Regulatory Changes in Indonesian Employment Law: Employment Contracts, Outsourcing, and Severance Pay

Introduction

Employment regulations in Indonesia have undergone significant changes since the enactment of Law Number 6 of 2023 on Job Creation (“Job Creation Law”).[1] This law amends, repeals, and establishes new provisions in Law Number 13 of 2003 on Manpower (“Law 13/2003”), which, for nearly two decades, had served as the primary legal foundation for employment relations in Indonesia.[2] The changes were subsequently implemented through several implementing regulations, including Government Regulation Number 35 of 2021 on Fixed-Term Employment Agreements, Outsourcing, Working Time and Rest Time, and Termination of Employment (“GR 35/2021”),[3] and Government Regulation Number 37 of 2021 on the Implementation of the Job Loss Security Program (“GR 37/2021”), which was amended by Government Regulation Number 6 of 2025 on the Amendment to Government Regulation Number 37 of 2021 on the Implementation of the Job Loss Security Program (“GR 6/2025”).[4][5]

The Job Creation Law was enacted to create a favorable investment climate and to absorb as much labor as possible.[1] However, behind these broader economic objectives, the reform directly affects the fundamental rights and obligations of workers, from employment status and job security to financial protection following termination of employment (“termination” or “dismissal”). This analysis examines the legal substance of those changes, based solely on the provisions currently in force.

The primary focus of this analysis is to assess how the amendments in labor regulations have altered the conditions and level of protection for workers in Indonesia. The key legal issues analyzed are as follows:

1. Employment Certainty and Worker Status: How the amendments to the Fixed-Term Employment Agreement (“FTEA”) provisions and the relaxation of outsourcing rules may potentially reduce job security and certainty.
2. Post-Termination Financial Protection: How the new formula for calculating severance pay, combined with the newly introduced Job Loss Security Program (“JLS”), affects worker protection after termination.
3. Compliance and Enforcement Challenges: How the state (as regulator) and employers face difficulties in implementing and enforcing these new rules.

Based on the identification of those legal issues, the objectives of this analysis are as follows:

1. To analyze the juridical implications of the changes to the regulation of Fixed-Term Employment Agreements (“FTEA”) and the relaxation of outsourcing rules.
2. To analyze the juridical implications of the amended formula for calculating severance pay combined with the Job Loss Security Program, and its impact on post-termination worker protection.
3. To analyze the challenges faced by the state and business actors in implementing and enforcing the new labor regulations.

To achieve these objectives, this analysis is structured as follows:

1. An analysis of the shift in the paradigm of worker protection in Indonesian labor law;
2. An analysis of the regulation of FTEA and its impact on employment certainty;
3. An analysis of the liberalization of outsourcing practices and their consequences on worker status and job security;
4. An analysis of the new financial protection framework for workers post-termination, including the revised severance formula and JLS program;
5. An analysis on enforcement challenges and the future prospects of industrial relations.

I. The Shift in the Legal Paradigm of Labor Law: From Protection to Flexibility

A. Analysis of the Fundamental Principles of Law No. 13 of 2003

Law 13/2003 was enacted to protect workers, who are inherently in a weaker position within the employment relationship. Points (c) and (d) of the “Considering” section of Law 13/2003 state that the development of manpower is necessary for “the enhancement of protection for workers and their families in accordance with human dignity”, and that such protection aims to “ensure the basic rights of workers/laborers and guarantee equal opportunity and treatment without discrimination… in order to achieve the welfare of workers/laborers and their families.”[2] These statements emphasize that the State positioned itself as an active regulator, with the primary objective of correcting the imbalance of power in employment relations and ensuring the realization of social justice for workers.

 

B. Analysis of the Principles and Objectives of the Job Creation Law

Conversely, the Job Creation Law was built upon a fundamentally different rationale.
The considerations and general elucidation sections of the law consistently emphasize broader economic goals. The recurring key phrases include “job creation”, “improvement of the investment ecosystem”, and “ease of doing business.”[1] Point (b) of the “Considering” section of the Job Creation Law states that “through job creation, it is expected to absorb the widest possible Indonesian workforce amid increasing competition and the demands of economic globalization.”[1] This demonstrates a legislative shift in focus, from protecting individual worker rights toward facilitating economic growth. Labor law is no longer viewed primarily as an instrument of social justice, but rather as part of a broader national economic strategy aimed at fostering business growth.

 

C. Legal Impact of the Paradigm Shift

This change in legal perspective carries concrete legal consequences, altering several specific provisions in the field of employment. If Law 13/2003 regarded “rigid regulations” as a necessary form of protection, the Job Creation Law views the same rigidity as an obstacle to investment that must be removed. The State’s legal role has therefore shifted, from protector of workers’ rights to facilitator of market dynamics. This paradigm serves as the foundation for the relaxation of rules in areas considered burdensome to employers, such as limitations on fixed-term contracts, restrictions on outsourcing, and high severance pay obligations.

