Employment Contracts in Indonesia

When hiring in Indonesia, companies must navigate specific employment laws to ensure compliance, particularly when it comes to employment contracts. Employers in Indonesia typically choose between Definite-Time Employment Contracts (PKWT) and Indefinite-Time Employment Contracts (PKWTT). Both contract types come with their own set of rules, advantages, and obligations. This guide offers an overview to help you choose the right option for your business. 

If you need tailored advice on employment in Indonesia, reach out to our HR specialists for comprehensive support. 

Definite-Time Employment Agreement (PKWT)

A PKWT, commonly referred to as a contract employment agreement, is valid only for a limited period, capped at five years under Indonesian law. This contract type is typically used for specific roles where the work is temporary, or project based. According to Indonesia's manpower laws, PKWT is ideal for positions such as: 

• Seasonal work, like farm work; 

• Project-based roles where the end date is known, such as construction or web development; 

• New positions on a trial basis before determining their long-term viability. 

Pros and Cons of PKWT:

Pros:

• Predictable Budgeting: PKWT contracts offer cost control by aligning the employment period with project timelines. 

• Employee Resignation Penalty: If the employee resigns before the contract period ends, they are often required to pay a penalty based on the remaining time. 

Cons:

• High Administrative Work: Employers must remember to renew these contracts on time; failing to do so can automatically convert the employment status to permanent (PKWTT). 

• No Probation Period: There’s no probationary period allowed under a PKWT, which can limit flexibility. 

• Compensation Requirements: Employers must provide a severance-like compensation when each contract period ends, even if the employee resigns. Additionally, if an employer terminates the contract prematurely, they must pay a penalty based on the remaining employment period. 

For companies interested in hiring contract employees, understanding these factors is essential. If you have further questions, our HR team is here to help you navigate the ins and outs of employment contracts in Indonesia. 

Indefinite-Time Employment Agreement (PKWTT)

The PKWTT, or permanent employment agreement, does not have an expiration date. This type of contract is suitable for roles intended to be long-term, providing both job security to employees and operational stability to employers. A PKWTT continues until either the employee resigns, the company terminates them, or the employee passes away. 

Pros and Cons of PKWTT:

Pros:

• Reduced Administrative Load: With no need for contract renewals, PKWTT agreements are easier to manage from an administrative perspective. 

• Probation Option: Employers may include a probation period of up to three months, allowing them to evaluate an employee’s performance before committing to a long-term agreement. 

• No Recurring Compensation Obligation: Unlike PKWT, the employer does not have to provide compensation every few years when renewing an agreement. 

Cons:

• Termination Obligations: Terminating a PKWTT employee requires severance pay based on their tenure. Severance and long-service payments can be significant, especially for long-term employees. 

• Relocation Costs: For employees who relocated for the job, employers must cover the cost of their return travel if the employee is terminated. 

Navigating employment in Indonesia can be complex, especially with detailed requirements for severance and long-service pay under a PKWTT. For tailored advice, reach out to our HR team at SAS. 

Choosing Between PKWT and PKWTT

When considering which contract type is right for your organisation, assess the duration and nature of the role. Project-based or seasonal roles may be ideal for PKWT, while long-term roles may benefit from the stability of a PKWTT. Each option has implications for company budgeting, administration, and compliance. 

If you're unsure which option suits your business needs best, consult with our HR specialists. Our team has extensive experience with employment contracts in Indonesia and can guide you through the process. 

Contact Us for Personalised HR Support

Employment regulations in Indonesia can be intricate, and it’s essential to remain compliant while balancing organisational needs. Whether you’re hiring for temporary roles or looking to expand your permanent workforce, SAS' HR team can provide the insight you need. Contact us today to discuss your hiring needs and ensure your business operates within Indonesia's regulatory framework.