23 February, 2013

Labour and employment law was a hot topic in Indonesia last year and we can expect that to continue in 2013. From the confusion over outsourcing to dramatic minimum wage increases and more frequent labour demonstrations, it has never been more important, or more difficult, for companies to stay abreast of regulatory changes.

First, a quick look back at 2012, which saw a number of important developments that will continue to preoccupy companies in the coming year.

Two decrees from the Ministry of Manpower introduced new restrictions on expatriate employees. The first decree, issued in February, closed certain positions to expatriates, including chief executive officer. The Manpower Minister later explained that the term “chief executive officer” used in the decree did not mean the president director or other executive officer of a company but referred to the head of human resources or administration. Then in June the Ministry of Manpower issued another decree that placed restrictions on expatriate positions in the education sector.

Also last June, a Constitutional Court decision resulted in confusion over a company’s ability to downsize for reasons of efficiency. Indonesia’s Labour Law permits the termination of employees due to the closing of a business, with the employees’ entitlement depending on whether there have been two years of continuous financial losses or whether the closing is essentially for reasons of efficiency.

The Constitutional Court ruled that these provisions of the Labour Law can only be used where the company is permanently shutting its doors. This is crucial since these same sections of the law have to date been broadly construed to permit an employer to downsize a part of the workforce for reasons of efficiency. The ability of an employer to downsize for reasons of efficiency is now unclear. The Constitutional Court also ruled that termination is the last resort and that every effort must be made to reduce costs without employee terminations. These efforts include cutting the wages and benefits of senior employees, i.e., managers and directors; reducing work shifts; limiting or eliminating overtime; cutting work hours and workdays; temporarily suspending workers; not extending the employment of contract workers; and providing early retirement for those who qualify.

Looking ahead to the coming year, there are several employment law issues that should be on the radar for businesses. First are the many restrictions and requirements on the use of fixed term contracts and daily workers. Many employers do not know or understand all the requirements, while at the same time Ministry of Manpower investigators are becoming much more active in enforcing rules on contract extensions, social security and annual leave for workers, minimum wage on piece work and daily wages. The main sanction for non-compliance with the relevant rules is the conversion of such workers into permanent employees, which has significant financial consequences for companies.

But the biggest issue, and the biggest source of confusion for companies, will likely remain the new rules and filing requirements surrounding outsourcing. On November 19, 2012, the Ministry of Manpower issued Regulation 19 to clarify the restrictions and requirements applicable to the outsourcing of labour supply and the subcontracting of work between companies.

However, there has been much confusion over the new restrictions and requirements. Regulation 19 restricts outsourcing to non-core activities and requires labour suppliers to be specially licensed. It is an effort to permit legitimate outsourcing while eliminating outsourcing intended to circumvent the rights of workers generally.

It is much less well known that certain distinct requirements apply to subcontracting of any type of services. This is understandable considering that the distinctions between subcontracting and outsourcing workers is blurred in some situations, and thus subcontracts might be used by companies to avoid the direct hiring of employees by interposing a thinly capitalized subcontractor entity.

All subcontracts of services are also subject to various restrictions and new registration requirements for the service contracts themselves and various supporting documents. Companies have until the middle of November 2013 to conform to these new rules.

With so many regulatory changes, Indonesia’s labour environment is becoming increasingly difficult to navigate. Companies can find themselves in a situation where they face sanctions despite their best efforts to comply with the rules. That is why, now more than ever, it is important for companies to get the professional assistance they require, so they can focus on running their business.

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