Hiring staff in Bali often starts with a warm handshake and a verbal agreement, but relying on casual arrangements is a dangerous strategy for foreign business owners. The local legal framework is rigid, and failing to formalize your workforce relationships can expose your company to severe financial penalties and significant operational disruptions.
Many employers discover too late that their existing agreements do not hold up in court, leading to disputes where the law overwhelmingly favors the employee. Without proper documentation, you risk automatically granting permanent status to temporary staff or facing massive back-pay claims that can cripple your business cash flow.
To navigate this complex landscape, you must understand the specific regulations governing Employment Contracts Indonesia. This guide outlines the seven critical rules every employer must follow to ensure full compliance and peace of mind in 2026. For the official regulations, you can reference the Ministry of Manpower’s legal database.
Table of Contents
- Written Contracts Are Mandatory (PKWT vs PKWTT)
- Essential Clauses You Cannot Skip
- Strict Limits on Fixed-Term Contract Duration
- Wages, Overtime, and "All-In" Salary Risks
- Real Story: The "Freelance" Trap in Seminyak
- Social Security (BPJS) Obligations
- Termination and Severance Rules
- Managing Outsourcing and Foreign Workers
- FAQ's about Employment Contracts Indonesia
Written Contracts Are Mandatory (PKWT vs PKWTT)
In the Indonesian legal system, ambiguity is the enemy of the employer. The most fundamental rule you must adhere to is that all fixed-term employment agreements (PKWT) must be in writing. While permanent employment agreements (PKWTT) can theoretically be oral, having a written contract is universally recommended to define the scope of work and protect your interests.
The law clearly distinguishes between these two types. PKWT is for temporary work, such as a specific project or seasonal role, while PKWTT is for ongoing, permanent positions. A critical detail often missed by foreigners is that Employment Contracts Indonesia must be written in the Indonesian language (Bahasa Indonesia). You can create a bilingual contract with English for your own understanding, but in the event of a discrepancy or legal dispute, the Indonesian version prevails by law.
If you fail to provide a written contract for a fixed-term employee, or if the contract is not registered with the local Manpower Office (Disnaker) where required, the law may automatically deem that employee as permanent (PKWTT). This conversion grants them full tenure rights, including severance pay and long-service entitlements, which can be a costly surprise for a business intending to hire short-term help.
Essential Clauses You Cannot Skip
Drafting a contract is not just about listing duties; it is about meeting statutory minimums. Government Regulation No. 35 of 2021 mandates that specific details must appear in every agreement. These include the names and addresses of both parties, the job title, the work location, the amount of wages, the method of payment, and the rights and obligations of both employer and employee.
Beyond these basics, Employment Contracts Indonesia must reflect statutory rights regarding leave, working hours, and social security. You cannot insert clauses that waive these rights. For instance, a clause stating “Employee agrees to waive annual leave in exchange for a higher salary” is null and void. The law considers such rights inalienable.
If you are unsure whether your current templates meet these strict standards, or if you need assistance structuring a salary package that is both competitive and compliant, it is highly advisable to consult a trusted tax management company. They can ensure your payroll structure aligns with mandatory clauses, preventing future disputes over unclear terms.
A central decision when drafting employment contracts in Indonesia is whether the role should be PKWT or PKWTT. PKWT (Perjanjian Kerja Waktu Tertentu) is a fixed-term employment agreement, designed for work that is time-limited, seasonal, or tied to a specific project or product. PKWTT (Perjanjian Kerja Waktu Tidak Tertentu) is an indefinite-term or permanent employment agreement, intended for ongoing roles in the business.
Reforms under the Job Creation Law and Government Regulation 35 of 2021 allow PKWT to run longer overall than before, but still within clear limits. In many cases, fixed-term employment contracts in Indonesia can now cover up to around five years including extensions and renewals, provided the work genuinely fits the criteria for PKWT. If a worker performs continuous, core tasks year after year, authorities may treat the relationship as permanent regardless of what the contract says.
