How to Master Severance Pay in Indonesia in 2026

Expanding Into Indonesia Today: Why Compliance Matters More Than Ever

Indonesia is Southeast Asia’s largest economy and one of the region’s top destinations for foreign employers in 2025. With its fast-growing middle class, competitive labor market, and strategic location, Indonesia offers tremendous opportunities for global companies entering Asia. However, expansion into Indonesia comes with one of the most important challenges beyond understanding local salary or working culture best practices: navigating intricate employment and termination regulations around severance pay in Indonesia.

Especially after the introduction of the Job Creation Law (Undang-Undang Cipta Kerja) and its updates, even a small administrative or procedural error like improper documentation, incorrect severance calculation, or failure to follow mandatory negotiation steps can result in costly penalties, reinstatement orders, or lengthy disputes at the Industrial Relations Court.

To help, this guide explains:

• Legal grounds for dismissal
• Employer obligations before termination
• How to calculate severance pay
• Which employees qualify for benefits
• Key compliance risks
• How an Employer of Record (EOR) in Indonesia like INS Global ensures safe and lawful terminations

By the end, you’ll have a clear framework to manage employment termination in Indonesia with confidence.

Understanding Termination Laws in Indonesia

The foundation of Indonesia’s employment landscape is set by:

• The Job Creation Law (Omnibus Law)
• Government Regulation (PP) 35/2021 on Fixed-Term Contracts, Outsourcing, Working Hours, and Termination
• Related ministerial regulations

Unlike many countries, Indonesia does not default to “employment-at-will.” Employers must follow specific, legally defined procedures before terminating any employee.

Key Labor Laws Affecting Severance Pay in Indonesia

Indonesia’s employment framework is built on several interconnected legal sources. Understanding how these laws operate together is essential for determining severance pay, termination procedures, and employer obligations.

Job Creation Law (Omnibus Law)

The Job Creation Law, often referred to as the Omnibus Law, significantly reformed Indonesia’s labor landscape with the goal of improving investment conditions. One of its core impacts is the redesign of termination procedures and severance calculations.

Key implications for employers include:

• A standardized severance structure that reduces previous severance entitlements in certain termination scenarios
• Clearer distinctions between termination for business reasons, misconduct, and mutual agreement termination
• Greater flexibility in structuring fixed-term contracts (PKWT), which indirectly affects severance eligibility
• Revised guidelines for dispute resolution, placing stronger emphasis on bipartite negotiation before escalating to mediation or arbitration

The Omnibus Law remains the overarching legal authority shaping severance obligations in 2025.

Government Regulation 35/2021 (PP 35)

PP 35 is the implementing regulation of the Job Creation Law and provides the operational rules that employers must follow. It is the most detailed and practical reference for termination and severance pay.

PP 35 outlines:

• Exact formulas for severance and long service pay
• Categories of termination that affect how much severance is owed (e.g., redundancy, efficiency, death, retirement, resignation, and misconduct)
• Rules for converting PKWT and PKWTT contracts
• Compensation rights that must be included in any termination package
• Required steps in the dispute-resolution process, including bipartite negotiation timelines
• Specific scenarios where severance may be reduced, enhanced, or not applicable

For foreign employers, PP 35 is the regulation that determines compliance, making it indispensable for lawful terminations.

Manpower Law No. 13/2003 (Amended)

Although partially superseded by the Omnibus Law, Indonesia’s original Manpower Law remains foundational. Many of its principles, such as employee protections, working hour rules, and the structure of employment contracts, remain in force or are similarly worded.

Relevant provisions include:

• Rules governing permanent employment (PKWTT)
• Requirements for early termination of PKWT contracts
• Minimum standards for employee rights, including leave, wages, and benefits
• Initial frameworks for severance and long service pay
• Early forms of dispute-resolution obligations

In practice, elements of the 2003 law continue to operate in tandem with the Omnibus Law, and employers must remain aware of which parts are still active and which have been replaced or amended.

Ministerial Regulations from the Ministry of Manpower

Ministerial regulations provide practical guidance that employers must apply day-to-day. Because they are updated frequently, they can significantly shift compliance requirements.

Common areas regulated by ministerial decrees include:

• Salary component definitions used for severance and BPJS calculations
• Minimum wage adjustments (UMK/UMP)
• Procedures for registering fixed-term contracts
• Conditions for outsourcing arrangements
• Work-from-home and hybrid work guidelines (emerging area)
• Occupational safety, health, and employee welfare requirements

These regulations often contain technical details that determine the validity of employer actions. Missing a ministerial update, even a minor one, can directly impact termination compliance.

Types of Employment Termination Recognized Under Indonesian Law

Indonesian labor regulations recognize several lawful forms of employment separation:

1. Natural End of Employment

• Completion of a fixed-term contract (PKWT)
• Retirement as defined in company policy or statutory age
• Employee death

These do not require severance unless contractually specified, but compensation rights (e.g., unused leave) still apply.

