Severance Pay vs. Layoff Benefits in Indonesia

When an employee submits their resignation, severance pay is one of the things that the company needs to provide. Have you ever heard of this term?

For more details, read the following article from Epicareer for Employers.

In the context of human resources and employment, severance pay refers to the compensation provided by a company to an employee when they resign voluntarily, aiming to compensate the employee for their service.

The amount of severance pay usually depends on factors such as the employee's length of service, their position, and company policies, as regulated in Article 50 of Government Regulation No. 35 of 2021.

According to this regulation, employees who resign voluntarily are entitled to two things: compensation as stipulated and severance pay, the amount of which is specified in the employment agreement.

Severance pay may also come with specific provisions, such as agreements that the employee will not sue the company and/or will not work for a competitor for a certain period after receiving it. These provisions are typically outlined in the employment contract.

By definition, severance pay for resigning employees differs from layoff benefits given to employees terminated by the company.

Layoff benefits are provided to employees affected by termination of employment (PHK) or dismissal from their workplace. Such dismissals may be based on various reasons, such as budgetary efficiency or the employee's performance.

Meanwhile, severance pay for resigning employees is given when employees voluntarily resign for various reasons.

In addition to severance pay, there are several similar separation payments that employees can receive. Some of these include:

• Severance Pay

• Length of Service Award (UPMK)

• Compensation for rights

In regulations, the government does not detail how severance pay should be implemented for employees. It all depends on each company's policy and is formulated in the employment agreement.

Therefore, many companies have not yet implemented this type of recognition for resigning employees. However, generally, here are the conditions that employees must meet to receive it when resigning, as stated in Article 36 of Regulation 35 2021 regarding employee termination:

• Submitting a written resignation request no later than 30 days before the resignation date

• Not bound by a service bond

• Fulfilling their obligations until the last working day

Permanent Employees

Now, let's look at an example of calculating severance pay for a permanent employee with a fixed-term employment contract (PKWTT).

The amount is primarily based on the amount of compensation as stipulated in Article 80, Paragraph 44 of the Job Creation Law. Here are the amounts:

• 3 to less than 6 years of service: severance pay equivalent to 2 months' salary

• 6 to less than 9 years of service: severance pay equivalent to 3 months' salary

• 9 to less than 12 years of service: severance pay equivalent to 4 months' salary

• 12 to less than 15 years of service: severance pay equivalent to 5 months' salary

• 15 to less than 18 years of service: severance pay equivalent to 6 months' salary

• 18 to less than 21 years of service: severance pay equivalent to 7 months' salary

• 21 to less than 24 years of service: severance pay equivalent to 8 months' salary

• More than 24 years of service: severance pay equivalent to 10 months' salary

The salary is calculated based on the basic salary plus fixed allowances each month. Here's an example:

Dion has resigned from ABC Company, and his last day was May 30, 2019. He has worked as an Digital Marketing t at ABC Company for 5 years with a salary of Rp7,000,000.

With his salary, how much severance pay can Dion receive?

Severance pay = 2 x Rp7,000,000 = Rp14,000,000

Temporary Employees

Temporary contract employees (PKWT) do not receive severance pay, but they are entitled to compensation if the company terminates their employment provided they have worked for at least one month.

The amount of compensation is also regulated in Regulation 35 2021 Article 16, Paragraph (1), as follows:

• For PKWT employees with a minimum work period of more than one month but less than 12 months: Work period / 12 x 1 month's salary

• Employees with continuous 12-month service receive compensation equivalent to 1 month's salary, which includes basic salary plus fixed allowances.

If employees are paid daily wages, the compensation is the average wage earned over 12 consecutive months.

That was a brief explanation of severance pay for employees. It is essential for companies to understand this, considering that many have not yet implemented it properly, despite government regulations.

What is the difference between "severance pay" and "layoff benefits"?

Layoff benefits must be given by the company to employees who decide to resign voluntarily. So, the employee submits a resignation letter for a reason and then the company processes it. Meanwhile, severance pay is given by the company when they terminate an employee.

How much is the amount of severance pay?

Calculation method for severance pay (pesangon):

• Less than 1 year of service = Severance pay equivalent to 1 month's salary.

• 1 year or more but less than 2 years of service = Severance pay equivalent to 2 months' salary.

• 2 years or more but less than 3 years of service = Severance pay equivalent to 3 months' salary.

What does severance pay cover?

Severance pay is compensation from the company to employees who experience termination of employment (PHK) or submit resignation. There are three types of severance pay in Indonesia: severance pay (uang pesangon), rights replacement money (uang penggantian hak), and service appreciation money (uang penghargaan masa kerja).

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