Regulatory Update · Employment Law · 6 November 2026
Indonesia Enacts New Employment Protection Law in 2026: What Foreign Investors Need to Know
An international investor’s guide to employment contracts, termination costs, outsourcing, minimum wages and the transition to Indonesia’s new labour framework.
Executive Summary
Indonesia enacted Law No. 27 of 2026 on Employment Protection on 28 October 2026. The law replaces the principal 2003 Manpower Law and the relevant employment provisions of the 2023 Job Creation framework. It applies to employment relationships in Indonesia, including those of Indonesian companies with Singaporean, Chinese or other foreign ownership.
For international investors, the distinction is not simply between an old law and a new law. Some requirements already operate directly; some are subject to transitional arrangements or must be read with surviving regulations; and some establish obligations whose practical administration remains to be specified. The new law also follows the Constitutional Court’s Decision No. 168/PUU-XXI/2023, issued on 31 October 2024. Consequently, not every change discussed below first arose in October 2026.
The main developments concern the legally recognised grounds for ending employment, termination and severance calculations, fixed-term contracts, permitted outsourced activities, minimum wage determination and a new statutory severance reserve. The status of each topic matters for employment liabilities and workforce arrangements in Indonesia.
Key points at a glance
- Law No. 27/2026 took effect on 28 October 2026 and replaces the 2003 Manpower Law and the employment provisions of the Job Creation framework.
- Business efficiency is no longer an express, standalone termination ground (Article 231).
- Several termination grounds move from a 0.5× to a 1.0× severance multiplier.
- Fixed-term contracts: up to 2 years, plus up to two extensions of no more than 1 year each.
- Outsourcing is limited to four supporting-service categories, with a one-year transition period.
- Implementing regulations are due by 28 October 2027 — a deadline for regulations, not a deferred start date.
1. Understanding Indonesia’s Employment Terminology
The terminology used in Indonesian regulations does not always correspond exactly to employment terminology in Singapore, mainland China or other jurisdictions. The following English descriptions are used throughout this article; the Indonesian terms are included for reference.
| Term used in this article | Indonesian legal term | Meaning for international readers |
|---|---|---|
| Fixed-term employee / fixed-term employment agreement | Perjanjian Kerja Waktu Tertentu (PKWT) | An employee engaged for a permitted temporary or time-limited role. This is not the same as an independent contractor or freelance service provider. |
| Indefinite-term / permanent employee | Perjanjian Kerja Waktu Tidak Tertentu (PKWTT) | Employment without a predetermined expiry date; a probationary period may apply under statutory conditions. |
| Termination of employment | Pemutusan Hubungan Kerja (PHK) | The legal ending of an employment relationship, subject to different grounds, procedures and payment consequences. |
| Statutory severance pay | Uang Pesangon | A termination payment based on a statutory service-period schedule and the multiplier applicable to the reason for termination. |
| Length-of-service award | Uang Penghargaan Masa Kerja (UPMK) | A separate service-related payment, payable in applicable termination situations. |
| Payment in lieu of accrued entitlements | Uang Penggantian Hak | Statutory or contractual accrued entitlements, such as qualifying untaken annual leave and certain return-travel costs. |
| Separation payment | Uang Pisah | A distinct payment for specified exit situations, including qualifying voluntary resignation; not the same as severance pay. |
| End-of-contract compensation | Uang Kompensasi PKWT | Compensation associated with the completion of a qualifying fixed-term employment period; different from both severance and separation payments. |
| Government Regulation | Peraturan Pemerintah (PP) | A subordinate regulation that provides implementation details for legislation. |
| Foreign-invested Indonesian company | Perseroan Terbatas Penanaman Modal Asing (PT PMA) | An Indonesian incorporated company with foreign investment; foreign ownership does not by itself exclude the company from Indonesian employment obligations. |
2. Which Rules Are Already Operational?
Law No. 27/2026 took effect on 28 October 2026 (Article 313). However, its individual provisions have different degrees of administrative readiness.
| Legal status | Matters covered | What the status means |
|---|---|---|
| Substantive rules directly in force | Statutory termination grounds and core procedures; severance multipliers; probation limits; prohibition on withholding employee diplomas; minimum-wage protection and wage-scale requirements | The law already sets the substantive obligation, although further technical regulations may still be issued. |
| In force, subject to transition or regulatory alignment | Fixed-term contracts; outsourcing; minimum wage calculations and sector-specific wage rates | The new provisions must be read together with express transitional clauses or earlier implementing rules, but only where those earlier rules remain compatible. |
| Statutory obligation established; operational details pending | Government-managed severance reserve | The obligation exists in the legislation, but the amount, funding schedule, administration and certain enforcement mechanics require implementing regulations. |
Article 310 preserves earlier implementing regulations only to the extent that they do not conflict with Law No. 27/2026. This is a conditional rule, not a blanket confirmation that all pre-existing regulatory provisions continue unchanged.
