Asia-Pacific law bulletin 2025

Indonesia

Landmark ruling of the Constitutional Court

In a landmark ruling issued in 2024, on Case No. 168/PUU-XXI/2023 (Decision), the Constitutional Court addressed a judicial review of key provisions of Law No. 13 of 2003 on Employment, as amended by Law No. 6 of 2023 (the Employment Law).

The Decision scrutinised several aspects of the Employment Law by:

• Focusing on a number of regulations involving fixed-term employment agreements, severance pay, wage policies and minimum wage standards, employment termination, foreign employees, outsourcing, leave entitlements, compensation for unpaid wages and length-of-service awards; and
• Approving a constitutional review of 21 provisions of Law No. 6 of 2023 of the Employment Law, although a total of 69 Employment Law provisions were challenged by the claimants.

There are three substantive changes that require employers to adapt their employment practices, as elaborated below.

Time limits on project-based fixed term employment agreements

The Decision has established a strict five-year limit for all fixed-term employment agreements. Previously, project-based fixed-term agreements tied to the ‘completion of work’ were interpreted to potentially exceed the five-year limit, as their duration depended on the completion time of the project itself.

Severance payment

Upon termination of employment, a permanent employee is entitled to a severance package, the amount of which is determined by a regulated formula which takes into account the employee’s length of service and the reason for termination.

The Decision, however, opens up the possibility for severance payments to exceed the statutory amount since the Court declared the regulated formula to be the minimum amount. This gives employees greater leverage in negotiations to demand a higher severance package. Therefore, employers must be prepared for upcoming requests for higher severance packages, particularly if the employees deem that their termination is contestable and unjust.

Employer and employee obligations during industrial disputes

Prior to the Decision, employers had to continue paying salaries for up to six months during the process of an industrial dispute. However, the Decision clarifies that both employers and employees must fulfil their respective obligations (including the payment of salary) until a final and legally binding decision has been rendered, which may result in prolonged financial commitments for employers.

Anticipated regulatory changes, following the Decision

The Decision signals that more changes are on the horizon. The Government of Indonesia is now tasked with drafting new and / or amending existing legislation to address the points raised in the ruling. This expected legislation will provide the necessary legal framework to ensure that the Employment Law aligns with the Decision and offers further clarity for both employers and employees on the Decision’s practical implementation.

Conclusion

The Decision represents a significant shift in Indonesia’s employment law landscape. Employers must carefully assess how these changes affect their practices. While the immediate implications may be substantial, the overall goal of the ruling is to bring greater legal clarity and fairness to Indonesia’s labour market.

To ensure compliance and mitigate potential risks as the legislation continues to evolve in response to the Decision, employers should closely monitor the introduction of new regulations, seek expert legal advice, and be proactive in adjusting their internal policies and practices.

Contributors: Dimas Koencoro Noegroho, Anindita Hapsari, and Gabriel Abraham Sebayang - Soemadipradja & Taher