Indonesian Insights

Written by Indrawan D. Yuriutomo

The major Indonesian labor law developments in 2011 included several high-profile employee strikes across the country and a Constitutional Court amendment to the Indonesian Manpower Law regarding the termination of employees.

Strike Action

Over the past 12 months, there have been a number of high-profile strikes, possibly as a result of Indonesia’s growing economic prosperity and rising domestic prices. Thousands of miners at Freeport McMoRan Copper & Gold Inc’s mine in Papua went on strike in September 2011 demanding higher wages, and only reached an agreement in December 2011. In November, approximately 2,500 workers at Indonesia’s largest mobile-phone carrier, Telkomsel, also went on strike demanding better pay. And some 50,000 members of the Indonesian Association of Workers’ Unions in Jakarta had also threatened to go on strike in November, averted only by the Governor’s acquiescence to their demand for a rise in the minimum wage. The minimum wage in the capital was increased to approximately IDR 1.5 million/month for 2012.

Amendments to the Indonesian Manpower Law

The Constitutional Court recently clarified a provision of the 2003 Manpower Law regarding employee termination. The amendment clarifies that an employer is still required to pay salary and benefits to an employee throughout the termination process. The process only ends with a decision of the Labor Court, and if that is appealed, the Supreme Court of Indonesia. This process may take up to 2 years or more.

By way of background, Indonesian labor law does not recognize termination-at-will and employee terminations must follow a lengthy termination process which may take up to 140 working days to complete. This process includes bipartite negotiations, a Labor Court decision, and if appealed,  a Supreme Court decision.  In practice, the process usually exceeds 140 working days and may take more than 2 years.

As this termination process can be costly for employers in Indonesia, many employers aim to reach quick settlements with employees and provide ‘sweeteners’ to avoid the lengthy termination process by signing a mutual agreement to terminate the employment relationship. The Constitutional Court’s amendment may thus weaken the employer’s leverage vis a vis negotiating the mutual termination agreement.

First Amendment to the Indonesian Manpower Law

Previously, the Manpower Law was amended by a 2004 Constitutional Court decision where the provisions of termination based on an employee’s serious violation were ruled to be no longer applicable. As a consequence, in order to terminate an employee who is alleged to have conducted a criminal act, the employer has to wait until the employee is first convicted in a criminal court for the relevant criminal act.

Second Amendment to the Indonesian Manpower Law

On September 19, 2011, the Constitutional Court again amended the Manpower Law.

As a general rule, before terminating an employment relationship, the parties (the employee, the employer and, if applicable, the union representative) are required to meet in an attempt to reach an amicable termination settlement.  If negotiations fail, the employer may only terminate the employee after obtaining approval from the Labor Court.

Similarly, Article 155 paragraph (2) of the Manpower Law stipulates that until a decision is made or defined (“belum ditetapkan“) by the Labor Court, both employer and employee must continue to perform all their obligations. The phrase “belum ditetapkan”, however, has multiple interpretations either from an employer or from an employee’s perspective.

Prior to this second amendment, there was some ambiguity as to whether an employer and employee must continue performing all their obligations until a final and binding decision is issued by the Labor Court or whether  a recommendation from the Manpower Office was sufficient, even though there was not yet a final and binding decision issued.

The Constitutional Court clarified this ambiguity, and affirmed its interpretation of the phrase “belum ditetapkan”, as contradictory to the 1945 Indonesian Constitution.  The phrase “belum ditetapkan” therefore was declared to have no binding legal force. This position clarifies that during a termination of employment, both the employer and employee must continue to perform all their obligations until a final and binding decision is issued.

Implication for the Employer

As indicated, the Constitutional Court’s decision confirms that employers and employees must continue to perform their obligations until a decision by the Labor Court. If the Labor Court decision is appealed, the binding decision would be the final judgment rendered by the Supreme Court. This, in effect, means that employers may be responsible to pay up to 2 years of salary during the termination process.

It also may, in practice, mean that the “sweeteners” that are provided to settle terminations mutually at the beginning of the process may need to be increased in the forseeable future.

This article is part of our 2011 Indonesian Law Review series, in which our attorneys discuss recent legal developments  over the past year and track the main trends in each industry. To date, we’ve published reviews on Taxation, Infrastructure & PPPs, and Investment.