3. Employment Termination: Business Efficiency Is No Longer an Express, Standalone Ground
Under the previous framework, Government Regulation No. 35 of 2021 expressly addressed termination for business efficiency, whether arising from losses or undertaken to prevent losses. Article 43 distinguished the resulting severance multipliers.
Article 231 of Law No. 27/2026 enumerates 15 grounds for termination, including corporate restructuring, specified business closures, force majeure, court-supervised payment suspension, bankruptcy, certain misconduct, prolonged illness and retirement. Business efficiency is not expressly included as an independent ground.
This omission should not be presented as an unequivocal statutory prohibition on every workforce reduction undertaken for efficiency. The relationship between Article 231 and the previous rules in Articles 36(b) and 43 of Government Regulation No. 35/2021 raises an interpretive issue under the compatibility test in Article 310.
The new law also prescribes measures to prevent termination before it occurs, including reducing overtime or shifts, reducing hours, temporarily placing indefinite-term workers on leave or a rotation arrangement, and offering voluntary early-retirement schemes (Article 228(2)).
4. Severance Pay: Why the Reason for Termination Changes the Cost
Indonesia does not use a single flat severance amount for all dismissals. Statutory severance pay is calculated from a schedule based on service, then adjusted by a multiplier corresponding to the legally recognised reason for termination. A length-of-service award may be payable in addition. The wage base generally consists of basic salary plus fixed allowances (Articles 232 and 234).
Under the prior Government Regulation No. 35/2021, several grounds carried 0.5 times the statutory severance schedule. In the corresponding provisions of Law No. 27/2026, those grounds generally use 1.0 times, with different treatment for certain other circumstances.
| Termination event | Earlier severance multiplier | Law No. 27/2026 treatment |
|---|---|---|
| Business closure after two continuous years of losses | 0.5× | Severance 1× plus length-of-service award 1× (Art. 237) |
| Permanent closure by the owner’s decision | No identical standalone category; closest non-loss closure rule: 1× | Severance 1× plus length-of-service award 1.5× (Art. 238) |
| Force majeure | 0.5× or 0.75× | Severance 1× plus length-of-service award 1× (Art. 239) |
| Court-supervised suspension of debt payments due to losses | 0.5× | Severance 1× plus length-of-service award 1× (Art. 240) |
| Bankruptcy | 0.5× | Severance 1× plus length-of-service award 1× (Art. 240) |
| Specified disciplinary breaches following required warnings | 0.5× | Severance 1× plus length-of-service award 1× (Art. 244) |
| Employee-initiated termination following qualifying employer misconduct | 1× | Severance 2× plus length-of-service award 1× (Art. 241(1)) |
| Retirement | 1.75× | Severance 2× plus length-of-service award 1×, subject to pension coordination (Arts. 247–248) |
| Death of employee | 2× | Severance-equivalent amount 2× plus length-of-service award 1× for heirs (Art. 249) |
| Employee-initiated termination for qualifying prolonged illness or accident-related disability after 12 months | 2× | Severance 2× plus length-of-service award 2× (Art. 246) |
The prior-law column refers to the severance multiplier, not necessarily all components of the former termination entitlement. “Court-supervised suspension of debt payments” is Indonesia’s PKPU process.
Illustrative employer liability
Assume an indefinite-term employee has five years of service and monthly qualifying pay of IDR 10 million. The basic statutory severance schedule is six months of wages (IDR 60 million), while the length-of-service award schedule is two months (IDR 20 million).
Depending on the legally applicable termination ground, the two components may total approximately IDR 80 million, IDR 90 million, IDR 140 million or IDR 160 million in the scenarios above. These are illustrations rather than universal termination costs; they exclude other accrued entitlements and taxes, and pension benefits may affect the calculation in retirement cases.
Separation payments are not severance
Under Article 233, a separation payment (uang pisah) arises in particular types of employment exit, including qualifying voluntary resignation under Article 242. Its amount follows the employment agreement, company regulations or collective bargaining agreement. If the company has not specified an amount, Article 233(2) says an amount of at least one month’s wages may be established. That wording does not automatically grant every resigning employee a mandatory one-month payment in all circumstances.
5. Termination Procedure: Discussion, Dispute Resolution and Limited Exceptions
The Constitutional Court had already clarified important termination safeguards in Decision No. 168/PUU-XXI/2023. Law No. 27/2026 reinforces those safeguards and sets out more detailed prevention and consultation requirements.
