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What global businesses need to know about payroll in Indonesia
Indonesia is the largest economy in south-east Asia, and ranks as the 16th largest economy in the world by GDP, only slightly behind recognized powerhouses like Australia and Spain. Much of this is down to the fact that it’s a much more populous country than you might think: around 280 million people live in Indonesia, a figure only beaten by India, China, and the United States.
Whereas many Asian economies have moved far more towards services in recent decades, more than half of Indonesia’s GDP still comes from industry and agriculture. It’s a major player in energy, palm oil, and other raw materials, and is also well known for manufacturing a huge range of products, from clothes to cars.
Indonesia has become far more open to foreign investment than it was in the past, and has benefitted from major financial and economic reforms since the turn of the millennium. But it has to be remembered that it is a developing country, and one where 87% of people are Muslim, so there are both practical and cultural considerations to account for when it comes to payroll and employment. This guide covers the basics.
Getting Started
The first barrier to setting up a business in Indonesia is the requirement to have a large amount of paid-up capital. For a foreign-owned LLC (known as a PMA), an investment plan for at least US$700,000 has to be presented, with at least 25% as paid-up share capital. Foreigners are not allowed to set up normal limited-liability companies in Indonesia.
The set-up process is long and complex, including:
- Drafting and notarizing of Articles of Association
- Application for company registration and licenses from the Ministry of Law and Human Rights
- Gaining approval for the name of the business
- Registration for electronic tax filing
- Meeting visa, work permit, and immigration requirements for any foreign directors
- Obtaining Domicile Certificates for the company and for building management
- Payment of legal services fees
- Registering with the Ministry of Manpower
- Applying for healthcare insurance, a tax registration number, VAT collection, and social security
This process takes a long time – as much as three months – but the fees involved are nominal: no more than a few hundred dollars or euros in total.
Companies do not need to set up a bank account in Indonesia but it is highly encouraged. You will need initial approval from BKPM (the capital investment coordinating board), a tax number, a Deed of establishment, and a domicile letter. Additionally, a power of attorney and proper identification is necessary. The whole process should take about a week to set up.
The complexity of the above means we strongly recommend accessing local expertise that understands how to navigate the legal and payroll challenges of the Indonesian market.
Employment Considerations
Paperwork in Indonesia is notoriously lax when it comes to hiring employees, but you will need to have a registered contact with the Ministry of Manpower if you plan to hire someone on a temporary basis. Verbal contracts are allowed, but only if a written letter of appointment is drafted.
Collective bargaining is becoming more common in Indonesia, and so dealing with trade unions is becoming a bigger priority in wage discussions. There can be only one agreement for the entire enterprise. Agreements are valid for two years, and negotiations can start three months before expiration. If wage growth and bonuses are not written out in those agreements, then it is up to the employee and employer to negotiate the terms.
The maximum working week is 40 hours, although this can be spread over five or six days: some businesses have been granted exemptions against this limit from the government. Overtime is limited to four hours per day and 18 per week, and should be paid at 150% for the first extra hour on any given day, and 200% for all time beyond this. Overtime on public holidays or rest days is 200% within the employee’s normal shift length, 300% for the first hour above this, and 400% for the following two hours. Every employee should be given at least a 30-minute break for every four hours worked.
Notice periods are a minimum of 30 days, although longer periods can be agreed upon in employment contracts. Probation periods generally run for three months.
Compensation, Bonuses and Severance
Minimum wage rates have steadily risen year by year in Indonesia, but vary substantially from one province to the next. As a guide, for 2024 the monthly minimum wage in the capital, Jakarta, is IDR 5,067,381 (approx. £255; $325; €300); rates in other provinces will usually be lower than this. It’s important to keep a close eye out for future changes in the years to come: they normally take effect on January 1.
Each year, employees who have worked the full year are entitled to the Tunjangan Hari Raya (religious allowance) bonus. This is worth one month’s salary and must be paid at least a week before the Eid-ul-Fitr public holiday; the date of this varies as it moves forward by approximately ten days every year. Employees who have not worked the full year can receive the THR on a pro-rated basis. Other discretionary bonuses are also permitted.
Severance pay is one month’s salary per year of service, and any partial years count as full years for the purposes of this calculation. This is capped at nine months’ salary for employees with over eight years of service.
Tax and Social Security
Income tax in Indonesia is levied progressively across five bandings. The first 5% applies to the first IDR 60 million earned each year (approx. £3000; $3850; €3550). Higher rates of 15%, 25% and 30% kick in as wages increase, before the highest rate of 35% is applied to all earnings above IDR 5 billion (approx. £255,000; $320,000; €295,000).
Corporate tax is levied at 22%, although public companies with at least 40% of shares listed and meeting other conditions can reduce their rate by 3%. VAT is currently applied at 11%, and includes the import of goods, although not exports. Several reductions and exemptions also apply.
Social security contributions are made in five different areas:
- Working accident protection: employer 0.24%-1.74%
- Death insurance: employer 0.3%
- Old age contribution: employer 3.7%, employee 2%
- Healthcare: employer 4%, employee 1%
- Pension: employer 2%, employee 1%
Holidays and Leave
Paid leave entitlement in Indonesia is 12 days per year, once an employee has completed one year of service. Employees who reach six years of service are entitled to a full month off in each of the following two years.
Indonesia has 16 days of public holidays per year. Employees should be paid for time off on public holidays, but whether holidays that fall on weekends are replaced by an alternative day off on a weekday is at the discretion of the government.
Maternity leave entitlement is three months, divided equally pre and post-birth, paid at normal rate by employers. Paid paternity leave entitlement is two days. Employees are also entitled to two days of paid leave if their child is being circumcised, baptized, married, or if they die.
Employees are entitled to medically certified sick leave, paid for by their employer. Sick pay runs at 100% of salary for the first four months, 75% for the next four months, 50% for the ninth to 12th months, and then 25% beyond that. Female employees are also entitled to two days of menstrual leave, should they need it.
In Summary
This guide demonstrates just how complicated payroll and employment law can be in Indonesia, in several different areas. But if you can navigate that complexity, especially around the business set-up processes, you’ll be all set to take advantage of a huge marketplace full of potential. Working with a global payroll provider can fill any gaps in your knowledge, and give you access to vital country-specific advice.
This article is for informational purposes only and not intended to convey or constitute legal or any other advice. It is not a substitute for advice from a qualified professional.