The year 2022 marks 70 years of bilateral relations between Indonesia and the United States—in fact, the two countries strengthened ties in 2015, officially becoming a strategic partnership. Indonesia’s young and growing middle class, stable economy (the largest in Southeast Asia), and democratic values, combined with a relatively low cost of living, make the country’s contractors great candidates for any US business hiring abroad.
If your company is exploring contracted talent in Indonesia, read on. You’ll learn how labor law categorizes workers and regulates employment agreements, wages, tax obligations, and protections. When it comes to finding and paying the perfect international contractor, discover advantages and limitations to popular payment services.
Employee vs. Independent Contractor
Indonesian labor law recognizes two kinds of workers: those who are permanent (or indefinite-term) employees and those who are fixed-term (or definite-term) laborers. Both groups are entitled to the same protections under the law, including those fixed-term workers who are not full-time employees.
Under Article 59 of the Manpower Law, fixed-term workers are limited to performing specific kinds of work: (1) work that is carried out and completed one time, (2) work that is seasonal, (3) work that should be completed within three years, and (4) work that is tied to a new product or activity in an experimental stage.
In Indonesia, contractors are distinguished from permanent employees in a few ways. A contractor is not considered a company employee and their work is governed by a fixed-term contract. Whereas among permanent employees, the law considers the employer to be a superior and the employee a subordinate, in the case of independent contractors, the relationship between business and worker is considered to be between contracting parties governed equally by relevant legislation.
Fixed-term workers in Indonesia are “contractors,” but not “independent contractors.” Independent contractors are paid upon completion of work and an independent contractor is not entitled to the same benefits as employees under labor law. Agreements made with independent contractors are governed by the Indonesian Civil Code. There is no test under the law to determine whether a worker is an employee or independent contractor—there is also no penalty for misclassifying independent contractors.
Labor Law: Indonesian Contract Workers
Labor law is determined by The “Manpower Law” (or “Labor Law”), Law #13 from 2003, as well as a 2021 Omnibus Law, specifically section GR 35/2021. These labor laws require the creation of employment agreements for all fixed-term contract relationships.
Employment agreements ✍🏽
Whereas work agreements for permanent employees can be made verbally or in writing, Indonesian law regulates fixed-term employment more stringently. These employment agreements must be written in Bahasa Indonesia (Indonesian) using the Roman alphabet. The agreements may not include the probation period allowed for permanent employees.
All agreements with fixed-term work must contain the following elements:
- Name, business type, and company address
- Name of international contractor, gender, age, and address
- Position or kind of work
- Location where work will be performed
- Amount and method of payment
- The rights and obligations of the employer and foreign contractor
- The start data and contract term
- Place and date of the contract signing
- Signatures of all parties in the contract
There are no implied terms in Indonesian employment agreements. Any work agreement that does not contain the required elements above or is not completed in writing as stipulated will be automatically considered a permanent employee agreement.
Signed contracts must also be registered by the business with the appropriate Ministry of Manpower (MOM) within three days using an online system. If this is not possible, the fixed-term contract must be delivered to the MOM within seven business days.
Prior to GR 35/2021, contract agreements were generally made for up to two years, with a potential extension of one year. An employment agreement may now be extended to a maximum of five years, including the original contract and any extensions, provided the contract is based on the period of work (see below):
GR 35/2021 divides fixed-term contracts (FTCs) into three categories:
An FTC based on work completion
This contract is for temporary or one-time work. While there is no specified maximum length for this contract type, the agreement must include provisions for the expected date of work completion by the contractor.
An FTC based on the period of time
This contract is for work completed in a short time, seasonal work, or work related to experimental products. These agreements are capped at 5 years, including extensions.
An FTC related to non-permanent work
This contract covers work that is based on attendance, or work that changes based on volume or time. Under this type of contract, a contractor cannot exceed 20 working days per month—if they work 21 days per month or more for three months consecutively, they will be considered permanent employees.
Working hours 🕰
Normal working hours in Indonesia should not exceed 40 hours per week—either seven hours per day and six days per week, or eight hours a day, five days per week. Under GR 35/2021, contract employees can work less than 40 hours in the following circumstances: (1) their work can be completed in under 35 hours per week, (2) the company is able to honor flexible working hours, and (3) work can be done outside of one specific location.
All workers should receive a 30-minute break for every four hours of continuous work. Workers who complete six days of work must be given one rest day and those who work seven days must be given two days of rest.
A business must honor overtime of up to four hours per day and 18 hours per week for contract employees with a few exceptions. Under GR 35/2021, employers must designate which roles are entitled to overtime pay. If a business fails to include this information in Collective Labor Agreements (CLAs), company regulations, or an FTC, the contract worker will automatically be eligible for overtime. A few roles are automatically excluded from overtime, including those classified for a "thinker, planner, implementer or controller."
Because labor law in Indonesia doesn’t distinguish between protections for permanent and fixed-term employees, contractors are eligible for holidays and annual leave, depending on their tenure. For full details on these benefits, see this guide to employment law in Indonesia.
Pay, wages, and taxes 💰
Pay under an FTC must be made when the contract expires. If the contract is extended, payment is due before the original contract expiration. In the case that a contract is terminated before the expiration date, the employer must pay the remaining wages on the FTC, regardless of which party pursues termination.
Additionally, at the end of the contract, if the contract worker has worked consecutively for 12 months, they will be paid their full monthly salary. In cases where the employee has worked either less or more than 12 months, wages paid will be prorated based on the contractor's time with the company.
Workers are eligible for a yearly religious holiday bonus, referred to as Tunjangan Hari Raya (THR), paid in Indonesian Rupiah. The THR is to be distributed by a business one week before the religious holiday an employee observes; THR is available for five holidays: Eid-il-Fitri, Christmas, Nyepi, Vesak, and Lunar New Year. The level of pay is based on the length of employee service.