Where termination cannot be avoided, the employer must conduct bipartite discussions with the relevant trade union or, if the employee is not a union member, directly with the employee. The statutory period for resolving those discussions is up to 30 working days. If no agreement is reached, the dispute proceeds through the applicable industrial-relations dispute-resolution mechanism. In the circumstances governed by Article 228, termination may be effected only after a binding, final determination; termination without the necessary agreement or final determination is void and may require reinstatement (Article 228(3)–(7)).
There are important exceptions. Article 229 does not require the same bipartite procedure for voluntary resignation, natural expiry of a fixed-term contract, qualifying retirement or death. Articles 241(2) and 242(2) also prescribe particular procedural outcomes. Temporary suspension during an ongoing termination process is legally distinct from temporary leave or rotation measures used to prevent termination; where suspension is permitted, ordinary wages and entitlements must continue to be paid (Article 235(2)).
Article 230 prohibits termination for specified protected reasons, including certain periods of illness, pregnancy, breastfeeding, marriage, religious observance and lawful union activity.
6. Fixed-Term Employment: Shorter Contract Limits and End-of-Contract Payments
Contract duration and form
Under the former framework, Government Regulation No. 35/2021 generally allowed fixed-term contracts based on duration for up to five years including extensions. Law No. 27/2026 introduces a new structure under Article 82:
- Initial fixed term: up to two years.
- Extensions: up to two, each no longer than one year.
- Advance notice: the employer must give written notice of a proposed extension at least seven days before expiry.
Fixed-term employment must be documented in written Indonesian-language contracts, cannot include probation, and is available only for eligible temporary or non-permanent types of work. Registration is required within three working days of signing. Use for work of a genuinely permanent nature may result in the legal relationship being treated as indefinite-term employment (Articles 83–87).
Compensation on expiry and renewal
End-of-contract compensation is separate from the employee’s final salary. Article 88 preserves the employer’s obligation to pay compensation when a qualifying fixed-term contract ends. Under Articles 15–16 of Government Regulation No. 35/2021, insofar as they remain compatible with the new law, the standard calculation is proportional to completed service:
End-of-contract compensation = (eligible months worked ÷ 12) × one month of qualifying wages
If a contract is extended, compensation for the initial completed term is paid when that term ends. Compensation for the extension is paid when the extension later ends—not at the beginning of the extension.
Example
A local employee on a six-month fixed-term contract with qualifying monthly wages of IDR 6 million would, upon completing that term, ordinarily receive IDR 3 million in contract-expiry compensation, in addition to any unpaid salary. If the contract is then extended for another six months, compensation for the second period is normally payable only after that extension ends.
Important distinction for international employers
Article 15(5) of Government Regulation No. 35/2021 excludes foreign national workers employed under fixed-term contracts from that particular compensation scheme. The applicability and continuing compatibility of implementing rules must be assessed separately from the rights of Indonesian local employees. This exception concerns the employee’s nationality, not the foreign ownership of the employing Indonesian company.
The new law does not expressly resolve what happens to pre-existing fixed-term agreements signed before 28 October 2026 whose original duration exceeds the new limits. Article 310 deals with surviving implementing rules; it does not itself settle every question concerning pre-existing individual employment contracts. Article 90 separately governs damages in qualifying cases of premature termination of a fixed-term agreement.
7. Outsourcing: Narrower Permitted Activities and Transition Periods
“Outsourcing” in Indonesia refers to work performed through a separate employing service company. It should not be confused with engaging independent business consultants.
Under Article 95, the general permitted supporting-service categories are cleaning, employee catering, security services and employee transportation. The law also provides specific arrangements for supporting services in the mining and oil-and-gas sectors, including subsidiary-company requirements. State-owned enterprises are subject to their own subsidiary arrangements (Articles 96–97).
Where outsourced employees perform work directly connected to the principal company’s production process, Article 98 provides that their employment relationship may transfer by operation of law to the company receiving the work. A procedure is available through labour inspection and judicial confirmation if the transfer is disputed.
Transitional provisions matter
Article 306 gives companies using outsourcing up to one year from 28 October 2026 to align with the law, while previously agreed outsourcing contracts remain effective until their contractual expiry. Articles 308–309 address specific one-year transitions for mining/oil-and-gas businesses and state-owned enterprises without the required subsidiaries. The law does not expressly resolve every private-law consequence of contracts extending beyond those specific transition dates.
8. Minimum Wages: New Statutory Formula, Existing Regulations and Unresolved Mechanics
Indonesia uses different minimum wage levels depending on location and, in certain cases, sector. In English:
- Provincial minimum wage (UMP): set at provincial level.
