Employment Series: Termination Benefits - Separation Pay Following Termination of Employment under Indonesian Law
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Employers, employees, labor unions, and the Government are generally expected to make reasonable efforts to prevent termination of employment. Nevertheless, where termination becomes unavoidable, it may give rise to certain statutory monies payable to the employee, the type and amount of which depend on the employee's status and the grounds for termination. These may include severance pay (uang pesangon), long service appreciation pay (uang penghargaan masa kerja), compensation of rights (uang penggantian hak), and separation pay (uang pisah).
In this edition of ARMA Law's Employment Practice Group Update, we discuss Separation Pay (Uang Pisah), one of the statutory entitlements that may arise in connection with termination of employment under Government Regulation No. 35 of 2021 on Fixed-Term Employment Agreements, Outsourcing, Working Hours, Rest Periods and Termination of Employment ("GR 35/2021") and why it is important for employers to expressly consider and regulate this entitlement.
A. Entitlements Based on Employment Status
As a general principle, an employee's entitlements upon termination of employment are first determined by the type of employment agreement. For employees engaged under a fixed-term employment agreement (perjanjian kerja waktu tertentu or "PKWT") termination generally gives rises to two types of statutory entitlements: (i) compensation pay (uang kompensasi), which is calculated based on the employee's completed period of service and given at the end of the PKWT (for any reason)[1]; and (ii). Compensation of loss (uang ganti rugi), payable by the terminating party where the PKWT is terminated before its agreed expiry.[2]
For employees under an indefinite-term employment relationship (perjanjian kerja waktu tidak tertentu or "PKWTT") termination of employment may instead give rise to severance pay (uang pesangon), long service appreciation pay (uang penghargaan masa kerja), compensation of rights (uang penggantian hak), and/or separation pay (uang pisah), depending on the applicable grounds for termination. In this regard, Separation pay is therefore relevant only to PKWTT employees.
B. Separation Pay under GR 35/2021
GR 35/2021 expressly grants separation pay in specific circumstances, including qualifying voluntary resignation, prolonged unauthorized absence following two proper written summonses, urgent violations stipulated in the employment documents, and certain other Termination grounds.[3] For each relevant circumstance, the amount is to be regulated in the employment agreement, company regulation ("PP"), or collective labour agreement ("CLA"). GR 35/2021 does not prescribe a fixed statutory formula or minimum amount.
In practice, many employers have yet to expressly regulate separation pay in their employment agreements and/or Company Regulations. Such omission should not be construed as automatically extinguishing an employee's entitlement where GR 35/2021 expressly provides for separation pay. Rather, the absence of a prescribed amount creates uncertainty as to the amount of such entitlement. An employee may therefore assert a claim based on an amount considered appropriate by the employee, with the final amount potentially being determined through settlement, mediation, or adjudication.
A real case where an undetermined separation pay amount led to a dispute can be seen from Samarinda District Court Decision No. 36/Pdt.Sus-PHI/2022/PN Smr, in which the court awarded the employee separation pay in the amount of Rp3.112.156,40 despite the absence of a company regulation or CLA stipulating the applicable amount, with the award determined based on considerations of fairness and the employee's length of service.
C. Practical Considerations
An employment dispute that proceeds through the Industrial Relations Court ("PHI") mechanism will typically be time-consuming, as it requires the parties to go through several stages, beginning with bipartite negotiations, followed by mediation before the competent manpower office and inevitably reaching the Industrial Relations Court.
To minimize the risk of such disputes, employers should expressly regulate separation pay in their employment agreements and company regulations. Based on practice, one approach is to structure the applicable formula by reference to the employee's years of service, for instance 1 (one) year or less, one to three years, three to six years, and so forth. Another approach is to differentiate the amount based on the grounds for termination, such as by setting a higher separation pay for employees who resign compared to a lower amount for employees whose employment is terminated due to misconduct or other violations (bad leavers).
The Company may therefore establish a clear and reasonable formula suited to its policies, in any amount it deems appropriate, providing employees with greater certainty over their entitlements while allowing the Company to manage its liabilities consistently and minimize avoidable disputes.
Disclaimer:
This client update is the property of ARMA Law and intended for providing general information and should not be treated as legal advice, nor shall it be relied upon by any party for any circumstance. ARMA Law has no intention to provide a specific legal advice with regard to this client update.
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