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An Important Caveat: Are Expatriate Employees Entitled To Severance Payment in Indonesia?

March 2015 - Employment. Legal Developments by Budidjaja & Associates .

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By Diana Kusumasari, Senior Associate

The Jakarta Industrial Relations Court recently issued a decision stating that a foreigner (non-Indonesian) who was dismissed as the Managing Director of an Indonesian incorporated company was entitled to severance pay, long service pay, and compensation of rights. This decision moves away from the prevailing understanding of Law No. 13 of 2003 on Manpower (“Manpower Law”) which is that expatriate employees are required to be “fixed term” employees and that fixed term employees are not entitled to severance pay, long service pay, and compensation of rights.

Mr. Vijay Perapti, an expatriate, became a director of PT. Tradition Indonesia in 1993 and then managing director in 1996. After serving as a director in the company for ten (10) years, Mr. Perapti claimed that he was dismissed by the company in September 2013, following a general meeting of shareholders. Mr. Perapti claimed that no reasons were provided for his dismissal.

Article 42 paragraph 4 of the Manpower Law provides that an expatriate may only be employed in a particular position for a “fixed term”. The period of fixed-term employment agreement is two (2) years, with a possible one (1) year extension. These agreements may be renewed once for a maximum of two (2) years, but only after a break of thirty (30) days.

The procedure for employing expatriates is subject to regulations which include, for example, the requirement to obtain official approval to engage expatriates (RPTKA) as well as the requirement to secure work permits for expatriates (IMTA). As a matter of practice, this generally means that expatriates enter into fixed-term employment contracts, commensurate with the terms of the underlying work permits (subject to possible extensions).

Note, however, that many Indonesian employers do not comply with the limits on employing expatriates. This practice has given rise to a line of argument amongst many legal practitioners and jurists that expatriate employees may be considered as permanent employees and are therefore entitled to severance pay upon the termination of their employment.

Severance Entitlement

There is no specific regulation under Indonesian law governing the right of expatriate employees to receive severance pay. The widely accepted view, however, is that expatriate employees are not entitled to severance pay.

Severance pay is commonly understood as compensation paid to a qualified employee for loss of job and job-related benefits as a result of having his/her employment severed. It is widely acknowledged that one of the reasons for regulating severance payment in the Manpower Law is to protect local employees, and not expatriate employees. The reason for not extending protection under the Manpower Law to expatriate employees is because they are generally paid much higher salaries relative to local employees and also generally enjoy benefits that are not provided to local employees, such as housing, generous health care benefits, life insurance, etc.

However, several recent judgments of the Industrial Relations Court and the Supreme Court that support this argument cannot be generally applicable to all expatriate employees. Under the civil law tradition, Indonesian courts are not bound by precedents (stare decisis) when ruling on a particular case. Further, the National Working Meeting of the Supreme Court decided in 2008, that the issue of expatriate employees’ entitlements to severance pay is to be decided on the facts of each case (casuistic).  

Interestingly, in Mr. Perapti’s case, the judge decided that PT. Tradition Indonesia should pay 1.59 Billion to Mr. Perapti as compensation for his dismissal. This amount comprised severance pay, wages for the period of October 2013 – August 2014 and compensation of rights. This decision is not consistent with the widely accepted view that a director appointed by the general meeting of shareholders is not subject to the Manpower Law, and that an expatriate under fixed-term employment is not entitled to severance pay.

Given to the above facts, employers are encouraged to obtain appropriate legal advice before hiring or terminating expatriate employees. The more cautious approach is for employers to obtain legal advice prior to the recruitment of expatriate employees and when drafting employment agreements.

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