- Regency/city minimum wage (UMK): may be set for a district or city and, when set, must exceed the provincial minimum.
- Sectoral minimum wage: an additional minimum applicable to designated sectors at provincial or regency/city level.
Minimum wage protection principally covers workers with less than one year of service (Article 140). Employers must separately establish a wage structure and scale, including for the broader workforce (Article 146). The statute also provides particular arrangements for qualifying micro and small businesses (Article 144) and a conditional application process for employers unable to meet the minimum wage (Article 140(6)–(8)); these must not be confused with a general exemption for foreign-invested companies.
A new comparison with decent living needs
Articles 137–139 introduce a formula considering economic growth, inflation and a specified index between 0.5 and 1.0, or an assessment of decent living needs (Kebutuhan Hidup Layak, or KHL). Article 139(4) requires the higher relevant value, based on the applicable formulation and the regional wage council process.
The pre-existing Government Regulation No. 49/2025 uses a narrower index range of 0.50–0.90, with living-cost considerations incorporated into setting the index, rather than operating in the same way as the statute’s direct comparison. On MYLEGAL’s interpretation, earlier rules may continue under Article 310 only where compatible with the higher-ranking law. The timing and technical basis for implementing the KHL comparison—including the relevant survey data—remain issues requiring administrative clarification.
Under the existing wage-setting regulations, the ordinary announcement deadlines have been 21 November for provincial minimum wages and 25 November for regency/city minimum wages; designated sectoral rates follow within specified additional periods. These dates remain subject to any replacement or amendment under the new law. A special December deadline under the 2025 regulation applied to the 2026 wage-setting cycle only.
9. The New Severance Reserve: Obligation Established, Funding Mechanics Pending
Article 253 introduces a statutory requirement for employers, subject to the stated exclusions, to provide a severance reserve managed by a government institution. The provision is intended to support payment of employee termination rights in the circumstances specified by the law. Micro and small businesses are excluded.
The reserve is not a replacement for severance pay, length-of-service awards or other statutory employee entitlements. However, the law does not yet set out all of the required funding amounts, payment timetable, administration and enforcement procedures. Those matters are delegated to implementing Government Regulations (Article 253(5) and (7)). Accordingly, the statutory obligation and the practical mechanics should be distinguished.
10. Transition to the New Framework
Key transitional provisions include the following:
| Provision | Significance |
|---|---|
| Article 300 | Industrial-relations claims already filed before the new law took effect continue to be determined substantively under the previous statutory regime. |
| Article 304 | Certain pending labour-inspection matters must align with the new law; criminal labour investigations already at the investigation stage follow the old framework. |
| Articles 306, 308–309 | Specific outsourcing transition arrangements, including one-year adjustment periods. |
| Article 310 | Earlier implementing rules survive only where they do not conflict with the new law. |
| Article 311 | Repeal of the 2003 Manpower Law and the relevant employment provisions of the Job Creation framework. |
| Article 312 | Implementing regulations must be established within one year of promulgation—by 28 October 2027. |
| Article 313 | The law itself took effect on 28 October 2026. |
28 October 2027 is a deadline for issuing implementing regulations, not a deferred start date for the entire statute. Substantive employment obligations introduced in 2026 may therefore already be legally relevant while their administrative detail is still under development.
Conclusion
Law No. 27/2026 represents a substantial reorganisation of Indonesia’s employment framework. For international investors, understanding its effect requires distinguishing the type of employment relationship, the legal reason for termination, the applicable payment components and the status of implementing regulations.
Certain rules already apply directly, notably core termination protections and severance calculations. Other matters, such as outsourcing and the interaction of the minimum wage formula with living-cost assessments, require attention to transitional provisions and compatible subordinate regulations. The new government-managed severance reserve creates a statutory obligation whose operational design is still pending.
The resulting legal position is neither that all previous regulations have vanished nor that every part of the new statute must await further Government Regulations. The two frameworks must be read together according to the specific transition and compatibility provisions.
Primary references: Law No. 27 of 2026 on Employment Protection (Articles 78–99, 137–147, 228–253, 300, 304, 306, 308–313); Government Regulation No. 35 of 2021 (including Articles 15–16 and the prior termination schedules); Government Regulation No. 36 of 2021, as amended by Government Regulation No. 49 of 2025; Constitutional Court Decision No. 168/PUU-XXI/2023 (31 October 2024).
Publication date and legal information cut-off: 6 November 2026. This publication provides general information and does not constitute advice on any particular employment arrangement, transaction or dispute. Indonesian statutory wording controls in the event of any difference between an English explanation and the official Indonesian text.
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