Indonesia’s Constitutional Court Ruling – A Game Changer for Workers’ Rights

On 31 October 2024, Indonesia’s Constitutional Court marked a significant shift in the country’s manpower law with Decision No. 168/PUU-XII/2023 (“Decision 168”). This decision was a Judicial Review of Law No. 13 of 2003 on Manpower, as amended by Law No. 6 of 2023 on Job Creation (“Manpower Law”).

Prioritising Local Workers

Decision 168 underscores the importance of prioritising Indonesian workers over foreign nationals, setting a clear expectation for employers to seek local talent before considering foreign hires. While the decision does not ban foreign workers, it requires that their employment be justifiable and be subject to certain prevailing restrictions, to ensure that local job opportunities remain protected. 

Five-Year Cap on Fixed-Term Employment Agreements

Decision 168 reaffirms that fixed-term employment agreements cannot exceed five years, including any extensions, and must be documented in Indonesian and use the Latin alphabet. Non-compliance with these requirements could expose employers to legal risks, although Decision 168 leaves the specifics open. Employers should revisit their existing fixed-term agreements to ensure they align with the requirements outlined under Decision 168.

Outsourcing Guidelines Anticipated

Currently, there is no clear guidance on what jobs may be outsourced by Indonesian employers. Decision 168 suggests that the Ministry of Manpower is expected to provide such guidelines, which will in turn offer much-needed clarity for employers, employees and outsourcing firms.

Until the anticipated guidelines are issued, existing restrictions on outsourcing arrangements remain in effect. Employers are expected to operate within these restrictions when outsourcing specific roles to ensure compliance with current regulations and mitigate potential legal risks. The guidelines are anticipated to clarify uncertainties and establish a clearer framework for permissible outsourcing practices.

Stricter Termination Procedures and Enhanced Post-Termination Entitlements

Decision 168 underscores the importance of bipartite negotiations to resolve disputes before initiating termination. If these negotiations do not lead to an agreement, termination may proceed only with a legally binding decision from the industrial relations court.

The decision also emphasises that post-termination entitlements outlined in the Manpower Law serve as a minimum standard, allowing for the possibility of higher compensation or a “golden handshake,” as referenced by the Constitutional Court in Decision 168. It should be noted, however, that any increase in post-termination entitlements is optional and subject to negotiation between the parties.

Prioritisation of Employee Payments in Employer Bankruptcy

In a move to safeguard employees’ financial rights, Decision 168 mandates that employee entitlements be prioritised over payments to other unsecured creditors, including those with preferential claims. This reinforces the protection of employee welfare in insolvency situations.

Despite this change, secured creditors will still retain the highest priority, maintaining precedence over employee rights. How the Indonesian Commercial Courts will interpret and implement this hierarchy in bankruptcy cases remain to be observed. Their approach will be instrumental in defining the practical application of this prioritisation.

Comprehensive Reform by 2026

Decision 168 also calls for a comprehensive overhaul of the Manpower Law by 2026 to resolve inconsistencies in the current legislation. Employers should anticipate the enactment of a new Manpower Law to address these issues.

In the interim, pending a new Manpower Law to be enacted, the provisions under Decision 168 have already come into effect and employers are expected to ensure compliance with these requirements with immediate effect. Employers should align their current manpower practices with the new provisions to ensure compliance.

Authored by Chalid Heyder, Teguh Darmawan, Julia Nugroho, and Andera Rabbani.