Indonesian Employment Contracts

Indonesia’s employment laws are detailed and protective, aiming to balance the rights of workers with the needs of employers. Whether you are hiring staff or starting a new job, understanding the basics of employment contracts in Indonesia is crucial for compliance and avoiding disputes.

Types of Employment Contracts

Indonesian law recognizes two main types of contracts:

1. Perjanjian Kerja Waktu Tertentu (PKWT) – Fixed-term contracts.

2. Perjanjian Kerja Waktu Tidak Tertentu (PKWTT) – Permanent contracts.

A PKWT is designed for temporary or project-based work. It must be in writing, in the Indonesian language, and include clear start and end dates. The maximum duration is generally five years, including extensions. PKWTs are not meant for ongoing roles that form part of a company’s core business. If a PKWT is used for permanent-type work, it may automatically convert into a PKWTT.

A PKWTT is a permanent employment contract. It can start with a probation period of up to three months (for non-blue-collar roles), and it remains valid until the employee resigns, is terminated according to law, or reaches retirement.

Mandatory Contract Contents

Under Indonesian law, employment contracts must include:

• Name and address of the employer and employee

• Job title and description

• Location of work

• Salary and benefits

• Terms of work, including hours, leave entitlements, and social security contributions

• Start date and duration (for PKWT)

• Rights and obligations of both parties

Contracts must be written in Bahasa Indonesia. If a bilingual contract is used, the Indonesian version prevails in case of disputes.

Employee Benefits and Protections

Employees in Indonesia are entitled to various statutory benefits. These include annual leave (at least 12 days after one year of service), public holidays, maternity and paternity leave, sick leave, and religious holiday allowance (THR). Social security contributions to BPJS Ketenagakerjaan and BPJS Kesehatan are mandatory.

In the event of termination, severance pay rules are strict and vary depending on the length of service and the reason for termination. Employers must follow proper termination procedures, often requiring negotiation or mediation to avoid legal challenges.

Common Mistakes to Avoid

Employers sometimes misuse PKWT contracts for roles that should be permanent, risking automatic conversion and liability for severance. Another common error is failing to register PKWTs with the Ministry of Manpower, which can invalidate the contract. On the employee side, signing a contract without fully understanding its terms—especially in a foreign language—can lead to misunderstandings about salary, benefits, or termination rights.

Conclusion

In Indonesia, employment contracts are more than formalities—they are legally binding agreements governed by strict labor laws. For employers, compliance is not optional; mistakes can lead to costly disputes. For employees, knowing your rights ensures you are protected and treated fairly. Both parties should take the time to draft, review, and understand every term before signing. A well-structured contract builds trust, clarifies expectations, and creates a stable foundation for a productive working relationship