PKWTT is the default choice for long-term roles. It offers more job security for employees and requires employers to follow stricter rules for performance management and termination. Using PKWT simply to “test” long-term positions can backfire, especially if contracts are renewed repeatedly with only short breaks. A practical rule: if the role is essential to your business model and not truly time-bound, design the employment contract in Indonesia as PKWTT from the start.
Strict Limits on Fixed-Term Contract Duration
One of the most frequent violations in Bali involves the misuse of fixed-term contracts (PKWT). Under the Job Creation Law and its implementing regulations, you cannot keep an employee on a temporary contract indefinitely. The total duration for a PKWT, including any extensions, is generally capped at five years.
For example, you might sign an initial contract for two years. You can extend this, but the total combined period cannot exceed the five-year statutory limit. Once an employee exceeds this timeline, or if the work they are doing is by nature permanent and continuous (like a receptionist in a year-round hotel), they are legally entitled to permanent status.
Monitoring these dates is crucial. If a contract expires and the employee continues working without a new written agreement, the relationship legally shifts to permanent status by default. This automatic conversion is a primary reason why managing Employment Contracts Indonesia requires diligent administrative tracking and cannot be left on “autopilot.”
Wages, Overtime, and "All-In" Salary Risks
Indonesian labor law is very protective regarding compensation. The standard working hours are 40 hours per week—either 7 hours a day for 6 days, or 8 hours a day for 5 days. Any work performed beyond these limits is considered overtime and must be compensated at a rate of 1.5x for the first hour and 2x for subsequent hours.
A common pitfall for foreign employers is the “all-in” salary concept. You might offer a higher flat salary and assume it covers potential overtime. However, unless the employee is in a specific managerial role where hours are uncontrollable, this assumption is legally flawed. If a dispute arises, the employee can claim unpaid overtime for years of service, calculated based on the statutory formula.
Your labor agreements in Indonesia must explicitly state the breakdown of wages. The basic wage and fixed allowances must amount to at least 75% of the total take-home pay. Failing to structure this correctly can lead to issues with THR (Holiday Allowance) calculations and severance payments, as these are often based on the basic wage plus fixed allowances.
Real Story: The "Freelance" Trap in Seminyak
In 2024, a boutique marketing agency in Seminyak owned by a British expat named Sarah ran into serious trouble. Sarah hired three graphic designers and a copywriter as “freelancers” to avoid the administrative burden of BPJS and taxes. They worked from her office, used company laptops, and adhered to fixed working hours of 9-to-5, but they had no written contracts, only verbal agreements and WhatsApp chats.
After 18 months, she decided to let one designer go due to budget cuts. The designer filed a complaint with the Badung Manpower Office (Disnaker), claiming unfair dismissal. Because Sarah could not produce a valid fixed-term contract, and because the working conditions (tools, hours, supervision) proved an employment relationship existed, the mediator ruled that the designer was effectively a permanent employee.
Sarah was ordered to pay full severance, long-service pay, and compensation for rights, totaling over IDR 60 million for just one employee. The ruling also triggered an inspection of her other staff, forcing her to regularize everyone and pay back-dated Social Security contributions. The lack of proper Employment Contracts Indonesia turned a simple staffing change into a financial disaster.
Social Security (BPJS) Obligations
Integrating social security into your employment agreements is not optional. Indonesia has a mandatory social security system known as BPJS, split into two branches: BPJS Kesehatan (Healthcare) and BPJS Ketenagakerjaan (Employment Social Security).
Every employee, whether on a fixed-term or permanent contract, must be registered. Your contract should clearly state that the company will deduct the employee’s portion of the contribution from their salary and pay the employer’s portion directly to the government.
Failure to register employees is considered a serious violation of their rights. Even if an employee says they “don’t want the deduction,” you as the employer are liable. If a worker has a workplace accident and is not covered because you failed to register them, you will be personally responsible for all their medical costs, which can be astronomical compared to the monthly premiums.
When Maya, a founder of a small SaaS company in Bali, hired her first four developers, she used simple “freelance” agreements downloaded from an overseas template site. Everyone worked from the same co-working space, used company laptops, attended daily stand-up meetings, and reported to her CTO. After talking with another founder, Maya realised that, in Indonesian law, this arrangement looked very much like regular employment 📖.
