Understanding severance pay in Indonesia is a critical aspect of workforce management for companies operating in one of Southeast Asia’s most dynamic economies.
For both local businesses and foreign employers, employment termination is not merely an HR decision it is a legal, financial, and reputational matter governed by detailed labor regulations.
Indonesia’s employment framework places strong emphasis on employee protection, making severance pay a mandatory and often complex obligation.
Misinterpreting severance entitlements, overlooking statutory benefits, or mishandling termination procedures can expose employers to disputes, penalties, and prolonged legal processes.
This is particularly challenging for international companies unfamiliar with Indonesian labor law, local employment practices, and evolving regulations. As a result, understanding how severance pay works and how to manage it correctly is essential for sustainable business operations.
This article provides a comprehensive overview of severance pay in Indonesia, covering regulations, applicability, termination scenarios, and compliance considerations. It also explains how an Employer of Record (EOR) can help businesses navigate severance obligations efficiently and compliantly.
What Are the Current Regulations Governing Severance Pay in Indonesia?
Indonesia’s severance pay regulations are primarily governed by Law No. 13 of 2003 on Manpower, as amended by Law No. 11 of 2020 on Job Creation (Omnibus Law) and further clarified through its implementing regulations, including Government Regulation No. 35 of 2021. These laws collectively define employee rights, employer obligations, and termination procedures.
Under the current regulatory framework, severance pay is not a discretionary benefit it is a statutory right. Employers are required to provide compensation packages when terminating employees under qualifying conditions. These packages typically consist of:
- Severance pay (uang pesangon)
- Long-service pay (uang penghargaan masa kerja)
- Compensation of rights (uang penggantian hak)
The Omnibus Law introduced adjustments to severance calculations, aiming to balance employee protection with business flexibility. While the maximum severance multipliers were reduced in some cases, employers are still required to comply strictly with statutory formulas.
Additionally, Indonesia recognizes industrial relations principles, meaning that termination should ideally be resolved through mutual agreement. Unilateral termination without valid grounds or proper process can result in legal challenges through the Industrial Relations Court.
Because labor regulations may be interpreted differently depending on the termination reason, employment contract type, and length of service, accurate application of the law is essential.
What Is Severance Pay in Indonesia and When Is It Applicable?
Severance pay in Indonesia refers to mandatory financial compensation paid by an employer to an employee upon termination of employment. It is designed to provide financial security during the employee’s transition period after job loss.
Severance pay becomes applicable when an employment relationship ends due to reasons such as:
- Company restructuring or efficiency measures
- Redundancy or role elimination
- Business closure or downsizing
- Termination without employee misconduct
- Mutual termination agreement
The amount of severance pay is calculated based on the employee’s monthly salary and years of service. Monthly salary typically includes base salary and fixed allowances, which are legally recognized as part of regular compensation.
It is important to note that severance pay does not apply uniformly to all termination cases. Certain circumstances such as resignation, serious misconduct, or contract expiration may limit or exclude severance obligations.
Employers must also distinguish between permanent employees (PKWTT) and fixed-term employees (PKWT). Fixed-term contracts generally do not qualify for severance pay; however, they may be entitled to end-of-contract compensation as stipulated under current labor regulations.
Additional Severance Packages for Long-Term Employees
Employees with extended tenure are entitled to additional compensation beyond standard severance pay. Indonesian labor law recognizes long-term service as a factor deserving greater financial protection.
This additional component, known as long-service pay, is awarded based on completed years of service. The longer an employee has worked for a company, the higher the entitlement. This payment is separate from standard severance and is calculated using predefined multipliers.
In addition to long-service pay, employees may also receive compensation of rights, which can include:
- Unused annual leave
- Relocation costs (if applicable)
- Housing and medical benefits stipulated in employment contracts
- Other benefits promised but not yet received
For employers, especially those with long-serving staff, severance obligations can represent a significant financial commitment. Without proper planning, these liabilities may affect cash flow and operational stability.
This is why workforce structuring, contract management, and termination planning must be handled strategically and in full compliance with Indonesian employment law.
Navigating Employee Termination as a Foreign Employer
For foreign companies expanding into Indonesia, employee termination presents unique challenges. Differences in legal culture, labor protection standards, and administrative processes often lead to misunderstandings and compliance risks.
