Dynamic Growth Market with Expanding Workforce Potential

Indonesia’s dynamic economy, growing middle class, and rapidly expanding digital sector make it an attractive destination for regional business expansion. However, companies entering the market must navigate a complex employment landscape, including local labour laws, mandatory BPJS (Badan Penyelenggara Jaminan Sosial) social security contributions, and evolving workforce regulations. Understanding these compliance requirements is essential for operating efficiently in one of Southeast Asia’s most diverse and populous labour markets.

Work Week and Leave

Maximum Working Week
In Indonesia, standard working hours amount to 40 hours per week, which can be distributed as either seven hours a day across six working days or eight hours a day across five working days each week.

Sick Leave
Sick leave is not defined by a specific number of days. The reduction in the employee’s salary during sick leave is determined by the duration of the absence:

• The employer covers 100% of compensation for the first 4 months.
• The employer covers 75% of compensation from 4 to 8 months.
• The employer covers 50% of compensation from 8 to 12 months.
• The employer covers 25% of compensation for the first 12 months.

Employees are entitled to paid sick leave, provided they submit a valid medical certificate from a doctor.

Maternity Leave
Maternity leave for mothers spans 3 months, with full pay. Female employees are granted 2 days of paid leave during the first and second days of their menstrual cycle.

Paternity Leave
Employees in Indonesia are eligible for two days of leave following the birth of their child or in the case of a miscarriage.

Other Leaves
According to Manpower law, bereavement leave is given for 2 days for the death of spouse, parents, parent-in-law and children and 1 day for the death of family member who’s living with the employee in the same house.

Wages

Payroll
Salary is usually paid on the 25th of each month.

Minimum Wage
Jakarta’s minimum wage for 2025 is IDR 5,396,791, with each region in Indonesia setting its own minimum wage.

Overtime
Overtime in Indonesia is any work performed beyond the standard working hours and is typically governed by employment contracts or collective agreements. The maximum allowable overtime is limited to 4 hours per day or 18 hours per week.

The rate of overtime pay varies based on the type of day and the number of hours worked beyond the standard schedule. On regular workdays, the first hour of overtime is compensated at 150% of the regular hourly wage, and any subsequent overtime hours are paid at a higher rate of 200%.

When employees work overtime on a weekly rest day or a public holiday that falls on their regular day of rest (provided they have a six-day workweek), the overtime pay structure is as follows:

• The first seven extra hours are paid at a rate of 200% of the regular hourly wage.
• The eighth hour of overtime is compensated at 300%.
• Any additional hours from the ninth to the tenth are paid at a higher rate of 400%.

If employees work overtime on a weekly rest day or a public holiday while following a five-day workweek, the overtime pay is structured as follows:

• The first eight extra hours are paid at 200% of the regular hourly wage.
• The ninth hour is paid at 300%.
• Any extra hours from the tenth to the eleventh are compensated at a higher rate of 400%.

Paid Time Off
Employees are entitled to 12 days of annual leave after completing 1 year of continuous service. After that, employees are entitled to 12 days of annual leave each subsequent year. Annual leave must be used within the year it is granted.

Income Tax

In Indonesia, Personal Income Tax (PIT) is applicable to individuals at progressive rates ranging from 5% to 35%. Expatriates should be aware that PIT is determined through a self-assessment scheme, and the country follows a worldwide income taxation system.

Indonesian tax residents must pay tax on both their domestic and foreign income unless a double tax agreement is in place. Non-residents are only taxed on income earned in Indonesia, subject to tax treaties.

Eligibility for PIT is based on an individual’s presence in Indonesia for more than 183 days in a 12-month period or having the intention to stay in the country. Factors defining “residing in Indonesia” include having a place of residence, vital interests, and habitual abode in Indonesia. The “intention to stay” requires supporting documents like a permanent stay permit or limited stay visa.

Foreigners who become domestic tax subjects are taxed only on Indonesian-sourced income if they meet expertise requirements. This expertise should be certified, and there should be an obligation for knowledge transfer to an Indonesian citizen. Certain foreign expatriates, like diplomatic personnel, military staff, and specific international organization representatives, are exempt from PIT.

Residents are subject to progressive withholding tax rates, while non-residents face a flat 20% tax on gross income. Deductions and relief are available, including deductions for individuals, spouses, and dependents.

The PIT rates for residents are as follows:

• Up to IDR 60 million: 5%
• Above IDR 60 million to IDR 250 million: 15%
• Above IDR 250 million to IDR 500 million: 25%
• Above IDR 500 million to IDR 5 billion: 30%
• Above IDR 5 billion: 35%

However, starting January 1, 2024, the PIT rates for residents will be withheld based on the new effective tax rates (ETR), as stipulated by Government Regulation No. 58 of 2023. These rates will be applied from January until November. Nevertheless, the annual calculation that is carried out in December is still done using the progressive income tax rate under Article 17(a) of the Income Tax Law as above, potentially leading to underpayment or overpayment in that month.

There are three categories of taxpayers based on GR 58/2023;

• Category A (Single with no dependent, Single with one dependent, Married with no dependent)
• Category B (Single with two dependents, Single with three dependents, Married with one dependent, Married with two dependents)
• Category C (Married with three dependents)

Employers are responsible for withholding and remitting taxes monthly, and expatriate employees must complete an annual tax return. Individual taxpayers, both residents and non-residents, can deduce specific amounts from their gross income when determining the annual taxable income.

Tax deregistration is recommended for expatriates leaving Indonesia to avoid continuous tax residency. To do so, they must submit an application to the local tax office.