Indonesia does not have a national minimum wage; instead, the governor in each of Indonesia’s 33 provinces sets a minimum wage annually per recommendation from the Provincial Council on Wages. A regency (or area within a province) can also set a minimum wage if it is not higher than the province wage. Further, business groups within a province or regency can set a minimum wage for their sector—this wage cannot drop below the wage set by the corresponding regency or province.
Deductions for income tax are required by law. Companies must withhold income tax on a monthly basis—these employee taxes are paid to the State Treasury on behalf of the employee and reported to the Tax Office by the business. Two kinds of social security taxes are also required of every business: the badan penyelenggara jaminan sosial (the health social security system or BPJS) and the employment BJPS (a system related to work accidents, pension, and death coverage).
Worker rights ⚖️
Fixed-term contract workers enjoy the same worker protections as permanent employees in Indonesia. Article 5 of the Manpower Law stipulates that workers must be protected against discrimination based on gender, ethnicity, race, religion, political affiliation, disability, and HIV/AIDS status, when it comes to applying for, obtaining, and advancing their skills. Male and female workers are entitled to equal pay for work of equal value, and sexual harassment is considered a general crime under Criminal Code.
Workers wishing to file a discrimination claim against a business can either initiate an industrial relations dispute or file a claim with their local Manpower Agency. For cases of harassment, employees can request bipartite negotiations.
The following justifications for contract termination by a business are prohibited: termination based on employee “belief, religion, political orientation, ethnicity, color, race, group, sexual orientation, physical condition, or marital status.”
How to hire and and pay foreign contractors in Indonesia
According to labor law, a business should notify their MOM three days before posting a job in an Indonesian newspaper. In the job announcement, an employer should include details about the number of employees sought for hire, the nature of work, and any required skills or expertise. If a business must fill a post immediately, they may advertise without MOM-notification, provided they notify the MOM after they hire.
Payment for foreign contractors 💲
Per Bank Indonesia’s 2015 regulation (17/3/PBI/2015), all payment to workers must be made in Indonesian Rupiah (IDR). As of April 2022, the exchange rate is $1 US dollar to 14,355.55 IDR. As of April 2022, the average salary range for contractors was between 273K IDR and 487K IDR per year.
To pay an international contractor, there are a number of digital options (in addition to cash or check) your business could implement. When considering the following services, do keep in mind that as of 2021, 66% of the population in Indonesia was unbanked. You’ll want to ensure you can offer all international contractors a convenient payment option that works for them, keeping in mind fluctuations to the exchange rate and fee structures.
Money transfer companies 💳
To transfer money to Indonesia, your business could use a service like WorldRemit, Remitly, OFX, Dunbridge Financial, Xoom (owned by PayPal), Azimo, and Wise (formerly Transferwise). Some of these services, including WorldRemit and Azimo, offer cash pick-up options for international payments that can help out unbanked contractors. It should be noted, however, that cash pick-ups often have higher associated fees than bank transfers.
While these payment services offer online convenience and multiple options (including wire transfer and international money order), fees and policies vary, and can impact your cost. Watch out for marked up exchange rates, high percent-based transfer fees, and required debit cards, issued by the transfer company, which can entail withdrawal fees.
Traditional money transfer services 🏦
An international wire transfer service like MoneyGram and Western Union offers online bank transfer, international money orders, and in-person cash pick-up options. Western Union, for example, has 13,000+ physical agent locations in Indonesia for paying international contractors. While these companies are easy to use and may offer lower fees than other payment options, they do make money on currency exchange—namely money on transfer fees and exchange rates which can vary and change at any time, and for which your business (and your contractors) will pay the cost.
Bank transfers using SWIFT 🏛
Businesses can use SWIFT (The Society for Worldwide Interbank Financial Telecommunications), a network of global financial institutions, for international funds transfers to Indonesia. When paying foreign contractors, SWIFT is a safe, user-friendly service for transferring money directly to a contractor's bank account (provided you have their bank details).
Again, this option will only be viable for a contractor who possesses a bank account. Another potential downside: SWIFT fees can add up fast, since payments are routed through multiple banks and transfer fees are typically charged every time. And it doesn’t matter if you use the same institutions every time your business makes a transfer to pay a contractor—it’s possible for the fees to vary every time.
For more great partnerships with international contractors 🤝
Figuring out how to hire and pay international workers in a new country can be complex. You need to ensure you stay compliant with Indonesian labor law, which is subject to change at any time. You’ll also want to make sure you’re finding and hiring great contractors, and that your payroll process is convenient, with minimal fees and hassles for all parties.
Pilot is here to help you hire and retain the best talent. Our expert team specializes in user-friendly remote payroll, benefits, and compliance for US-based companies hiring abroad. We can ensure your company stays up-to-date with labor law for contractors in Indonesia. Contractors love us, too: Pilot never marks up exchange rates, so team members can get paid more. Our team of HR and legal experts is eager to assist as you expand your company and hire in Indonesia—reach out anytime.
Interested in learning more about Pilot? Schedule a demo with one of our experts.
⚖️ Legal Disclaimer: The information contained in this site is provided for informational purposes only, and should not be construed as legal advice on any subject matter.
Cover photo of Bromo Tengger Semeru National Park, East Java, by Fajruddin Mudzakkir on Unsplash
Photo of cyclists in Kebumen, Java, by Dikaseva on Unsplash
Photo of traffic in Jakarta by Adrian Pranata Unsplash
Photo of biker in Ubud by Patrick Craig on Unsplash
Photo overlooking the sea from Uluwatu Temple, Bali, by Jared Schwitzke on Unsplash