Payroll System in Indonesia: Rules, Regulations, and Compliance

How do Indonesian payroll regulations align with employee rights, incentives, BPJS employment and health, taxes, leave, and terminations? Epicareer will discuss it here.

Payroll in Indonesia has always posed a challenge for foreign investors to comply with local accounting regulations, especially those crucial for Indonesian employees.

Therefore, because payroll systems are among the most critical aspects of company operations.

It's important to consider fair distribution of wages or salaries to employees — and other benefits they receive from working at your company that want to hire Indonesian employees.

Thus, a company's payroll system can ultimately have a positive impact on employees, and ultimately on the overall performance of the company.

The first fundamental aspect to understand is knowing exactly what rights your employees are entitled to. Here are some rights that your employees should receive:

a. Employee Working Hours

The standard working hours are 40 hours per week, which means on average, employees work around 8 hours a day with breaks provided every 4 hours of work.

Working hours are regulated as follows:

• Employees with a 6-day work week work 7 hours a day and 40 hours per week.

• Employees with a 5-day work week work 8 hours a day and 40 hours per week.

These regulations may not apply to certain industries and are typically governed by Ministerial decisions.

b. Minimum Wage

Employees should receive the regional minimum wage, which varies by province, district, and region. This can be renegotiated between the company and the employees.

c. Social Security Benefits

Employees are entitled to social security benefits (BPJS Kesehatan for healthcare / BPJS Ketenagakerjaan for employment), which include work accident insurance, life insurance benefits, old age benefits (pension), and healthcare programs under BPJS.

d. Leave Payments

Employees receive payments as per the law when they do not take annual leave, maternity leave, sick leave, and personal leave, adjusted according to company policy.

e. Allowances

Employees receive allowances, with the most common in Indonesia being religious holiday allowances (THR / Tunjangan Hari Raya) as mandated by law.

f. Overtime Pay

Employees receive payment for overtime work done. The overtime rate is 1/173 of the total monthly salary.

Employees are not allowed to work more than 3 extra hours per day and 14 extra hours per week. The Manpower Law and Overtime Regulations require employers to meet the following provisions:

• Employers must issue written orders for overtime hours.
• Employees, in turn, must provide written consent to work overtime.
• Employers must pay overtime wages.
• Employers must provide appropriate rest conditions for employees working extra hours.
• Employers must provide drinks and meals for employees working more than 3 extra hours.

If employees work overtime on weekly holidays or national holidays falling on weekly holidays while working a 6-day work week, their overtime payment is calculated as follows:

g. Overtime Rates

For overtime worked on regular workdays during a 6-day work week:

• The first 7 hours: Double the hourly wage.

• 8th hour: Triple the hourly wage.
• 9th and 10th hours: Quadruple the hourly wage.

For overtime worked on a workday during a 6-day work week:

• The first 5 hours: Double the hourly wage.
• 6th hour: Triple the hourly wage.
• 7th and 8th hours: Quadruple the hourly wage.

For overtime worked on weekly holidays or national holidays during a 6-day work week:

• The first 8 hours: Double the hourly wage.

• 9th hour: Triple the hourly wage.

• 10th and 11th hours: Quadruple the hourly wage.

Employees in high-level positions whose working hours are not restricted by regular work hours are not eligible for overtime pay.

Incentives refer to financial rewards received by employees, in addition to their regular wages or salaries.

Incentives are granted based on employee performance. They can be given either as individual incentives or group incentives.

One of the most common incentives provided by companies is overtime allowances.

Overtime allowance is the amount of money earned by employees when they work extra hours.

Additionally, incentives may also be awarded to individuals or teams that achieve specific targets set by the company.

Social security (BPJS Ketenagakerjaan) is provided to employees to ensure their safety while working at the company and upon reaching retirement age.

Life insurance is also included in this social security (BPJS Ketenagakerjaan).

The calculation of social security (BPJS Ketenagakerjaan) includes:

• Work accident insurance, ranging from 0.24% to 1.74% of monthly salary, fully paid by the company.
• Death benefits, which is 0.3% of monthly salary, also fully paid by the company.
• Retirement benefits, amounting to 5.7% of monthly salary, paid by the company (3.7%) and employees (2%). This retirement/pension insurance can be withdrawn when employees reach the age of 55 or anytime after they stop working. Employee participation in this social security or BPJS Ketenagakerjaan must be at least 5 years.

Health insurance for employees must be paid by both employees and employers.

The maximum amount that must be paid by the company is 4% of the maximum salary of IDR 4,000,000, and the minimum amount that must be paid by the company is 1% of the regional minimum wage (UMR).

