Understanding employee work contracts according to the law is essential to maintain legal compliance and create a professional working relationship. Contract types, employment terms, and the rights and obligations of both parties must be properly regulated.
Check the complete explanation below.
Employee Work Contract Regulations in Indonesia
In Indonesia, the regulations regarding the work contract system are stated in Law No. 13 of 2003 on Manpower, updated through Government Regulation (PP) No. 35 of 2021 as the implementing regulation of the Job Creation Law.
Broadly speaking, employee work contracts are divided into two types:
1. Fixed-Term Employment Agreement (PKWT)
PKWT, or fixed-term employment contracts, are intended for jobs that are temporary, seasonal, or based on a specific period.
Under the law, PKWT can only be applied to:
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Work that will be completed within a certain period,
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Seasonal work,
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Work related to new products, new activities, or additional products still in the trial phase.
The maximum duration for PKWT is 5 years (including extensions and renewals), as stipulated in PP No. 35 of 2021.
2. Indefinite-Term Employment Agreement (PKWTT)
PKWTT is a permanent employment contract without a time limit. This contract type is used for positions that are permanent and continuous.
In practice, PKWTT requires a probationary period of up to 3 months, during which the employee must receive the same rights and obligations as other permanent employees.
The company must provide a written contract that includes the parties’ identities, job position, rights and obligations, employment period, and wage system.
Read Also: 7 Ways to Boost Employee Motivation – A Must-Know for HR!
What Causes the Termination of an Employee Work Contract?
Termination of an employee work contract must be based on legal provisions to avoid disputes or legal risks in the future.
Under Article 81 Number 16 of Law No. 6 of 2023, which amends the Manpower Law through the Job Creation Law, an employment agreement ends when:
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The employee passes away, automatically ending the employment relationship.
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The contract term expires, particularly for PKWT.
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Selesainya suatu pekerjaan tertentu, jika proyek atau tugas yang menjadi dasar perjanjian telah rampung.
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There is a court decision or industrial relations dispute settlement with permanent legal force.
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Certain conditions stated in the contract, company regulations, or collective agreement occur, such as significant financial loss to the company.
To ensure lawful termination, companies must follow the agreed-upon reasons in the contract and meet administrative requirements such as written notice and compensation calculation.
Read Also: 6 Effective Strategies for Employee Performance Appraisal
What Are the Compensation Rights in an Employee Work Contract?
One crucial element in an employment contract is compensation rights. This is clearly stated in Article 15 of Government Regulation No. 35 of 2021, which defines:
"Compensation payment is a form of entitlement given to PKWT employees when their contract ends."
Compensation formula for PKWT:
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PKWT of 12 months or more: 1 month’s full wage as compensation.
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PKWT of 1 month or more but less than 12 months: (Months worked ÷ 12) × 1 month’s wage.
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PKWT exceeding 12 months: Calculated proportionally based on months worked.
Example:
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Employee works 6 months with a salary of Rp5,000,000:
Compensation = (6 ÷ 12) × Rp5,000,000 = Rp2,500,000
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Employee works 15 months with a salary of Rp6,000,000:
Compensation = (15 ÷ 12) × Rp6,000,000 = Rp7,500,000
Failure to provide compensation in accordance with the law may result in legal claims from former employees.
Read Also: 10 Types of Employee Allowances Provided by Companies
What Are the Penalties for Violating an Employee Work Contract?
The employment relationship between a company and an employee is bound by the signed employment agreement. Violating this agreement can result in sanctions for both parties:
Penalties for Companies
Companies must implement the employment relationship according to the signed agreement. Article 55 of the Manpower Law states:
"An employment agreement cannot be withdrawn and/or amended unless agreed upon by both parties."
This means that the company is not allowed to change the contents of the contract or assign different work without the employee’s written consent.
If the company assigns work outside the agreed scope without written consent, it violates Article 52 letter c regarding “the work agreed upon.”
Legal consequences:
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The contract is null and void.
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The company may be considered in breach of contract or engaging in unlawful acts.
Criminal Sanctions
In addition to being declared null and void by law, certain violations may also be subject to criminal sanctions, particularly those related to workers’ fundamental rights such as wages, working hours, and occupational safety.
Referring to Article 81 point 63 of the Job Creation Law, which amends Articles 185–188 of the Manpower Law, companies that violate statutory provisions may be subject to:
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Administrative fines
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Revocation of operational permits
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Certain criminal penalties depending on the violation
Read Also: 5 Strategies to Recruit High-Quality and Professional Employees
Penalties for Employees Who Violate an Employee Work Contract
Not only companies, but employees are also obliged to fulfill the terms of the employee work contract to the best of their ability. If a violation occurs, the following penalties may apply:
1. Resigning Without Valid Reason
Employees who resign abruptly without a clear reason and without following the proper resignation procedure may face:
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Written Warnings: Based on Article 161 paragraphs (1) and (2) of the Manpower Law, if an employee violates the terms of the employment agreement, the company may issue a maximum of three consecutive written warnings, each valid for six months (or as per internal regulations).
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Termination of Employment (PHK): If no improvement is made after three warnings, the company may terminate the employment relationship.
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No Salary Payment: Under Article 93 paragraph (1), wages are not paid if the employee does not perform their work. However, if the absence is due to a valid reason (such as illness, marriage, or a natural disaster), the employee is still entitled to wages as stipulated in Article 93 paragraph (2).
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Demotion or Other Disciplinary Actions: Depending on the company’s internal policy.
2. Being Late for Work
Tardiness is also considered a minor violation that can be penalized, depending on the severity and frequency.
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Fines or Salary Deductions: Based on Article 63 paragraph (1) letter a of Government Regulation No. 36 of 2021 on Wages, wage deductions are permitted to pay fines due to lateness, as long as this is regulated in company policy and agreed upon by the employee.
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Verbal or Written Warning: For minor or first-time violations, the penalty is usually administrative in nature.
Understanding and implementing employee work contracts in accordance with prevailing laws is not only a sign of compliance with labor regulations but also a reflection of professionalism in managing human resources.
Companies must ensure that their employee work contract system complies with the law, covering aspects such as the type of contract, causes for termination, compensation entitlements, and handling of contract violations.
If a company does not have the resources to manage these processes internally, partnering with a reliable and experienced third party is a strategic solution.
SOS is here as a solution to help your company manage its workforce professionally and in full compliance with regulations.
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Administration and office support
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This includes employee work contracts that comply with regulations and the fulfillment of all labor rights.
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