Laid off but paid out? Indonesia’s Supreme Court clarifies compensation payment obligation for early termination

On 29 December 2023, the Supreme Court of the Republic of Indonesia issued Circular Letter No. 3 of 2023 concerning the Implementation of the 2023 Supreme Court Meeting as a Guidelines for the Role of Indonesian Courts (SEMA No.3).

The circular provides crucial guidance on interpreting Article 62 of Law No. 13 of 2003 on Manpower (as amended) and its implementing regulation, particularly as it concerns Article 17 of Government Regulation No. 35 of 2021. The guidance provides clarity regarding the employer’s obligations to compensate fixed-term contract workers, particularly where an employment contract is terminated prematurely.

Balance-of-contract pay

According to Article 62 of the Indonesian Manpower Law as amended (Manpower Law), an employee whose contract is terminated before the end of their fixed-term employment agreement, must be paid for the remaining term of the contract.

This requirement is waived if the employment agreement is terminated, among other,  upon the completion of a particular piece of work, following a final and binding court decision, or upon the occurrence of a situation contemplated within the employment agreement.

Compensation pay

According to Article 61(A) of the Manpower Law as amended, where a fixed-term employment agreement expires, the employer must provide compensation pay to the employee. Companies have to provide the compensation payment only if the employment contract has expired or the work has been completed. However, Article 17 of the implementing regulation adds an additional obligation for companies to provide compensation payments if they terminate contracts early.

This requirement has ignited debate within legal circles regarding its validity since the requirement is solely stipulated in the implementing regulation. The circular aims to address and resolve this ongoing debate.

The compensation pay for temporary workers is provided in the form of additional salary. In general, this is one month’s salary if the contract is for 12 months. The amount will vary, and be pro-rated, depending on the duration of the employment contract.

It should also be noted that although foreign workers can only be engaged as temporary workers, they are not entitled to receive this type of compensation as per Article 15 (5) of Government Regulation No. 35 Year 2021 (GR 35).

Welcome clarity

By clarifying the interpretation of these legal provisions, the Supreme Court's circular offers much-needed clarity for companies and workers alike. It outlines the responsibilities of employers in ensuring fair treatment and compensation for employees, especially in cases of premature contract termination.

However, the issuance of this circular also underscores the prevailing view that Indonesia's legal framework remains pro-labour. Despite attempts to update the Manpower Law to make it more favourable to the employer, this is still a work in progress.

It should also be noted that the circular seems to suggest that the reasons for termination will have no effect on the obligation to provide compensation. Therefore, even if the company terminates the temporary worker due to gross misconduct, arguably, the company will still need to pay compensation.

To mitigate this risk, companies would be advised to stipulate in their employment contracts or company regulations that their employees must repay any losses incurred due to their gross misconduct.

The employment contract should also allow for the company to offset damages, including from the employee's entitlement to compensation.

Authored by Chalid Heyder, Teguh Darmawan, Andera Rabbani, Anisa Alifia, and Nigel Sharman.