Running a business in Bali is a dream for many, but the shifting regulatory sands can quickly turn that dream into a compliance nightmare. Many foreign investors (PT PMA) still rely on outdated advice from the pre-2020 era, unaware that the legal landscape has fundamentally transformed. From the introduction of the Omnibus Law to the confirmation of Law No. 6 of 2023, the rules governing how you hire, pay, and fire staff have evolved significantly.
Ignorance of these updates is no longer a valid defense and can lead to devastating financial penalties. Failing to adapt to Indonesian labour law changes can result in costly disputes, such as unexpected compensation claims for expired contracts or severe fines for mismanaging foreign worker permits. For business owners, the risk is not just financial; it is operational. A single compliance oversight can trigger audits that stall your expansion and damage your reputation in the tight-knit local community.
The good news is that these reforms were designed to offer greater flexibility if managed correctly. By understanding the nuances of Government Regulation (GR) 35/2021 and recent Ministry of Manpower decrees, you can build a more agile and legally secure workforce. This guide breaks down the critical updates you must implement immediately to safeguard your operations and ensure your company remains on the right side of the Indonesian Ministry of Manpower.
Table of Contents
- The Core Legal Framework Explained
- Fixed-Term Contracts (PKWT) Flexibility
- New Outsourcing Rules for Growth
- Termination and Severance Pay Updates
- Real Story: Avoiding a PKWT Crisis in Canggu
- Foreign Worker (TKA) Regulations
- Wage Policies for Micro and Small Businesses
- Occupational Health & Safety (OHS) Essentials
- FAQ's about Indonesian Labour Law Changes
The Core Legal Framework Explained
The foundation of employment regulation in Indonesia has shifted from a rigid, pro-employee structure to a more balanced approach aiming to stimulate investment. While Law No. 13 of 2003 remains the “parent” legislation, it has been heavily amended by the Job Creation Law (Omnibus Law) and subsequent regulations like Law No. 6 of 2023. These updates are not mere suggestions; they are the new standard for all entities operating within the archipelago.
For foreign business owners, the most critical aspect to grasp is the consolidation of these rules. The Constitutional Court has pushed for a unified Employment Law by 2025, meaning enforcement is becoming stricter and more centralized. The Indonesian labour law changes introduced through these mechanisms impact everything from leave entitlements to how you structure your company’s internal regulations (Peraturan Perusahaan). Staying updated is essential to avoid “copy-pasting” old contract templates that are now legally void.
Fixed-Term Contracts (PKWT) Flexibility
One of the most significant wins for employers is the extension of Fixed-Term Employment Agreements (PKWT). Previously, these contracts were tightly restricted in duration, often forcing employers to make staff permanent (PKWTT) prematurely. Under the current regime (GR 35/2021), a PKWT can now last for up to five years, including extensions. This allows businesses to align workforce planning with longer-term projects without the immediate liability of permanent employment.
However, this flexibility comes with a new financial obligation: PKWT Compensation Pay. Unlike in the past, when a contract ends, you are now legally required to pay compensation to the worker, calculated based on their tenure. The formula is generally one month’s salary for every 12 months of service, pro-rated for shorter periods. Failure to pay this compensation is a direct violation of the recent Indonesian labour law changes and is one of the most common reasons for disputes in Bali today.
New Outsourcing Rules for Growth
Outsourcing has also undergone a major facelift, expanding the scope of what businesses can hand over to third parties. Historically, outsourcing was limited to “non-core” activities like cleaning, security, or catering. Today, the regulations allow for a broader range of activities to be outsourced, provided the outsourcing company is a fully licensed legal entity. This is a game-changer for startups looking to remain lean while scaling core operations.
Crucially, the law now mandates “Transfer of Rights Protection” (TUPE) clauses. If you change outsourcing providers, the new provider must honor the existing workers’ years of service and rights, ensuring continuity. This prevents the chaotic “fire and re-hire” cycles that used to plague the industry. For business owners, this means you can switch vendors to get better service without worrying that your entire outsourced workforce will walk away or sue for unfair dismissal.
Termination and Severance Pay Updates
Perhaps the most discussed topic among employers is the restructuring of severance pay. The new framework has simplified the calculation formulas and removed the mandatory 15% housing and medical allowance uplift that used to inflate termination costs. This adjustment makes the cost of separation more predictable and manageable for companies facing restructuring or insolvency.