2. Mutual Agreement Termination (PHK by Mutual Consent)

Terminations by mutual agreement (Kesepakatan Bersama) are common and legally encouraged.
Employers must still:

• Prepare a signed mutual agreement
• Register it with the Industrial Relations Court for validation

This protects against future claims.

3. Termination for Business Reasons

This includes:

• Organizational restructuring
• Department closures
• Efficiency improvements
• Digitalization
• Outsourcing transitions

Termination for business reasons follows strict compensation rules, which differ from misconduct-based terminations.

4. Termination for Just Cause (Misconduct)

Examples include:

• Theft, fraud, or dishonesty
• Physical assault or harassment
• Serious insubordination
• Wilful damage to company property
• Absenteeism beyond permitted limits

Under Indonesian law, employers cannot simply fire an employee for misconduct. They must follow statutory steps and, in some cases, issue multiple warnings or involve the tripartite dispute mechanism.

How Employers Can Use “Just Cause” Termination in Indonesia

Before ending employment for misconduct, employers must ensure:

1. Written notice of allegations
2. Opportunity for the employee to respond
3. Internal investigation or formal warnings
4. Attempts at bipartite negotiation
5. Documented termination letter with compensation details

Without these steps, termination may be ruled invalid, regardless of the misconduct’s severity.

Essential Documentation for Legal Terminations

Employers should prepare:

• Investigation reports
• HR interviews and witness statements
• Performance records
• Warning letters (SP1, SP2, SP3 where applicable)
• Bipartite negotiation minutes
• Final termination decision (PHK)
• Payment breakdown (severance, service pay, compensation rights)

Proper documentation is a critical defense against wrongful dismissal claims.

Notice Period Requirements in Indonesia Explained

Indonesia does not have a universal statutory notice period for termination. Instead, employers must follow a mandatory negotiation and notification process, including:

• Bipartite negotiations (up to 30 days)
• Notification to employees in writing
• Potential mediation by the Manpower Office (Disnaker)

However, notice pay or payment in lieu of working notice is possible depending on the situation.

How to Calculate Severance Pay in Indonesia (2025 Rules)

Indonesia uses a structured formula based on PP 35/2021. Severance pay consists of:

1. Severance Pay (Uang Pesangon)
2. Long Service Pay (Uang Penghargaan Masa Kerja)
3. Compensation Rights (Uang Penggantian Hak)

1. Severance Pay Formula

2. Long Service Pay Formula

3. Compensation Rights Include:

• Unused annual leave
• Relocation expenses (if applicable)
• Return travel for migrant workers
• Housing and medical benefits (if included in contract)
• Other contractual entitlements

Who Qualifies for Severance Pay in Indonesia?

Employees qualify if:

• They are terminated for business or efficiency reasons
• Their contract is ended early by the employer
• They are permanent employees (PKWTT)

Employees do not qualify if:

• They resign
• Their fixed-term contract ends naturally
• They are dismissed for serious misconduct after due process

Examples of Severance Calculations

Example 1

• Monthly salary: IDR 15,000,000
• Years of service: 5
• Severance: 5 months × 15M = 75M
• Service pay: 3 months × 15M = 45M
• Compensation rights: 10M
  Total Severance: IDR 130,000,000

Example 2

• Monthly salary: IDR 10,000,000
• Years of service: 2
• Total severance package: ~30M–40M depending on compensation rights

Severance obligations can escalate rapidly, especially for teams with long-standing employees.

Common Risks and Penalties for Wrongful Termination

Termination may be considered unlawful if:

• Bipartite negotiations were skipped
• Misconduct was not documented
• Compensation was miscalculated
• The employer did not follow PP 35/2021 procedures
• The termination letter lacked required details

Potential Consequences

• Reinstatement
• Backpay from termination date
• Penalties imposed by the Industrial Relations Court
• Mandatory mediation or arbitration

Disputes in Indonesia can last 2–4 years, making compliance essential.

Contracts May Offer Additional Benefits But Cannot Reduce Statutory Minimums

Indonesian employment contracts can include superior benefits as long as they do not reduce statutory rights. Employers may offer:

• Enhanced severance packages beyond the PP 35 standard
• Additional compensation, such as retention bonuses or relocation allowances
• Longer notice periods, even though notice is not traditionally mandated
• Supplementary insurance or allowances

These benefits often help international employers remain competitive, but they also become legally binding obligations once written into the contract. Employers must ensure contractual terms are consistent with the most recent labor regulations.

Ensuring Compliance When Terminating Employees in Indonesia

Compliance in Indonesia is not merely procedural, but a legal requirement that directly affects an employer’s risk exposure. Every termination must follow a structured process that includes written notification, negotiation attempts, and accurate severance calculations.

Skipping even one step can invalidate the termination and expose the employer to reinstatement orders or substantial penalties.

What a Termination Letter Must Include

A termination letter (Surat PHK) is a formal legal document that must present a clear and factual basis for ending employment. To be considered valid, it should include:

• Legal basis for termination – Reference the specific clause in PP 35 or the employment contract justifying the termination reason.
• Final work date – This date determines payroll cutoffs, BPJS reporting, and severance calculations.
• Breakdown of compensation – Include severance, long service pay, compensation rights, unused leave, and any contractual benefits.
• Summary of negotiation attempts – Employers must show they attempted bipartite negotiation for at least 30 days.
• Rights and obligations for both parties – Such as company property return, confidentiality agreements, and final payment deadlines.
• Return-of-property clause – Document keys, ID cards, laptops, intellectual property, and confidential materials.

