Omnibus Bill for Job Creation finally passed into Law

Omnibus Law Approved.  President Jokowi vowed to initiate reform to boost investments and create more jobs during his inauguration speech as 2nd term president in October 2019, while for the first time introducing the Omnibus Law as a new concept to jumpstart the initiative.   Fast forward a year, and after facing multiple delays from COVID-19 and endless pushback from labor union groups, parliament has finally approved and passed the Omnibus Bill on Job Creation (Cipta Kerja) into Law on 5th October 2020.

Several key points to highlight:

  1. Parliamentary hearing for Omnibus Law approval was discreetly fast-tracked from the initial schedule of 8-Oct to 5-Oct, likely to avoid a potentially big clash with a planned demonstration by labor union groups on 6-8 Oct to oppose the Omnibus Law.
  2. Said Iqbal, head of leading labour union KSPI and strongly opposed to the Omnibus Law, was invited to the palace to meet with President Jokowi on 5-Oct to have closed door discussions.
  3. Under the new law, corporate severance payment liability will be reduced roughly 40% from previously max. 32 months to max. 19 months (but with an additional 6 months paid by the Government, totaling 25 months).
  4. Other noteworthy changes include minimum wage calculations, outsourcing and contract work regulations.

Foreign business owners have long complained that current laws hamper investment, slowing an economy that had hovered around 5% annual gross domestic product growth in recent years. The current labor law, in particular, had been a cause for concern as it makes it hard for companies to fire underperforming employees and requires them to pay large severance packages, which discouraged hiring.

Without the reforms to the Indonesian economy through the job creation bill, “employment will move to other more competitive countries, competitiveness of job seekers [will be] relatively low compared to other countries,” the Office of Coordinating Minister for the Economy said in a statement over the weekend.

“Investment costs in Indonesia are quite expensive and less competitive than neighboring countries… One of the reasons is the high standard of minimum wages in Indonesia compared to other countries and the high cost of severance pay in the event of a termination of employment,” it added.

According to the ministry, severance pay in Indonesia on average equaled 52 weeks of salary, whereas it is 32 weeks in Thailand, 25 weeks in Vietnam, 23 weeks in the Philippines and 17 weeks in Malaysia.

Changes under “Job Creation Act”

Existing labor law (2003) Omnibus law draft (May 2020) Omnibus law final (October 2020)
Working day and leave
Weekly working days 6 working days and 1 off day in a week OR 5 working days and 2 off day in a week 6 working days and 1 off day 6 working days and 1 off day
Gender-specific leave Female workers are allowed to take leave during the first and second day of menstruation cycle; and during pregnancy or pregnancy failure (reasonable amount of days) Removed Removed
Religious leave Employers are obligated to allow employees to take leave for religious reasons (reasonable amount of days) Removed Removed
Salary
Salary based on unit produced or time period No specific standard Time period salary: daily, weekly, monthly>
Unit based salary: based on an agreed amount of unit produced/sold
Time period salary: daily, weekly, monthly
Unit based salary: based on an agreed amount of unit produced/sold
Minimum wage per region Minimum wage is determined by each region: Province, District (Kabupaten/Kota), and job sector Minimum wage only based on Provincial region Removed minimum wage based on job sector. Minimum wage can be determined based on Province or District (Kabupaten/Kota)
Minimum wage formula Minimum wage (t+1) = Minimum wage (t0) * inflation rate * GDP growth Minimum wage (t+1) = Minimum wage (t0) * regional GDP growth First look seems similar with existing formula with inflation rate and/or GDP growth as two variables of the formula. But, more details will come out on a separate regulation (PP).
Bonus (Might be a one-off payment for transition to new Omnibus Law) N/A Must be in accordance with the length of working period. Maximum bonus amount is 5x salary applicable for employees who have worked for 12 or more years Removed
Severance package (for more details, see Table 2)
Severance package (including: Severance Pay, Compensation for Working Period, and Compensation for Reimbursements) Maximum 32x monthly pay
Max. severance formula: 2*9x (max. base severance) + 10x (max. compensation for working period) + 15%*(18x+10x) = 32x monthly pay
Maximum 17x by corporate Maximum 25x monthly pay (potentially 19 months max paid by corporate and 6 months by Government)
Max. severance formula: 9x (max. base severance) + 10x (max compensation for working period) = 19x monthly pay by corporate
Social guarantee
Pension guarantee Must include employee in the pension guarantee program (BPJS) or else company will be fined and charge criminally Removed fines and sanctions for company who does not participate in pension guarantee program Removed fines and sanctions for company who does not participate in pension guarantee program
Employee dismissal guarantee No rule Cash benefits and skill enhancing programs through Program Jaminan Kehilangan Pekerjaan (JKP) Cash benefits and skill enhancing programs through Program Jaminan Kehilangan Pekerjaan (JKP)
Ease of doing business
Foreign workers Company that hires foreign workers must have a plan for the use of foreign workers that is approved by the Ministry of appointed official Removed Removed
Outsourcing Only allowed for non-core lines of business, supporting roles Removed Removed
Contract workers Requirements for contract workers:
(1) only eligible for specific roles (seasonal job, temporary job, new project and/or trial phase), (2) cannot substitute full-time positions, and (3) maximum length of 2 years and can only be extended once for an additional 1 year
Removed Removed maximum length of 2 years.
Essentially, no time limitation for contract workers, however requirements (1) and (2) still apply