As a result, the new regulations discussed in subsequent chapters constitute a tangible manifestation of this market-oriented flexibility principle.

Comparative Matrix of Key Labor Regulations Table

 

II. New Rules on Fixed-Term Employment Agreements (FTEA)

A. Comparison of Provisions on Duration and Extension of Contracts

One of the most significant changes in the new employment regulations lies in the reformulation of the rules governing Fixed-Term Employment Agreements (FTEA). Under Law 13/2003, Article 59 imposed strict limitations on the use of FTEAs. The contract duration was limited to a maximum of two (2) years, and it could be extended once for a period not exceeding one (1) year. Furthermore, a renewal of an FTEA was only permissible after a 30-day interval.[2] This structure essentially created a time limit that encouraged employers to convert a worker’s status into a Permanent Employment Agreement (“PEA”) if the need for the position was continuous in nature.

This framework was completely changed by GR 35/2021. Article 8 of the regulation stipulates that an FTEA based on a specific duration may be made for a period of up to five (5) years.[3] Furthermore, if the work is not yet completed, the FTEA may be extended, provided that the total period of the FTEA and its extension does not exceed five (5) years in total.[3] This means that workers may be retained in non-permanent status for a substantially longer period (up to five years).

 

B. Analysis of the New Rules on FTEA Compensation

To balance the greater flexibility granted to employers, the government introduced a new right for FTEA workers, the FTEA compensation payment. This entitlement is regulated in Articles 15 and 16 of GR 35/2021.[3] Article 15(1) obliges employers to provide compensation money to workers whose employment relationship is based on an FTEA upon the expiry of the agreement.[3] This payment applies to workers who have been continuously employed for at least one (1) month. 

The amount of compensation is calculated based on the worker’s period of service, as set forth in Article 16. The formula is: (Length of service in months ÷ 12) × 1 month of wages.[3] The wage used as the basis of calculation includes basic salary and fixed allowances.[3] This provision introduces a new form of financial protection that was not previously regulated in Law No. 13 of 2003.[2]

 

C. Legal Impact on the Status and Job Security of Contract Workers

The combination of the extended contract duration (up to five years) and the introduction of FTEA compensation creates a new structure of employment relationships in Indonesia. Previously, the shorter contract limit (two years + one-year extension) indirectly encouraged conversion to permanent employment. Under the new system, the five-year duration provides employers with greater managerial flexibility to maintain contract status for a longer period. 

Within this framework, compensation serves as a legally recognized settlement mechanism for non-permanent employment relationships upon contract expiry. This policy potentially shifts the employment norm in Indonesia, from a system based on employment certainty and permanent status, toward one emphasizing managerial flexibility and long-term contractual arrangements. The shift enhances managerial discretion for employers but simultaneously reduces long-term employment predictability for contract workers.

 

III. Relaxation of Outsourcing Regulations

A. Analysis of the Removal of Job-Type Restrictions

The new regulation significantly transforms the legal landscape of outsourcing practices. Under Law 13/2003, outsourcing was tightly restricted. Article 65 paragraph (2) of the law provided that work which could be outsourced to another company must constitute “supporting service activities or activities not directly related to the production process.”[2] The elucidation of Article 66 paragraph (1) of the same law gave examples of such supporting activities, including cleaning services, food provision, and security personnel.[2] This limitation clearly delineated the boundary between core work, which had to be performed by permanent employees of the company, and supporting work, which could be outsourced.

The Job Creation Law fundamentally changed these provisions through Article 81, which amended Article 64 of Law 13/2003 to read: “A company may delegate part of the performance of work to another company through an outsourcing agreement.”[1] Furthermore, Article 65 of Law 13/2003, which previously contained the detailed limitations on the types of work eligible for outsourcing, was deleted.[1][2] This deletion effectively abolishes the legal restriction on outsourcing core work. As a result, companies are now legally permitted to outsource even core business functions, such as production operators, analysts, or administrative staff.

 

B. Affirmation of Legal Responsibilities of the Outsourcing Company

Alongside the removal of job-type restrictions, the new law provides clearer allocation of legal responsibility. Article 66 of Law 13/2003, as amended by the Job Creation Law, stipulates that the employment relationship (either Fixed-Term or Permanent) exists between the outsourcing company and the worker.[1] Paragraph (2) further states that: “The protection of workers/laborers, wages, welfare, working conditions, and settlement of disputes arising therefrom shall be the responsibility of the outsourcing company.”[1]

This wording establishes a clear legal separation of liability between the user company (the client) and the outsourcing company (the vendor). All employer obligations under labor law rest solely with the outsourcing company.

