Indonesia Severance & Labor Law 2026

Why Indonesian employment law deserves your full attention

If you are hiring in Indonesia — whether you are a local company, a regional group, or a foreign business bringing on remote talent — the single most important thing to understand is this: Indonesia is an employee-protective jurisdiction. Employment is not "at will." You generally cannot end a working relationship simply because it is no longer convenient, and when employment does end, statutory payments often follow.

This is not a quirk of practice. It is written into the law, enforced by a dedicated court, and routinely tested in disputes. Employers who treat Indonesian hiring like a US or Singapore arrangement tend to discover the gap the expensive way: at the industrial relations court, after a dismissed worker files a claim.

This guide walks through the legal framework, the difference between fixed-term and permanent contracts, probation rules, how termination and severance actually work, where employers most often slip, and how an Employer of Record (EOR) such as Deel reduces the risk of all of it. Treat the figures and mechanics here as a working orientation, not formal legal advice — as of 2026, many points are interpreted case-by-case, so verify specifics with a qualified Indonesian labor advisor.

The legal framework, in plain terms

Indonesian employment is governed primarily by UU No. 13/2003 (the Manpower Law / Undang-Undang Ketenagakerjaan). That law was significantly amended by UU No. 6/2023, the law confirming the Cipta Kerja (Job Creation / "Omnibus") reforms. The Omnibus framework reshaped a number of employment rules — including fixed-term contracts, outsourcing, working time, and the mechanics of termination and severance.

Sitting underneath the statute is implementing regulation PP No. 35/2021, which provides the operational detail on fixed-term employment agreements (PKWT), outsourcing, working time and rest, and termination of employment (pemutusan hubungan kerja, or PHK). When you need the "how" rather than the "what," PP No. 35/2021 is usually where the answer lives.

For practical purposes, you should think of these three instruments as a stack: UU No. 13/2003 is the base, UU No. 6/2023 (Cipta Kerja) is the amendment layer, and PP No. 35/2021 is the regulation that operationalizes the post-Omnibus rules.

Two contract types: PKWT vs PKWTT

Almost every employment relationship in Indonesia falls into one of two categories, and choosing the wrong one is one of the most common — and most costly — mistakes employers make.

• PKWT (Perjanjian Kerja Waktu Tertentu) — a fixed-term employment agreement, used for work that is temporary or time-bound by nature.
• PKWTT (Perjanjian Kerja Waktu Tidak Tertentu) — an indefinite / permanent employment agreement, the default for ongoing roles.

The distinction is not cosmetic. It changes whether you can impose probation, what happens at the end of the term, and what you owe when the relationship ends. Here is how they compare:

The headline takeaway: PKWT is for genuinely temporary work, not a loophole to avoid severance. If you put a permanent-type role on a string of fixed-term contracts, you are exposed to the risk that the arrangement is reclassified as permanent — at which point the protections and payments of a PKWTT attach retroactively.

Probation: narrow and strictly limited

Probation in Indonesia is more constrained than many employers expect.

• Probation is only allowed for PKWTT (permanent) employment. You cannot impose a probation period on a fixed-term PKWT worker — such a clause is treated as void.
• Probation may last a maximum of three months.
• During probation you cannot pay below the applicable minimum wage. The "trial period" does not license sub-minimum pay.

Even within probation, a dismissal still needs to be handled properly rather than treated as a free pass to terminate at will. The practical rule of thumb: probation narrows your obligations somewhat, but it does not put you back into an at-will world.

Termination (PHK) and the severance package

Termination of employment — PHK — is the area where the protective character of Indonesian law is most visible. As a general principle, ending a permanent employment relationship requires a valid ground, and the process matters as much as the reason.

When a qualifying termination occurs, the law contemplates a statutory package that, depending on the reason for termination, can be made up of three components:

1. Severance pay (uang pesangon) — the core payment, scaled to the employee's length of service.
2. Long-service / reward pay (uang penghargaan masa kerja) — an additional service-recognition payment that applies once an employee reaches certain tenure thresholds.
3. Compensation of rights (uang penggantian hak) — reimbursement for accrued entitlements, such as untaken annual leave and other rights owed at separation.

A crucial nuance: not every termination triggers the same package. The reason for the PHK — for example, redundancy, business closure, retirement, certain forms of misconduct, or resignation — affects which components are due and at what multiple. The exact multipliers are set by regulation and are applied case-by-case, so the right approach is to calculate each separation against the specific ground rather than assuming a single flat formula.

Severance scales with tenure — via multipliers, not a flat number

Severance pay is multiplier-based: the longer the employee's service, the more months of pay the formula produces, up to statutory ceilings. Uang penghargaan masa kerja follows its own tenure-banded schedule. Because the precise multiplier tables are fixed by regulation and interpreted case-by-case — and because the applicable multiple can vary with the reason for termination — this guide deliberately does not reproduce a full multiplier table. As of 2026, treat severance as "tenure-scaled and regulation-defined," and calculate any real separation with a qualified advisor or a payroll partner that maintains the current tables. Verify, as rules are interpreted case-by-case.