She decided to clean things up before any disputes arose. With help from a local consultant, she re-mapped the roles. Two senior developers, essential to the product roadmap, moved onto permanent PKWTT contracts with a clearly written three-month probation, Indonesian-language terms, and references to the company regulation on leave, overtime, and performance reviews. Their employment contracts in Indonesia now reflected their real, long-term positions.
A third developer joined on a PKWT contract tied to a specific 12-month project for a new module, with carefully drafted scope and end date. The fourth specialist, a security auditor who only worked a few days each month for multiple clients, kept a genuine independent-contractor agreement, with no fixed hours and clearly defined deliverables. For peak testing periods, Maya used an outsourcing firm that already had compliant employment contracts in Indonesia for its staff.
Twelve months later, the project-based PKWT ended smoothly when the module was delivered, while the two PKWTT developers stayed on with revised salary packages. The security specialist continued working on a flexible basis. Because the documentation matched the reality on the ground, Maya avoided misclassification problems and could answer investor questions about labour compliance with confidence.
Termination and Severance Rules
The most contentious part of any employment relationship is the end of it. Indonesian law is famously difficult when it comes to firing staff. You generally cannot terminate an employee without a valid legal reason, such as verified misconduct (after issuing warning letters), resignation, or legitimate efficiency measures (redundancy) which require specific proof.
For fixed-term contracts (PKWT), if you terminate the agreement early, you are legally obligated to pay the employee the wages for the remaining period of the contract. Additionally, at the end of any PKWT, you must pay “compensation money” (Uang Kompensasi) calculated based on their tenure.
For permanent contracts (PKWTT), termination triggers severance pay (Uang Pesangon), long service pay (UPMK), and compensation for rights. The exact formula depends on the reason for termination. Your Employment Contracts Indonesia cannot override these statutory amounts. A clause stating “No severance shall be paid upon dismissal” is illegal and unenforceable.
Managing Outsourcing and Foreign Workers
For businesses that prefer not to hire direct staff, outsourcing is an option, but it is tightly regulated. Under the latest rules, outsourcing is only permitted for certain types of work, and the outsourcing company must have a specific license. If you use an unlicensed provider, the workers may legally be considered your direct employees, transferring all liability to you.
When it comes to hiring foreign staff (Expatriates), the rules for Employment Contracts Indonesia are even stricter. Foreigners must be on fixed-term contracts; they cannot be permanent employees. Their contract duration must align exactly with the validity of their work permit (RPTKA/IMTA). Furthermore, the job title in the contract must match the title approved by the Ministry of Manpower. A mismatch here is a common reason for immigration deportations and fines.
FAQ's about Employment Contracts Indonesia
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Can I write the employment contract in English only?
No. While you can use a bilingual format, the Indonesian version is mandatory and is the governing version in the eyes of the law. An English-only contract may be deemed null and void.
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What is the minimum duration for a fixed-term contract?
There is no specific minimum duration, but it is typically used for projects lasting at least one month. The maximum duration, including extensions, is generally five years.
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Do I have to pay severance to contract employees (PKWT)?
You do not pay "severance" in the traditional sense, but you must pay "compensation money" (Uang Kompensasi) at the end of the contract term. This is calculated as (Tenure in Months / 12) x 1 Month Salary.
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Can I put a probation period in a fixed-term contract?
No. Probation periods are only legally permitted for permanent contracts (PKWTT). If you include a probation clause in a fixed-term contract, the law may void the probation and count the tenure from day one.
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What happens if I don't register the contract with Disnaker?
For fixed-term contracts, failure to record/register them with the local Manpower Office (where required online via WLKP) can jeopardize the validity of the fixed-term status, potentially converting the employee to permanent status.
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Are verbal agreements valid for casual daily workers?
While common, they are risky. If a "casual" worker works 21 days or more for three consecutive months, they legally convert to a permanent employee. It is always safer to have a written agreement defining the daily worker status.