Changes in Severance Package

Article no. under existing regulation Existing labor law (2003) Omnibus law draft (May 2020) Omnibus law final (October 2020)
Total Severance Package Maximum 32x monthly pay Max. severance formula: 2*9x (max. base severance) + 10x (max. compensation for working period) + 15% compensation for reimbursement*(18x+10x) = 32x monthly pay Maximum 17x paid by corporate Max. severance formula: 9x (max. base severance) + 8x (max compensation for working period) = 17x monthly pay by corporate Maximum 25x monthly pay (19 months max paid by corporate and 6 months by Government) Max. severance formula: 9x (max. base severance) + 10x (max compensation for working period) = 19x monthly pay by corporate
Severance pay structure 156 <1 year (working period) = 1 month pay1 – <2 years = 2 month pay2 – <3 years = 3 month pay3 – <4 years = 4 month pay4 – <5 years = 5 month pay5 – <6 years = 6 month pay6 – <7 years = 7 month pay7 – <8 years = 8 month pay8+ years = 9 month pay <1 year (working period) = 1 month pay1 – <2 years = 2 month pay2 – <3 years = 3 month pay3 – <4 years = 4 month pay4 – <5 years = 5 month pay5 – <6 years = 6 month pay6 – <7 years = 7 month pay7 – <8 years = 8 month pay8+ years = 9 month pay <1 year (working period) = 1 month pay1 – <2 years = 2 month pay2 – <3 years = 3 month pay3 – <4 years = 4 month pay4 – <5 years = 5 month pay5 – <6 years = 6 month pay6 – <7 years = 7 month pay7 – <8 years = 8 month pay8+ years = 9 month pay
Compensation for working period 156 3 – <6 years= 2 month pay6 – <9 years = 3 month pay9 – <12 years = 4 month pay12 – <15 years = 5 month pay15 – <18 years = 6 month pay18 – <21 years = 7 month pay21 – <24 years = 8 month pay24+ years = 10 month pay 3 – <6 years= 2 month pay6 – <9 years = 3 month pay9 – <12 years = 4 month pay12 – <15 years = 5 month pay15 – <18 years = 6 month pay18 – <21 years = 7 month pay21+ = 8 month pay 3 – <6 years= 2 month pay6 – <9 years = 3 month pay9 – <12 years = 4 month pay12 – <15 years = 5 month pay15 – <18 years = 6 month pay18 – <21 years = 7 month pay21 – <24 years = 8 month pay24+ years = 10 month pay
Compensation for reimbursements 156 Unused (unexpired) leave days, transportation expense, relocation expense, medical expense max. 15% of severance pay amount Removed ONLY unused (unexpired) leave days and transportation expense
Severance pay by specific case
Laid-off following 3 warning letters (SP) 161 (1) severance pay, (2) compensation for working period, (3) compensation for reimbursements Removed Removed
Laid-off due to company merger/change in ownership 163 (1) 2x severance pay, (2) compensation for working period, (3) compensation for reimbursements Removed Removed
Laid-off due to company making net loss for 2+ years or bankruptcy 164-165 (1) severance pay, (2) compensation for working period, (3) compensation for reimbursements Removed Removed
Laid-off due to company doing efficiency measures 164 (1) 2x severance pay, (2) compensation for working period, (3) compensation for reimbursements Removed Removed
Passing away of employee 166 Heir is to be given: (1) 2x severance pay, (2) compensation for working period, (3) compensation for reimbursements Removed Removed
Laid-off due to pension 167 Heir is to be given: (1) 2x severance pay, (2) compensation for working period, (3) compensation for reimbursements Removed Removed
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