Although the government has provided some assistance to employers, such as tax incentives and credit or financial restructuring, this does not eliminate the fact that the unemployment number increases day by day. Thus, most labor associations conclude that the government has not conducted maximum efforts to avoid such massive layoffs.

This article will elaborate firstly whether employers may unilaterally conduct massive layoffs and furlough based solely on cost effectiveness. Additionally, workers’ entitlement for severance payments for laid-off workers and alternatives to layoffs which may be considered will be elaborated.

The 2003 Labor Law provides limited ways for employers to lay off their workers, only by way of an order from the Industrial Relations Court (in Indonesian: Pengadilan Hubungan Industrial, or PHI), or through a mutual settlement agreement. Given the uncertainties involved in obtaining PHI orders, in practice, employers usually conduct layoffs by way of mutual settlement agreements. This means that obtaining consent from workers to be laid off is mandatory.

However, this consent does not waive employers’ obligation to pay certain severance amounts to the laid-off workers, specifically to permanent workers. In general, such amount may differ for each worker based on their monthly remuneration and years of service.

Additionally, reasons for such layoffs may determine the settlement or severance amount that must be paid to the laid-off workers. For instance, employers may lay off their workers by paying a lesser of severance amount if the business has to close down due to continual losses or force majeure. This, however, must be evidenced by valid documents such as financial reports and other relevant documents as required by the Manpower office. Therefore, layoffs carried out by employers whose businesses are still running would be considered as “normal terminations” which, accordingly, require higher severance payment.

Severance payments are not required to be paid for contract workers and foreign workers. Employers may unilaterally lay off such workers by paying the remainder of the employment contracts.

Laying Off Workers Who Are Affected by COVID-19

It is worth noting that employers are not allowed to immediately lay off workers who are not able to work after being infected with the novel coronavirus (COVID-19) as stipulated under 2003 Labor Law. However, employers may gradually reduce workers’ remuneration up to 75 percent in the fourth month of their absence prior to conducting layoffs.

Placing Workers on Furlough

On the other side, placing workers on furlough is a different issue. Under the law, furlough is defined as the right of the workers to take unpaid leave for certain personal reasons. This means the initiative to furlough must come from the workers and not the employers. In fact, however, this is used as an alternative by the employers to maintain their workers without actually laying them off during this pandemic.

Given the above, in compliance with 2003 Labor Law may result industrial cases between employers and their workers, as many have been currently submitted to the Manpower office.

We suggest the following alternative measures for employers to layoff staff.

  • Reducing salaries and facilities for position holders at managerial level.
  • Reducing working hours, days, or shifts accompanied by less remuneration pay.
  • Enforcing temporary holiday usage on a rotating basis.
  • Enforcing early pension to eligible workers.

The above, however, requires workers’ consent since this would be considered an amendment of employment terms. Hence, employers should first consult with the respective workers, workers’ representative, or their labor unions, if any, before applying these alternative measures. Alternatively, employers can consider not extending an employment contract if it has ended and canceling new employment of workers in the probationary period. The point is that a layoff should be the last option to be taken by employers facing the pandemic.

The writers, Dimas Koencoro Noegroho and Aveninta Maria Rosalin, are associates at Soemadipradja & Taher, the Indonesian corporate law firm. The views presented in this article are their own, do not constitute legal advice, and are not to be acted on as such.

Dimas Koencoro Noegroho

Dimas is a senior associate in Soemadipradja & Taher, who started practicing in 2006. He obtained his Bachelor of Laws degree from Universitas Trisakti, Jakarta, majoring in business law. Dimas is well known for his assistance for multinational and local corporations in employment, general corporate and insurance.

Aveninta Maria Rosalin

Aveninta is an associate in Soemadipradja & Taher. She obtained her Bachelor of Laws degree with cum laude from Universitas Indonesia in 2018, majoring in international law. She has previously published her legal articles on several legal platforms. Aveninta has acted for both Indonesian and foreign clients in a variety of projects and commercial transactions, including those related to employment law.