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Indonesia – Controversy Over Outsourcing Regulation: Third-Party Contracting Arrangements.

16 May, 2013

 

Outsourcing has become a hot-button issue in Indonesia, with labor unions leading large demonstrations in Jakarta against the practice. The unions claim that about 16 million Indonesians, or roughly 40 percent of the country’s formal workforce of 40 million, are outsourced employees, or hired on short-term contracts, or paid daily wages.

 

Companies in Indonesia can delegate part of their work to be performed by subcontractor companies or labor suppliers. In Indonesia, both types of delegation are described as “outsourcing.” While Law No. 13 of 2003 regarding Manpower requires companies to only outsource non-core functions, there remains a great deal of ambiguity around the practice. A recent Constitutional Court decision and Ministerial Regulation have sought to clear up this ambiguity and tighten the rules surrounding outsourcing. It remains to be seen whether this will satisfy the unions and what kind of effect it will have on business.

 

Recent Developments

 

On November 19, 2012, the Ministry of Manpower and Transmigration (“MOMT”) enacted Regulation No. 19 of 2012 on the requirements for outsourcing a supply of labor and subcontracting of services (the “Outsourcing Regulation”). It sought to clarify the rights and obligations of the ‘user company’ receiving services and of employees in relation to the ‘subcontractor company’ or ‘labor supplier,’ respectively.

 

Under the Outsourcing Regulation, a user company can only delegate work to a subcontractor company under certain conditions; these include that the delegated work is separate from the user company’s main activities and the work does not directly affect the production process.

 

To engage a subcontractor to provide services, the user company must prepare a “Description” of the type of supporting work that will be delegated and register this Description with the local MOMT office where the work will be performed. The Description should be accompanied by a similar document called a “Flowchart” prepared by the relevant industry association that details the typical “core” and “non-core” activities in the given sector. The user company cannot engage the services of a subcontractor company prior to successfully registering the Description with an acknowledgement from the MOMT office. Failure to comply with this requirement means that, by operation of law, the employees of the subcontractor company will automatically become employees of the user company.

 

Once the Description has been successfully registered, then the user company can enter into a services contract with the subcontractor. The services contract must also be registered with the relevant MOMT office at least 30 days prior to the commencement of services.

 

By contrast, user companies can delegate even more limited types of work to a labor supplier as follows:  cleaning services; catering services for employees; security services; support services for the mining and oil industries; and transportation services for employees. The labor supply contract itself must be registered with the relevant MOMT office within 30 business days after the labor supply contract has been signed and prior to the commencement of labor supply.

 

It is important to note that labor suppliers must prepare written employment contracts with their employees. Such employment contracts must also be registered with the local MOMT office where the work is conducted. In the event that the user company terminates the labor supply contract and transfers substantially the same work to a new labor supplier, arrangements must be in place for the new labor supplier to take on the fixed term contract workers of the former labor supplier. It appears that this Transfer of Undertaking Protection of Employment (“TUPE”) principle does not extend to permanent employees of the former labor supplier. There are various additional rules that may impact the terms and conditions of engagement of the new labor supplier, which rules have yet to be clarified.

 

Outlook

 

User companies, subcontractor companies, and labor suppliers must come into compliance with the Outsourcing Regulation by November 19, 2013. The new rules raise a number of issues that have not yet been clarified. With regard to subcontracting of services, industry associations have not yet published Flowcharts detailing the core and non-core activities in their respective industries. In many cases, there is no obvious relevant industry association at all. It is also unclear whether the MOMT will readily accept the Flowcharts and Descriptions of core and non-core activities filed by user company applicants or actively seek to limit the activities characterized as non-core activities suitable for third-party services contracts.

 

Given the enormous scope of the services sector and the daunting logistics of following such procedures for all services contracts in the Indonesian economy, it is unclear whether the MOMT will narrow the scope of services that are subject to these requirements. It is also unclear whether the private sector is ready to make, and whether the MOMT is ready to receive and process, all the necessary filings of Flowcharts, Descriptions, Services Contracts, and Labor Supply Contracts, as well as the Employment Contracts in the case of labor suppliers.

 

Despite the dramatic new rules, it remains unclear whether unions will accept that the Outsourcing Regulation has gone far enough in protecting the rights of employees, or whether they will continue to demand a total ban on the practice of outsourcing of labor supply.

 

SSEK

 

For further information, please contact:

 
Richard EmmersonSoewito Suhardiman Eddymurthy Kardono
richardemmerson@ssek.com 
 
Indrawan Dwi YuriutomoSoewito Suhardiman Eddymurthy Kardono
indrawanyuriutomo@ssek.com  
 

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