Foreign employers frequently encounter difficulties such as:
- Interpreting Indonesian labor regulations accurately
- Understanding local employment norms and expectations
- Managing language barriers in employment documentation
- Handling disputes through local legal mechanisms
Unlike some jurisdictions where employment-at-will applies, Indonesia requires valid legal grounds and procedural fairness for termination. Employers must demonstrate compliance with statutory requirements, including notice periods, severance calculations, and, in some cases, negotiation with labor unions.
Failure to follow proper termination procedures can result in:
- Court-ordered reinstatement
- Payment of back wages
- Additional compensation penalties
For foreign entities without a legal presence in Indonesia, these risks are even greater. Managing payroll, employment contracts, and severance obligations without local expertise can be both costly and time-consuming.
Common Termination Scenarios and the Effect on Severance Pay in Indonesia
Different termination scenarios lead to different severance outcomes. Understanding these distinctions is crucial for employers to calculate obligations accurately.
Termination due to redundancy or efficiency
Employees are generally entitled to severance pay, long-service pay, and compensation of rights. The calculation follows statutory multipliers based on years of service.
Termination due to company closure
If a company shuts down for reasons unrelated to financial loss, employees are entitled to full severance benefits. However, closures due to force majeure or prolonged losses may reduce severance obligations under specific conditions.
Termination due to employee misconduct
Serious violations may limit severance entitlements. In such cases, employees may only receive compensation of rights, provided misconduct is proven and properly documented.
Resignation by employee
Employees who voluntarily resign are not entitled to severance pay but may still receive compensation of rights, depending on contractual terms.
Expiration of fixed-term contracts
PKWT employees are generally not entitled to severance pay but may receive contract completion compensation as regulated by current labor laws.
Each scenario requires careful documentation and legal justification to avoid disputes.
| Reason for termination | Severance pay |
| Company merger/ acquisition/ restructuring | Full amount |
| Retirement | 1.75% of standard rate |
| Force Majeure (Unforeseen circumstances) not resulting in closure | 0.75% of standard rate |
| Force Majeure resulting in bankruptcy or closure | 0.5% of standard rate |
| Employee Misconduct | Reduced or waived (depends on severity) |
| Resignation | No |
Identifying Invalid Termination Situations
Indonesian labor law clearly defines situations where termination is considered invalid. Employers must avoid terminating employees under protected conditions, including:
- Pregnancy or maternity leave
- Marriage
- Religious observance
- Temporary illness with medical proof
- Reporting employer violations
Terminating employees under these circumstances may result in legal consequences, including reinstatement orders and financial penalties.
Additionally, termination without prior negotiation or without involving bipartite or tripartite dispute resolution mechanisms may be deemed unlawful. Employers must follow due process, including issuing warning letters where required and documenting performance or misconduct issues thoroughly.
Understanding these limitations is essential to protecting both employee rights and employer interests.
How an Employer of Record Can Facilitate Determining Severance Pay Allowance in Indonesia
An Employer of Record (EOR) provides a strategic solution for companies seeking to operate in Indonesia without establishing a legal entity.
Under an EOR arrangement, the EOR becomes the legal employer on behalf of the client company, managing employment compliance, payroll, tax, and statutory benefits including severance pay.
By leveraging an EOR, businesses benefit from:
- Accurate severance calculations based on current labor laws
- Compliance with Indonesian employment regulations
- Risk mitigation related to termination disputes
- Proper handling of employment contracts and documentation
- Local expertise in labor law interpretation
For foreign employers, an EOR eliminates the complexity of navigating unfamiliar legal systems. For local companies, it ensures operational efficiency and compliance consistency.
Accrizon Consulting, as a trusted accounting and tax advisory firm in Indonesia, offers Employer of Record services designed to simplify workforce management.
Our team ensures that severance pay obligations are calculated correctly, paid on time, and fully compliant with Indonesian regulations allowing clients to focus on business growth rather than administrative burden.
Understanding severance pay in Indonesia is not optional it is a fundamental requirement for responsible and compliant employment practices.
From regulatory frameworks to termination scenarios, severance obligations demand accuracy, transparency, and local expertise.
For companies seeking a seamless and compliant solution, partnering with an Employer of Record is a strategic advantage.
With Accrizon Consulting’s Employer of Record services, you gain peace of mind knowing that your employment obligations including severance pay, are managed professionally and in accordance with Indonesian law.
Ready to expand or manage your workforce in Indonesia without compliance risks?
Contact Accrizon Consulting today and let our Employer of Record solutions support your business with confidence and clarity.