Indonesia provides income tax exemptions for certain types of income, such as foreign dividends received by domestic taxpayers, subject to reinvestment requirements.

Reporting individual tax returns can be done directly at the tax office, through postal services, or authorized online tax services. It’s crucial for expatriates to seek assistance from registered local tax advisors to understand their tax liabilities and potential exemptions.

Social Insurance

The Workers Social Security Scheme in Indonesia covers various areas, with contributions based on monthly wages. Employers contribute to life insurance, accident insurance, old age benefits and pension plan. Here’s a breakdown:

• Life insurance: 0.3% (recomposed into 0.2% in case there is a JKP (unemployment benefit) claims and will be automatically counted by Social Insurance).
• Accident insurance: 0.24-1.74% (recomposed into 0.10 – 1.60% in case there is a JKP (unemployment benefit) claims and will be automatically counted by Social Insurance).
• Old age benefits: 3.7% by employer and 2% by employee
• Pension plan: 2% by employer and 1% by employee of fixed monthly salary with maximum cap at IDR 10,547,400.

Under the BPJS Ketenagakerjaan program, mandatory for all businesses, employees contribute 3% of their monthly salary. The scheme covers accident compensation, old age benefits, pension benefits, and life insurance.

Health Insurance
The BPJS healthcare program (BJPS Kesehatan) is a vital national insurance initiative that encompasses all Indonesian residents. It is designed to provide members with three crucial categories of healthcare services:

• Basic Healthcare Services
• Advanced Healthcare Services
• Hospitalization Services

Contribution Rate:

• Employer Contribution Rate: 4% (capped at IDR 480,000)
• Employee Contribution Rate: 1% (capped at IDR 120,000)

The maximum wage considered for these calculations is IDR 12 million. Even if an employee’s salary surpasses this threshold, both employer and employee contributions are capped at IDR 480,000 and IDR 120,000, respectively.

Contributions are due by the 15th of each month. If the 15th falls on a weekend or public holiday, the following business day will be considered the due date. The program covers the employee, their spouse, and up to three children (including stepchildren), for a total of five members.

In Indonesia, the employment of foreign workers is regulated by the Ministry of Manpower, particularly through Regulation No. 8 of 2021 (MOM Reg 8/2021). To hire a foreign worker, a local company must create a detailed Foreign Worker Utilization Plan (RPTKA), specifying the work, position, and length of employment. The RPTKA serves as the basis for visa and stay permit approval by the Ministry of Manpower.

The application process involves submitting the RPTKA online, addressed to the Director of Foreign Manpower Utilization Management. The employer, which can include various entities like government institutions, private companies, and cultural institutions, undergoes a feasibility study by MOM to ensure compliance with requirements. The assessment includes information on the employer, reasons for hiring a foreign worker, the position within the company, the number of foreign workers, contract details, and more. Results are issued within two working days.

Following the assessment, the employer submits personal information and documents of the foreign worker for verification by MOM. Upon approval, a payment of US$1,200 is required upfront to cover 12 months’ contributions to the Foreign Workers Compensation Fund and 1 time payment of PNBP (Penerimaan Negara Bukan Pajak) is an administration of Non-Tax State Revenue in amount of US$150. Once paid, the MOM issues the RPTKA approval, and the data is sent to the Ministry of Law and Human Rights for visa and stay permit processing.

Exemptions to the RPTKA process exist for certain categories, such as board members, diplomatic staff, or emergency activities. For tech-based startups, a three-month RPTKA exemption is granted, after which an application for RPTKA approval is required.

Upon RPTKA approval, the MOM issues an IMTA, and the immigration office provides a limited-stay visa (VITAS). After arriving in Indonesia, the foreign worker converts the VITAS to a limited stay permit (KITAS). Additional requirements for VITAS include a letter of good standing from the embassy or consulate and a health letter.

Recent regulatory changes, such as GR 48/2021, extend the validity of the Limited Stay Permit (ITAS) to five years, with a one-time five-year extension. Expatriates can convert their visit stay permit to ITAS or ITAS to a permanent stay permit (KITAP), eliminating the need for annual visits to the immigration office.

The Permanent Stay Visa (KITAP) allows expatriates to permanently stay in Indonesia after holding a KITAS for four consecutive years. A local sponsor, such as the employer or spouse, is required. Conversion of stay permits simplifies processes for foreign workers, easing administrative burdens and providing added certainty.

In accordance with Government Regulation No. 35 of 2021, employers in Indonesia have specific grounds for terminating employees, each associated with severance payment, service reward, compensation pay for rights, and detachment money components. The reasons range from mergers, takeovers, and company closures due to several factors such as financial losses or force majeure. Employees can also resign voluntarily or be terminated for specific violations, prolonged illnesses, reaching pension age, or passing away, each with corresponding compensation.

However, termination on invalid grounds is prohibited, such as sickness, fulfilling state obligations, religious practices, marriage, childbirth, reporting crimes, and discriminatory reasons. The termination process involves a written notice of resignation from employees at least 30 days before the last day and a written notice from employers at least 14 working days or seven working days during the probation period. This comprehensive framework ensures fair and just employment termination practices in Indonesia.

Note: On mass leave days, government institutions and banks will be closed. Therefore, banking transactions and services related to government offices may not be available on these days.

Please find our Indonesia office address below:

One Pacific Place 15th Floor,
Jl. Jend. Sudirman Kav. 52-53,
Kebayoran Baru,
Jakarta Selatan 12190, Indonesia

Email: info@linkcompliance.com