Date Published: 21 July 2020
Whether your investment into Indonesia is to take the form of an acquisition or the incorporation of a new joint venture company, Indonesian Labour Law applies and must be complied with. This article provides you with a brief overview of Indonesian Labour Law and how it may apply to you and your investment.
What is the source of Indonesian Employment and Manpower law and how is it relevant to my investment?
The main source of Indonesian Labour Law is Law No 13 of 2003 on Manpower (“Law 13”).
The relevance of Law 13 to investors cannot be overstated. If you are investing in an Indonesian operating company as opposed to an investment holding company in Indonesia, it goes without saying that that operating company must comply with Law 13 at all times. Law 13 is also particularly relevant if your investment takes place by way of an acquisition as it may have financial and operational implications on the company after completion. Where you are acquiring shares in an Indonesian company and your acquisition results in a change in control, the existing employees of the company must be given proper notice of the proposed acquisition prior to its completion, and are deemed to have been terminated by reason of the change of control. The termination is deemed by Law 13 and upon termination the employees are entitled to severance benefits calculated in accordance with the prevailing formula prescribed by law. The company may be excepted from this if the employees have chosen to voluntarily resign from their positions or if the company has provided the employees with an option to continue working at the company post-acquisition and the employees have chosen to exercise this right.
What are the key points to note?
Many aspects of Law 13 are unique when compared to Singapore. For example, in Singapore and many other jurisdictions, companies can choose to enter into contracts of service (namely, employment contracts) or service contracts (relevantly, consultancy contracts). Where contracts of service are concerned companies can also structure these contracts to be for full-time or part-time employment, and for a fixed term or on a permanent basis. In Indonesia Law 13 prescribes a statutory limit on the maximum term of fixed-term contracts (whether expressed as a contract of service or service contract).
Another example is that in Indonesia employees are entitled to unlimited sick leave. Employees are also entitled to a religious holiday allowance, known as ‘Tunjangan Hari Raya’ or “THR”. THR is payable to employees regardless of their religion, although the religion practiced by the employee impacts the date by which the employer must make the payment. The THR is a mandatory payment, and companies are obliged to pay this even during the COVID-19 pandemic.
A further example is that termination of employment in Indonesia must generally be for cause. Where termination is without cause and for reasons other than the insolvency, restructuring, or acquisition of the company, the terminated employee is entitled to certain payments under Law 13.
How can I employ foreign employees?
In order to employ a foreign employee, you must apply for the appropriate visa for the foreign employee and the foreign employee must hold the appropriate visa at all times. If the foreign employee is predominantly based overseas but is required to travel to Indonesia occasionally for business purposes, the foreign employee must obtain the relevant business entry visa. If the foreign employee will be working in Indonesia, the foreign employee must obtain a work permit (also known as an “IMTA”) and a residence permit (“KITAS”).
You should also note that although the company’s board of directors and board of commissioners can be comprised of expatriates, the office of the director of human resources must be held by an Indonesian citizen.
Your investment into Indonesia may take the form of an acquisition or newly incorporated company. As long as there is change in control of the Indonesian company, Law 13 applies and must be complied with. We hope that this article has provided you with a useful summary of the potential impact that Law 13 may have on your investment.
This update is provided to you for general information only and should not be relied upon as legal advice. If you have any enquiries as to the contents of this update or if you are considering an expansion into Indonesia, please feel free to contact any of the members of our Indonesia Desk, who will be able to guide you accordingly.
CNPLaw’s Corporate Advisory Lawyers
Each M&A deal entails the confluence of multiple legal disciplines. That is why we take great care when assembling a team for each deal, ensuring that there is an optimal mix of specialisation in the clients’ identified areas of concern, such as tax, employment and intellectual property, and necessary industry-specific experience.
We provide support to our clients at every stage of the deal. We will be there at the beginning of the process, helping to facilitate the negotiations between the parties and advising on the structure of the transaction. Once the parties have reached a consensus, we meticulously prepare the necessary documentation. Recognising that M&A deals are often the first page of a new chapter for the parties involved, we also provide post-transaction support to ensure a smooth transition such as the preparation of shareholder agreements, employment agreements, and other relevant commercial documentation.
There are numerous commercial drivers behind the rising popularity of joint ventures as a business/investment structure, including obtaining access to new markets within and across jurisdictions and harnessing the synergies of complementary skill sets.
By advising on how the joint venture should be structured along with related issues, such as the sharing of intellectual property and tax considerations, and documenting the terms of the party’s collaboration, our corporate lawyers help drive your joint venture ideas forward.
We continue to provide support to the joint venture throughout the course of its lifespan by preparing service agreements and other commercial agreements relevant to its operations.
In addition to offering legal insights, our lawyers are experienced at advancing our clients’ interests while being attuned to the ongoing and developing relationship between the respective parties. This contributes towards fostering a spirit of trust which is the cornerstone of any successful joint venture.
Every business involves an amalgam of various stakeholders, such as investors, shareholders and directors. Ideally, each of these stakeholders should have a common vision of what is best for the company. However, this is rarely the case when individual interests are factored into the equation.
Stakeholder conflicts (regarding issues such as breaches of fiduciary duties, derivative actions, shareholder oppression, management deadlocks, management compensation, dividend payments and buy-outs) can be a thorny issue and can leave a company crippled if not addressed promptly.
Given the diversity of interests at play, we appreciate that a multi-faceted approach is usually the most cost-efficient method of resolving stakeholder conflicts. Therefore, we provide clients with ready access to an integrated team of lawyers (combining the experience of our corporate, dispute resolution and employment law practices where applicable) who will effectively engage the relevant stakeholders in discussions on how best to resolve their differences amicably.
More often than not, clients are able to avoid costly protracted court proceedings and resolve stakeholder conflicts with discretion and expediency.
Employment issues are of fundamental concern to both individuals and corporations alike. This is especially so given the growing emphasis on human capital development across the world. Such issues involve an intricate interplay between commercial objectives and normative considerations. Here at CNPLaw, our lawyers strive to help our clients find the balance required to nurture a positive working environment. We advise both employers and employees (whether local or foreign) on the areas below.