PKWT employees: end-of-contract compensation

Under the post-Omnibus framework, fixed-term PKWT employees are now entitled to a completion payment (uang kompensasi) at the end of their contract, scaled to how long they worked. This is separate from PKWTT severance and is one of the changes employers most often overlook — a PKWT ending "naturally" at its term is not a zero-cost event.

How disputes are resolved

If employer and employee disagree about a termination or its payments, the dispute does not go straight to litigation. The expected path starts with bipartite negotiation — direct discussion between the parties — and, if that fails, can escalate through mediation and ultimately to the Industrial Relations Court (Pengadilan Hubungan Industrial, or PHI). The PHI is a real and active forum, and a poorly documented or poorly calculated termination is exactly the kind of matter that ends up there.

Where employers get this wrong

The same handful of mistakes account for most Indonesian employment disputes. If you avoid these four, you avoid the majority of the risk.

• Misusing PKWT for permanent roles. Putting a core, ongoing job on a fixed-term contract (or a chain of them) to sidestep severance is the classic error. If the work is permanent in nature, the arrangement can be deemed PKWTT — and the permanent-employment obligations attach.
• No Bahasa Indonesia contract. Employment agreements are expected to be in Indonesian (a bilingual version is common and sensible). Relying on an English-only contract creates enforceability and interpretation risk, especially in a dispute.
• Informal dismissal without process. Telling someone "today is your last day" without a valid ground, documentation, and the proper process is not a clean termination — it is the setup for a PHI claim. Process and paper trail matter.
• Under-calculating pesangon. Because severance is multiplier-based and the applicable multiple depends on the termination reason and tenure, it is easy to underpay by applying the wrong formula. Under-calculation is one of the most common triggers for a dispute — and the shortfall, plus the cost of fighting it, usually dwarfs the original "saving."

How an EOR like Deel reduces termination risk

For companies hiring in Indonesia without a local entity — or wanting to offload the compliance burden even with one — an Employer of Record changes the risk profile. With Deel acting as EOR, Deel becomes the compliant legal employer of record in Indonesia: it holds the local employment relationship, issues locally compliant PKWT or PKWTT contracts drafted to the current statutory framework, and runs payroll and statutory contributions correctly from day one. That removes the most common upstream mistakes — wrong contract type, missing Bahasa Indonesia agreement, sub-minimum probation pay — before they ever happen.

Just as importantly, Deel handles the back end. When a role ends, Deel calculates the statutory severance components correctly for the specific termination reason and tenure, and manages offboarding within Indonesian law — including the process steps that, done informally, are what land employers in front of the PHI. In effect, the EOR converts an unfamiliar, dispute-prone process into a managed, compliant one.

Before you terminate anyone, weigh the exposure

It is worth being blunt about the stakes. A mishandled dismissal in Indonesia is not a minor administrative hiccup. Wrongful-termination disputes, exposure at the Industrial Relations Court (PHI), and severance miscalculation are recurring, real, and expensive — and they tend to surface at the worst possible moment, when you have already moved on and assumed the matter was closed. The cheapest dispute is the one you design out of existence by getting the contract type, the documentation, and the severance math right the first time.

FAQ

Is severance mandatory in Indonesia?

In many cases, yes. On a qualifying termination (PHK) of a permanent (PKWTT) employee, the law contemplates a statutory package that can include severance pay (uang pesangon), long-service pay (uang penghargaan masa kerja), and compensation of rights (uang penggantian hak). Which components apply, and at what multiple, depends on the reason for termination — so it must be assessed case-by-case.

What is the difference between PKWT and PKWTT?

PKWT is a fixed-term employment agreement for temporary or project-based work, while PKWTT is an indefinite, permanent agreement for ongoing roles. PKWT cannot include a probation period and now carries an end-of-contract compensation payment, whereas PKWTT permits up to three months' probation and is subject to the full severance framework on qualifying termination. Using PKWT for genuinely permanent work risks reclassification as PKWTT.

Can I fire an employee for poor performance?

Not informally, and not without process. Termination generally requires a valid ground plus proper documentation and procedure, and performance-based dismissals in particular need to be substantiated rather than asserted. Skipping the process is the most reliable way to end up defending a claim at the PHI — so build the record, follow the steps, and verify the correct approach case-by-case.

How long can probation last?

A maximum of three months, and only in a permanent (PKWTT) relationship. Probation is not permitted in a fixed-term PKWT contract, and even during probation you cannot pay below the applicable minimum wage.

Do PKWT (contract) employees get any end-of-contract pay?

Yes. Under the post-Omnibus framework, PKWT employees are entitled to a completion payment (uang kompensasi) at the end of their fixed term, scaled to their length of service. This is separate from PKWTT severance and is frequently overlooked by employers who assume a contract ending "on schedule" costs nothing.

Where are employment disputes resolved?

Disputes generally start with bipartite negotiation directly between the parties, can move through mediation, and ultimately reach the Industrial Relations Court (Pengadilan Hubungan Industrial, or PHI). Because the PHI is an active forum and outcomes turn on documentation and correct payment calculations, getting the contract and severance math right up front is the best dispute-avoidance strategy.