Severance Pay Must Now Be Set Aside Under the Employment Protection Law, but Who Pays if a Company Is Unable to Pay?

The Government and the House of Representatives of the Republic of Indonesia (DPR RI) passed the Draft Law on Employment Protection into law on 6 October 2026. One of the new provisions introduced is a severance pay reserve fund, intended to provide certainty regarding the payment of workers’ entitlements when they experience termination of employment (PHK).

Minister of Manpower Yassierli explained that this policy was prompted by situations in which companies lack the funds to pay severance. In a report published by detikFinance on 7 October 2026, Yassierli stated that the severance pay reserve fund would form part of the protection framework established under the new law.

However, the implementation mechanism has not yet been explained in detail and will be regulated by a Government Regulation (Peraturan Pemerintah or PP). The issue is that establishing a reserve fund does not automatically guarantee that workers will receive their full severance pay. Who will bear the shortfall if a company is unable to pay, and how will workers’ entitlements continue to be fulfilled when a company fails to discharge its obligations?

From Severance Pay Obligations to Payment Certainty

To date, severance pay has been one of the entitlements to which workers become entitled under certain circumstances involving termination of employment. The provisions governing termination of employment and the entitlements arising therefrom are regulated under Law Number 13 of 2003 concerning Manpower, as amended, including by Law Number 6 of 2023, and Government Regulation Number 35 of 2021 (the “Employment Regulations”).

Under the Employment Regulations, employers are obliged to pay severance in accordance with the grounds for termination of employment and the applicable provisions. However, the existence of a legal obligation does not always guarantee that payment will proceed smoothly. When a company lacks sufficient funds, workers risk encountering difficulties in obtaining their entitlements, even when those entitlements have already been established.

The severance pay reserve fund has been introduced to address this issue. Yassierli stated that the scheme was designed to address situations in which companies claim to lack the funds required to pay severance.

The President of the Confederation of Indonesian Trade Unions (Konfederasi Serikat Pekerja Indonesia or KSPI), Said Iqbal, described the scheme in his statement on 7 October 2026 as resembling a social security contribution mechanism. Employers would subsequently make periodic contributions to an institution designated by the Government so that severance funds would be available separately from the company’s assets.

This proposal has the potential to reduce the extent to which severance payments depend on a company’s financial condition at the time of termination of employment. However, there is a fundamental difference between providing a source of funds and guaranteeing payment. A reserve fund will effectively protect workers only if the regulations ensure that the funds are sufficient, can be disbursed when needed, and are supported by a mechanism for addressing any shortfall.

Who Pays, and Who Bears the Shortfall?

One of the main issues concerns the source of funding. In its report, detikFinance quoted Said Iqbal as questioning who would be required to pay contributions to the severance pay reserve fund and what sanctions would apply to companies that failed to fulfil this obligation.

If employers are required to make contributions, the implementing regulations need to specify the calculation method, payment periods, and the parties responsible for managing the funds. The contribution amounts must also be designed proportionately so that the funding obligations can be met without disregarding companies’ financial capacity.

However, the more fundamental issue is what happens if the accumulated funds are insufficient to cover all severance payments. Would employers remain obliged to pay the shortfall? Would the fund manager be responsible for payments up to a certain limit? Or would workers continue to bear the risk when a company lacks the financial capacity to pay?

Establishing a reserve fund does not, in itself, transfer the obligation to pay severance from employers to the fund manager. Unless the regulations establish a guarantee mechanism and specify responsibility for any payment shortfall, workers may not obtain certainty of payment merely because a reserve fund has been established.

A similar risk arises when a company falls behind on its contributions. Sanctions against companies are indeed necessary to encourage compliance, but sanctions alone do not resolve the difficulties faced by workers who need to receive severance pay. The regulations must determine whether workers can still receive payment when a company fails to fulfil its obligations, as well as how any funding shortfall will be addressed without placing the entire risk on workers.

How Does It Differ from Job Loss Insurance?

The severance pay reserve fund must also be clearly positioned in relation to existing employment social security programmes, particularly Job Loss Insurance (Jaminan Kehilangan Pekerjaan or JKP).

Under Government Regulation Number 37 of 2021 concerning the Implementation of the Job Loss Insurance Programme, as amended by Government Regulation Number 6 of 2025, JKP benefits include cash benefits, access to labour market information, and vocational training for eligible workers. JKP funding comes from contributions by the Central Government amounting to 0.22% of monthly wages and the reallocation of Occupational Accident Insurance (Jaminan Kecelakaan Kerja or JKK) contributions amounting to 0.14% of monthly wages, bringing the total JKP contribution rate to 0.36% of monthly wages.

However, JKP benefits cannot be equated with severance pay. Severance pay is an entitlement arising under the provisions governing termination of employment and constitutes an obligation of the employer, whereas JKP is a social security programme intended to assist workers who have lost their jobs.

Accordingly, the existence of JKP does not automatically resolve the issue of a company’s failure to pay severance. Conversely, the severance pay reserve fund must not be regarded as a substitute for JKP without a clear legal basis. The two serve different functions and must be designed to complement one another.

The Government needs to explain how the two schemes will interact, including the allocation of funding responsibilities and the benefits received by workers. Without clarity, the new scheme risks adding another layer of administration without actually addressing the existing shortfalls.

The Availability of Funds Does Not Yet Guarantee Entitlements

The challenges associated with the severance pay reserve fund extend beyond fund collection to issues concerning legal status, supervision, and workers’ access to the funds. Separating the funds from a company’s assets, for example, must be accompanied by rules specifying how the funds are to be managed and protected when a company experiences financial difficulties or is declared bankrupt.

In such circumstances, it is important to establish whether workers can access the funds directly once the relevant requirements have been met, how payment claims will be verified, and whether the segregated funds will remain protected against the company’s financial difficulties. Without clear provisions, the mere segregation of funds is insufficient to ensure that severance payments can be made without impediment.

Said Iqbal also warned that the scheme risks becoming merely a rule on paper if it is not accompanied by stringent sanctions. This concern must be addressed through implementing regulations that, in addition to governing companies’ obligations, also establish a payment mechanism for situations in which those obligations are not fulfilled.