 

C. Legal Consequences for Worker Status and Employment Relationships

Post–Job Creation Law, and as further regulated under GR 35/2021, the legal construction of “employer” in outsourcing arrangements has been redefined. Even though a worker de facto performs work at the user company’s site and under its operational direction, the de jure employment relationship exists only between the worker and the outsourcing company. Thus, the outsourcing company is the legally recognized employer, bound by an employment agreement (either FTEA or PEA) with the worker. Consequently, the outsourcing company bears full responsibility for the fulfillment of all worker entitlements, including wages, social security, and other statutory protections.

This transformation may have far-reaching implications for industrial relations. Under the new framework, workers performing identical jobs at the same workplace may be employed by different outsourcing companies. Legally, this condition complicates efforts to negotiate a collective labor agreement (CLA) at the user-company level, since the workers no longer share a common legal employer. As a result, the collective bargaining power of workers becomes fragmented and more complex, because the user company can readily replace one vendor with another through a business contract mechanism.

 

IV. Changes to Financial Protection After Termination of Employment

A. Comparative Analysis of Severance Pay Formulas (Case Study: Termination Due to Efficiency)

The right to severance pay constitutes one of the most essential forms of financial protection for workers who are terminated. The new regulation introduces major amendments to this right, primarily by reducing the severance pay multiplier applicable to dismissals not caused by the worker’s fault. The starkest contrast appears in cases of termination due to efficiency measures.

Article 164 paragraph (3) of Law No. 13 of 2003 stipulates that workers terminated due to efficiency measures are entitled to compensation comprising: two (2) times the statutory Severance Pay (SP); one (1) time the Service Pay (SPY); and Compensation of Rights (CR).[2]

This framework was altered by Government Regulation No. 35 of 2021, particularly Article 43, which distinguishes two efficiency scenarios: first, if termination occurs because the company suffers losses, the worker is entitled to 0.5 (half) × SP.[3] Second, if termination occurs to prevent potential losses, the worker is entitled to 1 × SP.[3] In both cases, the worker still receives 1 × SPY and CR. These adjustments significantly reduce the employer’s direct financial burden in implementing corporate restructuring or downsizing.

 

B. Analysis of the Job Loss Security Program (JLS) under GR 37/2021 as Amended by GR 6/2025

Concurrently with the reduction in severance pay, the government introduced a new social protection mechanism, the Job Loss Security Program (JLS). This program is specifically governed by Government Regulation No. 37 of 2021, later refined by Government Regulation No. 6 of 2025.[4][5]

1. Benefits, Participation, and Claim Mechanism

The JLS program, administered by BPJS Ketenagakerjaan, provides three primary benefits to eligible participants: (1) cash benefits; (2) access to labor market information; and (c) job training.[4] Under the latest provisions of GR 6/2025, the cash benefit is paid monthly at 60% of the worker’s wage for a maximum of six (6) months.[5] This marks a significant improvement over the previous scheme, which provided 45% of wages for the first three months and 25% for the subsequent three months. The wage ceiling used for benefit calculation is capped at IDR 5,000,000 per month.[4] Additionally, the claim submission period has been extended from three (3) months to six (6) months following termination, allowing more time for affected workers to exercise their rights.[5]

2. Legal Relationship Between JLS and Severance Pay Entitlement

Legally, participation in the JLS program does not eliminate the worker’s right to severance pay from the employer. The JLS benefit constitutes an additional entitlement under the social security system. However, as a matter of policy, the JLS was introduced in parallel with the reduction of the severance pay formula.

This combination represents a redistribution of financial risk associated with termination.
Under the previous regime, the entire burden rested upon the employer through severance payments. Under the new regime, that burden is partially shifted to a social insurance mechanism (JLS). Funding for JLS is sourced from the government’s initial capital and the recomposition of contributions from other social insurance programs, such as Work Accident Insurance (WAI) and Death Insurance (DI).[6][7]

GR 6/2025 also reduces the total JLS contribution rate to 0.36% of the monthly wage.[5] For workers with long service periods, the aggregate value of benefits under the combined reduced severance pay + JLS system may differ significantly compared to the single severance pay scheme under the previous law.

