Can All Types of Work Be Outsourced? Risks of Non-Compliant Outsourcing Arrangements

Introduction

Outsourcing remains one of the methods used by companies to support business activities and workforce management. However, in practice, there is still an assumption that all types of work can be outsourced to third parties. This assumption may lead to non-compliant outsourcing practices, resulting in labor disputes and corporate risks. Therefore, companies must understand the types of work that can be outsourced under the applicable regulations. Through Regulation of the Minister of Manpower Number 7 of 2026 on Outsourced Work, the government limits the types of work that can be outsourced to protect workers' rights while providing legal certainty for companies.

Legal Basis

Regulation of the Minister of Manpower Number 7 of 2026 on Outsourced Work (“MoM Regulation 7/2026”) regulates the types of work that can be assigned to an Outsourcing Company and the implementation of outsourced work. Under MoM Regulation 7/2026, outsourced work is restricted to specific business fields. These provisions are set forth in:

Article 3 of MoM Regulation 7/2026

“(1) Part of the work execution as referred to in Article 2 constitutes the types and fields of work at the Employer Company in the form of labor supply services.

(2) The types and fields of work as referred to in paragraph (1) constitute ancillary activities, comprising:

a. cleaning services;

b. food and beverage provisioning;

c. security;

d. provision of drivers and worker transportation;

e. operational support services; and

f. ancillary work in the fields of mining, oil, gas, and electricity.”

This provision indicates that companies cannot outsource core business activities directly related to the company’s production process or main business activities. Consequently, companies must employ workers for such core business activities directly. MoM Regulation 7/2026 only permits the use of outsourced labor for ancillary services across six designated fields. Companies are also prohibited from outsourcing work outside these six fields, including classifying work related to the company’s core activities as “operational support services”.

Risks of Sanctions for Infringers

Employer Companies that violate the provisions on permissible outsourced work will face administrative sanctions. Pursuant to Article 8, these sanctions are imposed progressively and include:

1. Written warnings.

2. Business activity restrictions, in the form of limiting the production capacity of goods and/or services for a specified period and/or suspending the issuance of business licenses in one or more locations for companies operating projects across multiple sites.

The imposition of such administrative sanctions is carried out by the authorities responsible for issuing business licenses, based on recommendations from the Labor Inspector (Pengawas Ketenagakerjaan) pursuant to the provisions of Article 8 paragraph (4).

Strategic Steps to be Taken

To ensure compliance with MoM Regulation 7/2026 and avoid business restriction sanctions, Employer Companies and Outsourcing Companies can take the following steps:

1. Conducting a work-type audit: Pursuant to Article 3 of MoM Regulation 7/2026, the Employer Company must identify and ensure that the outsourced work falls under the ancillary activities within the six permissible fields.

2. Registering the Outsourcing Agreement: The Outsourcing Company must register the Outsourcing Agreement with the local Manpower Office where the work is performed no later than 3 (three) working days from the signing date, as regulated under Article 5 paragraph (2).

3. Ensuring the fulfillment of workers' rights: Pursuant to Article 4 paragraph (3), the Employer Company remains responsible for ensuring that the Outsourcing Company fulfills the protection and rights of workers/laborers in accordance with statutory regulations, including wages, working hours, leave, social security, and religious holiday allowance.

4. Making adjustments within the transitional period: Companies whose types and fields of outsourced work do not yet comply with MoM Regulation 7/2026 must make the necessary adjustments no later than 2 (two) years from the date of the regulation's promulgation, pursuant to Article 10 letter b.
   

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Recommendations

1. Reviewing Outsourcing Agreement clauses: Companies must ensure that the Outsourcing Agreement specifies not only the types of work being outsourced but also the work execution location, the number of outsourced workers/laborers, as well as worker protections and rights, such as overtime pay, occupational health and safety, and employment termination rights, as regulated under Article 4.

2. Selecting compliant Outsourcing Companies: The Employer Company should collaborate with Outsourcing Companies that have fulfilled business licensing requirements, implemented occupational health, safety, and environmental standards, and registered their Outsourcing Agreements with the Manpower Office in accordance with applicable regulations.

Closing

MoM Regulation 7/2026 reaffirms that companies cannot outsource all types of work to third parties. Outsourced work is strictly permitted for ancillary activities, namely cleaning services, food and beverage provisioning, security, the provision of drivers and employee transportation services, operational support services, and ancillary work in the fields of mining, oil, gas, and electricity. Under these provisions, companies are prohibited from outsourcing core business activities directly related to the company’s main business activities or production processes. Should a company persist in outsourcing work outside the permitted fields, it may face administrative sanctions in the form of written warnings and business activity restrictions. Consequently, companies must re-evaluate the types of work currently outsourced and ensure that the utilization of outsourced labor aligns with the boundaries established under MoM Regulation 7/2026.