Typically, employees will receive benefits from class/type 2 coverage, but depending on company policy, some employees (especially in management positions) may receive upgraded coverage.

ompanies are required to pay and report their taxes on a monthly and annual basis.

Monthly taxes include:

• Article 25 corporate income tax (PPh 25), which must be paid by the 15th of the following month and submitted to the tax office by the 20th of the following month.
• Article 21 employee withholding tax (PPh 21), which must be paid by the 10th of the following month and submitted to the tax office by the 20th of the following month.

On the other hand, annual taxes include:

• Corporate Income Tax, which must be paid before filing tax returns and submitted no later than the end of the fourth month after the end of the fiscal year, i.e., in April.
• Personal Income Tax, which must also be paid before filing tax returns and submitted no later than the end of the third month after the end of the fiscal year, i.e., in March.
• Late payments and reporting will result in penalties that companies must pay to the tax office.

To avoid penalties, it is crucial to consider timely tax payments.

Employees must adhere to specific regulations when taking leave.

However, every company must provide opportunities for their employees to take leave with the obligation to continue paying their wages/salaries.

a. Annual Leave

Employees are entitled to a total of 12 days of annual leave. The company has the right to allow or postpone employees from taking annual leave.

Postponement can be done for up to six months.

According to Indonesian law, there are no specific regulations stating the compensation that employees may receive if they do not take annual leave.

However, this matter can be included in the employment agreement. During annual leave, the company must pay the employee the agreed-upon amount of wages or salary.

b. Maternity Leave

Maternity leave is granted for a period of 3 months and is typically taken 1.5 months before childbirth and 1.5 months after childbirth.

During maternity leave, the company must provide full wages to the employee.

The length of maternity leave can be extended if recommended by a doctor.

c. Sick Leave

If an employee takes sick leave, it should not reduce their annual leave entitlement.

The amount of wages to be paid when an employee is on sick leave is as follows:

• For the first 4 months, the company must pay 100% of the wages.
• For the next 4 months, the company must pay 75% of the wages.
• For the following 4 months, the company must pay 50% of the wages.
• For subsequent months, the company must pay 25% of the wages.

Additionally, for menstrual leave (for female employees), they are paid in full if they are unable to perform their duties on the first and second days of menstruation.

d. Personal Leave

There are regulations regarding personal leave as well.

There are several conditions under which personal leave must be paid, including:

• Marriage (3 days),
• Marriage of an employee's child (2 days),
• Circumcision of an employee's child (2 days),
• Baptism of an employee's child (2 days),
• Wife of the employee giving birth or experiencing a miscarriage (2 days),
• Death of a close family member of the employee (spouse, child, parent, or parent-in-law) (2 days),
• Death of an extended family member of the employee (1 day).

a. Termination Procedure

Indonesian labor law does not explicitly outline termination of employment.

However, companies cannot dismiss their employees arbitrarily.

To obtain approval, employers must file a lawsuit, unless they reach an agreement with the employee by signing a mutual termination of employment.

Labor laws also do not provide protection for employees.

However, it is not allowed to dismiss employees for the following reasons:

• The employee gets married.

• The employee is absent due to illness for less than 12 months.

• The employee is an active member of a labor union.

Reasons why an employee may be terminated from their job include:

• The employee breaches the employment agreement.
• The employee is imprisoned.
• The employee is ill for more than 12 months.
• The employee is absent from work for more than 5 days without valid reasons, provided they have been notified twice.
• The employee reaches retirement age.

Not all reasons for terminating employees need to be related to their misconduct.

Employers can terminate employees for business-related reasons:

• There may be changes in the company's status, merger with another business, or change in ownership acquisition.
• The company goes bankrupt.
• The company incurs continuous losses for two consecutive years as evidenced by financial statements.
• The company permanently closes its business.

b. Periodic Notice

Employees are expected to provide written resignation letters and notices at least one month in advance.

c. Severance Pay

Employees terminated from their job are entitled to receive payment based on:

• Less than 1 year of service: 1 month's salary
• 1 year or more but less than 2 years: 2 months' salary
• 2 years or more but less than 3 years: 3 months' salary
• 3 years or more but less than 4 years: 4 months' salary
• 4 years or more but less than 5 years: 5 months' salary
• 5 years or more: 6 months' salary
• 6 years or more: 7 months' salary
• 7 years or more: 8 months' salary
• 8 years or more: 9 months' salary

The detailed regulations governing the payroll system must be thoroughly understood by companies operating in Indonesia, including foreign companies.

It is advisable for companies to continuously monitor and adjust their policies to comply with these regulations to avoid violations of Indonesian laws.

If you are seeking talent from Indonesia, you can find top talent in IT, E-Commerce, Sales, Business Development, Marketing, and more on Epicareer for Employers.

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