The General Compensation Rule for Termination of Fixed Term Agreement

Article 62 Labor Law regulates the general rule of termination of fixed term employees in Indonesia. The article regulates termination by employee and termination by employer:

1. In case the employee terminates its fixed term employment agreement before expiry of the agreement, the employee is required to compensate the employer in the amount of the employee’s wages multiplied by the amount of months from the date of termination until the date of expiry of the fixed term employment agreement.
2. In case the employer terminates the employment agreement of the employee before expiry of the agreement, the employer has a similar obligation to pay compensation towards the employee.

The Exceptions to the General Rule

The general rule as described above is subject to certain exceptions. Neither the employee nor the employer is required to pay termination compensation as described in article 62 Labor Law in case of:

1. death of the employee;
2. expiration of the fixed term employment agreement;
3. a decision by a body which has binding force on the employee and employer (e.g. court decision or order of the industrial relations disputes settlement institution); or
4. a specific termination condition as set out in the employment agreement, the company regulations or the collective labor agreement. Such specific conditions may include natural disasters, social unrest and security disturbances.

Besides the exceptions stated in above, employee and employer may decide to deviate from article 62 Labor Law upon mutual agreement. However, since the Labor Law, and thus article 62 Labor Law, is obligatory law, the employer cannot priory exclude the applicability of this article in the fixed term employment agreement.

Our Advice

Both employee and employer are advised to maintain extreme caution when deciding to terminate the employment agreement of fixed term employees. To prevent major damages we advise to have each situation reviewed by a legal expert.