Understand Employee Employment Contract Rules to Avoid Risks

Employee employment contract rules are essential for every company to understand to ensure that working relationships are fair and professional. Without a clear legal foundation, contracts can lead to administrative risks or even labor disputes.

By understanding employment contract regulations correctly, companies can build a safe, efficient, and compliant work system. Let’s go through the complete explanation below.

How Long Should an Employment Contract Last According to the Job Creation Law?

In the Job Creation Law and its derivative, Government Regulation No. 35 of 2021, the duration of employment contracts is specifically regulated so that the employment relationship remains clear and fair for both parties. Each type of employment agreement has a different validity period depending on the status of the employee.

Here is the explanation:

1. PKWT Employees (Fixed-Term Employment Agreement)

PKWT or contract employees are designated for jobs that are temporary, seasonal, or project-based. According to the regulation:

• The maximum contract duration for PKWT is five years, including extensions.

• When the contract expires, the company may renew it through a new agreement depending on business needs.

• PKWT employees are entitled to compensation at the end of the contract period, as stated in Article 15 of PP No. 35/2021.

Read Also: 7 Differences Between PKWT and PKWTT You Must Know!

2. PKWTT Employees (Permanent Employment Agreement)

PKWTT or permanent employees have an indefinite employment period. The rules are as follows:

• This agreement applies to jobs that are continuous or permanent in nature.

• Typically, PKWTT begins with a probationary period of up to three months, which must be stated in the contract.

• After completing the probationary period, employees automatically become permanent staff with full rights such as social security and severance pay.

Legal Basis and Regulations Related to Employee Employment Contracts

Employee contract regulations are clearly outlined in Law No. 13 of 2003 on Manpower, the Job Creation Law, and Government Regulation No. 35 of 2021 concerning Fixed-Term Employment Agreements (PKWT), Outsourcing, Working Hours, and Termination of Employment (PHK).

Here’s the overview:

1. Types of Employment Agreements and Employee Status

Regulations distinguish between two main types of employment agreements:

• PKWT (Fixed-Term Employment Agreement) – for temporary or project-based jobs.

• PKWTT (Permanent Employment Agreement) – for continuous and long-term jobs.

Both agreements must clearly state the employee’s rights, obligations, and duration to ensure fairness for both parties.

2. Written Contract Requirement for Employers

Every employer is required to prepare a written employment contract signed by both parties.

This document serves as valid proof of the employment relationship and must include employee details, position, salary, and contract duration.

Without a written agreement, the company’s legal position becomes weak in case of labor disputes.

3. Probation Period, Contract Extension, and Compensation

The Job Creation Law and PP 35/2021 also regulate probation limits, contract extensions, and employee compensation:

• Permanent employees (PKWTT) can have a maximum three-month probation period.

• Fixed-term employees (PKWT) can only extend contracts up to a maximum total of five years.

• Once the contract ends, employees are entitled to compensation based on their length of service.

4. Employee Rights Protection in Employment Relationships

Labor regulations emphasize that every employment agreement must protect employees’ rights, including:

• Fair wages and allowances.

• Regulated working hours and rest periods.

• Participation in BPJS and other social security programs.

These provisions ensure fair, humane, and lawful working conditions.

Read Also : Understanding the Outsourcing Labor Law in Indonesia

Key Components of Employee Employment Contract Rules

Every employment contract must include essential components as its legal foundation. These elements ensure both parties’ rights and obligations are protected under the Manpower Law and Job Creation Law. 

Berikut penjelasannya:

1. Employee and Employer Information

This section lists the employee’s and company’s complete details, including names, addresses, positions, and employment status.

It must also specify the type of employment agreement—whether PKWT or PKWTT—to clarify the nature of the relationship.

2. Rights and Obligations of Both Parties

The contract should state job responsibilities, working hours, wages, allowances, and performance standards.

In return, the employer must ensure a safe workplace, proper facilities, and timely wage payments.

Clear terms prevent misunderstandings or violations of rights.

3. Contract Duration and Validity Period

This section specifies how long the contract lasts and the terms for renewal if necessary.

• For PKWT (contract employees): maximum duration of five years, including extensions.

• For PKWTT (permanent employees): indefinite duration.

Clear duration terms help companies manage work schedules and HR administration efficiently.

4. Sanctions and Termination Procedures

Contracts should include clauses on how to resolve breaches by either party. This includes termination procedures, compensation entitlements, and dispute resolution mechanisms as outlined in PP No. 35/2021.

5. Additional Clauses in Employment Agreements

Additional clauses may cover:

• Confidentiality of company information.

• Training obligations during employment.

• Non-compete clauses after employment ends.

These protect the company’s business interests while maintaining employee professionalism during and after employment.

Read Also: Occupational Health and Safety Law You Should Know

Why Companies Must Comply with Employee Employment Contract Rules?

Compliance with employee employment contract rules is not just a legal obligation—it’s a long-term investment in sustainable business operations. The result is a transparent, fair, and professional HR system. Here’s why:

1. Enhances Legal Certainty and Employee Trust

Contracts that comply with the Manpower Law and Job Creation Law provide a strong legal foundation for both employers and employees.

This legal clarity fosters professionalism, boosts productivity, and strengthens employee trust in management, knowing their rights are well protected.

2. Prevents Legal and Administrative Sanctions

Non-compliance with employment regulations can result in serious consequences.

Companies risk administrative penalties, labor lawsuits, and reputational damage that could harm public trust.

Ensuring that all employment contracts meet legal requirements helps maintain business stability.

3. Promotes Professional and Efficient HR Management

Adhering to employment contract regulations reflects a structured and modern HR management approach.

With clear and lawful administrative systems, companies can focus on improving performance without legal distractions.

For many organizations, an effective way to maintain compliance is to partner with a professional staffing service like SOS, which ensures that all employee contracts are properly structured and legally compliant.

Manage Employment Contracts and HR Efficiency with SOS

As a professional manpower provider, SOS helps companies ensure that all employee contract and administrative processes comply with current labor laws.

Here’s what we offer:

• Legally compliant documentation based on the latest regulations.

• Transparent, auditable HR administration.

• Time and cost efficiency without compromising legal compliance.

Contact SOS for consultation and discover legal and efficient HR management solutions for your business.