 

V. Enforcement Challenges and the Future of Employment Relations

A. Analysis of Changes in Sanctions under the New Regulation

The effectiveness of any legal rule fundamentally depends on its enforcement mechanism.
In this regard, there are notable changes in the sanction framework applicable to violations of certain worker rights. For example, under Law 13/2003, failure to pay severance pay could constitute a criminal offense.[2] In contrast, for newly introduced rights such as FTEA compensation, GR 35/2021 does not prescribe criminal sanctions.[3] Violations of this obligation are instead subject to administrative sanctions, ranging from written warnings to business activity restrictions, suspension, or even revocation of business licenses.[3] Administrative sanctions, however, differ in nature and are often perceived as less deterrent compared to criminal penalties. 

This situation increases the burden on labor inspectors (Disnaker), who have long faced limitations in terms of human and financial resources. The complexity of the new regulations (for example, verifying five-year contracts and supervising unrestricted outsourcing practices) requires greater enforcement capacity and institutional strengthening.

B. Impact on the Mechanism for Resolving Industrial Relations Disputes

Taken together, the regulatory changes analyzed above have the potential to reshape the landscape of labor disputes between employers and workers. The growing use of contract and outsourced labor may reduce corporate reliance on permanent employees. This development directly affects the membership base and bargaining power of labor unions in collective negotiations.

The future of employment relations will likely be characterized by ongoing adaptation.
As the balance of power shifts between the parties, the existing mechanisms for bipartite and tripartite dialogue may require recalibration to remain effective in resolving disputes. Consequently, there remains a persistent potential for disputes, whether through judicial proceedings or collective actions. This evolving direction of labor law policy demands adjustments from all stakeholders, but such adjustments will inevitably be accompanied by conflicting interests between employers and workers.

 

Conclusion

This legal analysis demonstrates that the series of new labor regulations centered around the Job Creation Law have comprehensively transformed three principal pillars of employment relations in Indonesia.[1] First, the provisions governing Fixed-Term Employment Agreements (FTEA) were amended by extending the maximum contract duration to five years, balanced by the introduction of a new entitlement to compensation.[3] Second, outsourcing practices were liberalized through the elimination of job-type restrictions, which legally reinforces the shift of employer responsibility to the vendor company.[1] Third, financial protection for workers post-termination was modified through the reduction of severance pay amounts, combined with the introduction of the Job Loss Security Program (JLS).[3][4]

Overall, these regulatory changes signify a paradigm shift in Indonesian labor law — from a protective model to a market-oriented model that prioritizes labor market flexibility as an instrument of economic policy.

The main challenge arising from this shift is the creation of a labor framework that grants greater operational flexibility to employers, while at the same time reducing employment predictability for workers. This not only affects individual bargaining positions but also systemically influences the mechanisms of collective bargaining. Moreover, the increased complexity of these new rules adds further strain to the state’s supervisory apparatus, creating the risk of a gap between legal provisions and actual enforcement in practice.

The future of employment relations in Indonesia will continue to be shaped by the tension between business efficiency demands and workers’ aspirations for decent work.

To foster a more balanced and equitable employment relationship under the new legal framework, several implementation aspects warrant consideration:

1. Reevaluation of Critical Provisions: Further review is required for key provisions, such as the maximum duration of FTEAs and the need for clearer boundaries regarding which job types may be outsourced.
   The objective is to identify a new equilibrium that does not entirely sacrifice employment certainty.
2. Strengthening Enforcement Mechanisms: Additional resource allocation is necessary to enhance the capacity of labor inspectors, including recruitment of additional personnel, training programs, and budgetary support for proactive supervision.
3. Reform of JLS Accessibility: Although JLS benefits have been significantly improved,[5] efforts must continue to optimize claim processes, especially to ensure accessibility for individuals with limited digital access. Outreach and assistance services will be crucial to ensure that the program functions effectively in practice.
4. Optimization of Tripartite Dialogue: The tripartite dialogue forum among the government, labor unions, and employer associations plays a vital role in evaluating the impact of new regulations and developing collaborative solutions to emerging challenges.

 

References

[1] Law No. 6 of 2023 on the Enactment of Government Regulation in Lieu of Law No. 2 of 2022 on Job Creation into Law.

[2] Law No. 13 of 2003 on Manpower.

[3] Government Regulation No. 35 of 2021 on Fixed-Term Employment Agreements, Outsourcing, Working Time and Rest Time, and Termination of Employment.

[4] Government Regulation No. 37 of 2021 on the Implementation of the Job Loss Security Program.

[5] Government Regulation No. 6 of 2025 on the Amendment to Government Regulation No. 37 of 2021 on the Implementation of the Job Loss Security Program.

[6] Government Regulation No. 44 of 2015 on the Implementation of Work Accident Insurance and Death Insurance Programs.

[7] Government Regulation No. 49 of 2023 on the Second Amendment to Government Regulation No. 44 of 2015 on the Implementation of Work Accident Insurance and Death Insurance Programs.