying somebody, and work is present whenever they are doing something useful for you. That leaves command as the element deciding the entire question, and command turns out to be far easier to exercise by accident than most companies expect.

What command looks like in practice

A genuine contractor is engaged to deliver a defined outcome. You specify what the finished thing has to be, when you need it and the standard it must meet, and then you leave the person to deliver it however they see fit.

What you cannot do is reach into how they spend their time. You cannot set their working hours, allocate their tasks day by day, require them at your stand-up or your sprint planning, make them exclusive to you, place them in a reporting line, or supply the laptop and company email address that become their primary tools. Every one of those is command, and command is what converts a contractor into an employee in the eyes of a labor inspector.

Read that list against how a full-time engineer sitting in your office actually spends a week. The role only functions if somebody is available during your business hours, picking up work as it arrives, inside your team, taking direction. That description is employment in everything except the paperwork sitting in your drawer. Your contract may say otherwise, and against those facts your contract will lose.

What it costs once the arrangement unwinds

Employer social security in Indonesia comes to roughly 10.2 percent of wages: 3.7 percent for old-age savings, 2 percent toward pension up to the wage ceiling, 0.24 percent for work accident cover at office risk, 0.3 percent for the death benefit, and 4 percent for health cover up to its own ceiling. None of it was paid, and all of it is owed for the whole period of the engagement.

PP No. 86 of 2013 then adds a late payment charge of 2 percent a month on the arrears. Across a two or three year engagement that compounds into a figure exceeding the principal, which is the part companies miss when they model this as a straightforward catch-up payment.

After that come the statutory payments, all of them backdated. THR at one month of wages for every year of service under Permenaker No. 6 of 2016, and end-of-term compensation at one month for every twelve months of service under Articles 15 to 17 of PP 35/2021, together with accrued annual leave. Then PPh 21 income tax, because an employer is a withholding agent, so where nobody withheld the liability follows the party who should have done.

Our own modeling puts the contractor structure at roughly 46 percent below compliant employment for the same take-home pay. That 46 percent is the unpaid employer cost, sitting on your balance sheet as a liability nobody has quantified, growing at 2 percent a month from the day somebody finally looks at it.

The sanctions reach further than money

Article 17 of UU No. 24 of 2011, read with PP 86/2013, sets out a graduated ladder for failing to enroll workers in BPJS. It opens with a written warning, moves to a fine, and ends with the denial of certain public services. That final rung is the one worth understanding properly, because it reaches business permits and licenses, and central or regional government applies it at BPJS's request. A company unable to renew a permit has an operational crisis on its hands and not an accounting entry.

Article 55 of the same law provides for imprisonment of up to eight years or a fine reaching one billion rupiah. Academic commentary treats that provision as aimed principally at employers who collect contributions and then fail to remit them, and there is a live argument in the literature over whether it extends to simple failure to register. Administrative sanctions are the realistic exposure for the overwhelming majority of employers. Criminal liability sits behind them, and its presence changes how a board reads the whole question.

A foreign company carries one further exposure on top of all that. People working in Indonesia on your behalf can create a permanent establishment, which brings Indonesian corporate income tax on the profit attributable to it, along with registration and filing obligations that were never set up because nobody thought an entity existed.

Who actually triggers it

Very little of this arrives through a regulatory sweep, and waiting for an inspection is the wrong model of the risk. It arrives through the individual, and usually at the moment the engagement ends.

An engineer who works out what severance, THR and end-of-term compensation they would have accrued as an employee can file at the industrial relations court. It costs them almost nothing to do, Indonesian labor law is protective by design, and every element of the three-part test points their way. One filing establishes the position for everybody you have engaged on the same terms.

An intermediary does not solve it

Routing the engagement through a third party is the usual response, and it helps only where that third party is genuinely equipped for the job. PP 35/2021 requires an alih daya company to be an Indonesian legal entity holding business licensing issued by the central government. A foreign supplier satisfies neither condition, whatever the invoice happens to say, and the engagement stays defective all the way down the chain.

One widely repeated point needs correcting here, because it still circulates. The old restriction limiting outsourcing to five categories of work under Permenaker No. 19 of 2012 was revoked by Permenaker No. 23 of 2021, so the distinction between core and supporting activities has gone. Outsourcing to a properly licensed Indonesian entity is lawful for any kind of work at all. The only thing that matters is whether that entity actually holds the license.

When freelancers genuinely work

Plenty of engagements are properly contractor engagements and should stay exactly as they are. A defined piece of work with a beginning and an end, a specification you can write down, a deliverable you can accept or reject, and a person who has other clients and their own equipment. A migration, a security audit, a design package, a discrete build. Structured that way a contract for services is the right instrument and we would recommend it.

The distinction holds up well when you treat it as a planning question. Where you can describe what you want delivered without describing how somebody should spend their week, a contract for services fits comfortably. Where the honest description of the role is a person doing whatever needs doing, in your team, during your hours, you are hiring an employee and the only decision left is which entity employs them.

What we do about it

We employ your Indonesian staff on compliant fixed-term contracts under our own entity, with BPJS enrollment, PPh 21 withholding, THR and end-of-term compensation all inside a single monthly invoice. You direct the work as closely as you like, because we hold the employment relationship and the command element therefore sits where the law expects to find it.

Our cost tables show what that comes to across twelve salary bands. If you are running a contractor population in Indonesia today and would rather understand the exposure before somebody else quantifies it for you, send us the arrangement and we will tell you what we see.