A termination letter lacking these elements can be rejected by the Industrial Relations Court, even if the underlying reason is valid.

Recordkeeping Best Practices

Indonesia’s labor system places a strong emphasis on evidence. Accurate and consistent recordkeeping is essential to demonstrate fair process, employer good faith, and compliance with PP 35.

Employers should maintain:

• Performance reviews – Provide a documented history of employee strengths, development areas, and progress.
• Warning letters (SP1, SP2, SP3) – Particularly critical for misconduct-related cases.
• Attendance logs – Including biometric data or digital time records if used.
• Investigation notes – Witness statements, internal reports, and interviews related to alleged misconduct.
• Emails and HR correspondence – Demonstrate transparency and consistent communication.
• Signed bipartite negotiation minutes – Serve as proof that dispute-resolution steps were followed before termination.

High-quality documentation is the strongest defense against labor disputes and can significantly reduce the likelihood of reinstatement or financial penalties.

Common HR Mistakes During Offboarding in Indonesia

Offboarding employees in Indonesia requires precision. The following errors are often the most frequent, and the most damaging, for foreign companies:

• Not conducting bipartite negotiations – Skipping this mandatory step can instantly invalidate the termination.
• Incorrect severance calculation – Misapplying PP 35 formulas or misclassifying salary components can lead to disputes.
• Failing to register mutual termination agreements – Without court registration, agreements may be deemed unenforceable.
• Withholding documents like experience letters – This can be interpreted as bad faith and escalate tensions.
• Paying final wages late – One of the most common grounds for employee complaints to the Manpower Office.
• Applying PKWT rules incorrectly – Early termination of a fixed-term contract requires compensation, not severance, and errors here are particularly costly.

A structured and compliant offboarding workflow dramatically reduces the risk of disputes.

How a Global EOR/PEO Simplifies Termination Compliance in Indonesia

Foreign companies often face challenges because Indonesian labor regulations are detailed, procedural, and frequently updated. These challenges include:

• Complex severance formulas tied to service length and termination category
• Mandatory dispute-resolution steps that must be documented
• Frequent regulatory changes, especially under the Omnibus Law framework
• Strict documentation requirements for both performance and misconduct
• Different rules for PKWT vs PKWTT employees, which impact compensation obligations

An Employer of Record (EOR) assumes responsibility for these complexities and ensures complete compliance throughout the employment lifecycle.

How an EOR Prevents Termination-Related Fines

An EOR acts as the legal employer of your Indonesian workforce, ensuring that all labor requirements are fulfilled accurately and on time.

An EOR handles:

• Legally compliant employment contracts
  Drafted according to Indonesian law and tailored to the employee’s location and industry.
• Accurate payroll, tax, and BPJS contributions
  Prevents costly penalties from misreported social security and tax payments.
• Mandatory benefits administration
  Ensures workers receive benefits required by law or local practice.
• Severance and compensation calculations
  Uses the correct PP 35 formulas and salary bases.
• Proper termination procedures and documentation
  Ensures that bipartite negotiation, termination letters, and final payments meet legal standards.

By handling these obligations, the EOR dramatically reduces the risk of litigation, reinstatement, and government penalties.

Benefits of Outsourcing HR, Payroll, and Compliance

Partnering with a PEO/EOR in Indonesia offers several strategic advantages:

• Faster market entry without a local entity
  Companies can hire employees in Indonesia immediately through the EOR’s existing legal structure.
• Lower compliance risk
  Local experts oversee contracts, payroll, and labor law changes.
• Reduced administrative workload
  Internal HR teams can focus on strategic activities rather than Indonesian regulatory complexities.
• Predictable HR costs
  Transparent monthly fees minimize unexpected legal or administrative expenses.
• Consistent, legally compliant employee management
  Every HR step from hiring to termination is handled according to Indonesian law and industry best practices.

Why INS Global Is the Safest Partner for Hiring and Termination in Indonesia

Since 2006, INS Global has supported expansion into 160+ markets, including Indonesia.
We handle:

• Hiring
• Onboarding
• Payroll and benefits
• Contract drafting
• HR and compliance advisory
• Employee termination procedures
• And more

Our experts stay updated on:

• Indonesian labor codes
• BPJS obligations
• Omnibus Law updates
• PKWT/PKWTT rules
• Regional compliance requirements

We help you:

• Avoid wrongful termination claims
• Ensure compliant exits
• Reduce HR burden
• Protect your Indonesia strategy

Expand Confidently in Indonesia with INS Global

Managing employees in Indonesia doesn’t need to be complicated. INS Global ensures compliance, protects your company, and accelerates your market entry, so you can focus on growth, not administrative burden.

Contact us today to master severance, termination, and HR compliance in Indonesia.