Despite the reduction in statutory amounts, the procedure for termination has become more rigorous. You cannot simply fire an employee; you must issue a notification letter stating the reasons, and if the employee objects, you must enter bipartite negotiations. Skipping these steps can render the termination illegal, forcing you to reinstate the worker with back pay. Understanding these Indonesian labour law changes is vital, as they prioritize due process over the raw amount of the payout.
Real Story: Avoiding a PKWT Crisis in Canggu
Sarah, a boutique hotel owner in Canggu, nearly lost her business due to a misunderstanding of the new contract rules. She had employed her housekeeping staff on repeated one-year contracts since 2019 without paying the new mandatory compensation upon renewal, assuming the old rules still applied.
In late 2024, two staff members resigned and filed a complaint with the local manpower office, claiming unpaid compensation and demanding to be recognized as permanent employees due to administrative errors in their contract renewals.
The Outcome: Sarah faced a potential liability of over IDR 150 million. However, she quickly engaged a legal consultant who helped her negotiate a settlement based on the correct calculations under GR 35/2021. More importantly, she immediately audited all remaining staff contracts, transitioning eligible roles to the correct PKWT format and setting aside monthly provisions for the compensation pay. This painful lesson secured her business against future claims, proving that proactive compliance is cheaper than reactive settlements.
Foreign Worker (TKA) Regulations
Hiring foreign talent is often essential for specialized roles, and the process has been streamlined under the “RPTKA Approval” system. The old work permit (IMTA) has been effectively replaced by the RPTKA (Foreign Worker Utilization Plan), which now serves as the primary authorization for both manpower and immigration purposes. This “single-window” approach reduces bureaucratic redundancy, but the scrutiny on the necessity of the foreign hire remains high.
Employers must undergo a feasibility assessment to prove the foreign worker’s value and commit to transferring knowledge to local staff. Additionally, certain roles, particularly in Human Resources, remain strictly off-limits to foreigners. Tech startups enjoy a specific exemption, allowing RPTKA waivers for the first three months of operation, a policy designed to foster the digital ecosystem in places like Bali.
Wage Policies for Micro and Small Businesses
The government acknowledges that a “one size fits all” minimum wage destroys small enterprises. Consequently, specific exemptions allow micro and small businesses to agree on wages below the provincial minimum, provided they meet certain poverty-line thresholds (at least 50% of average consumption). This is a lifeline for small cafes and warungs starting up in competitive areas.
However, accurate financial reporting is essential to qualify for this exemption. If you claim to be a small business but your revenue exceeds the threshold, you expose yourself to back-pay lawsuits. To ensure your financial classification aligns with your payroll strategy, it is wise to consult with a trusted tax management company. They can verify that your revenue reporting supports your wage structure, keeping you compliant with both tax and labor authorities.
Occupational Health & Safety (OHS) Essentials
Finally, the modern regulatory framework places a heavy emphasis on Occupational Health and Safety (K3). It is no longer optional to have safety protocols; it is a mandatory integration into your corporate management system. This applies even to office-based businesses, where stress and ergonomic risks are now considered part of the safety spectrum.
Employers are obligated to provide Personal Protective Equipment (PPE) where necessary and conduct regular risk assessments. In the event of a workplace accident, the lack of a documented OHS management system can lead to criminal negligence charges against the directors. Documenting your safety training and incident reports is the best defense against these liabilities, turning safety from a cost center into an insurance policy for your business continuity.
FAQ's about Indonesian Labour Law Changes
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Do the Indonesian labour law changes affect existing permanent employees?
Yes. While their permanent status (PKWTT) remains, regulations regarding overtime calculation, leave, and potential severance pay upon termination have been updated and apply to all staff regardless of when they were hired.
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Can I still use a probationary period for fixed-term contracts (PKWT)?
No. Under the current regulations, probationary periods are strictly prohibited for fixed-term contracts (PKWT). If you include a probation clause, the contract may legally be deemed permanent (PKWTT) from day one.
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What is the penalty for not paying PKWT compensation?
Failure to pay the mandatory compensation at the end of a fixed-term contract can result in administrative sanctions, including the restriction of business activities, and allows the employee to sue for the unpaid amount through the Industrial Relations Court.
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How do the changes impact outsourcing in Bali?
The changes allow you to outsource core business activities, which was previously restricted. However, you must ensure your vendor is a legal entity and that their contracts with workers protect continuity of service to avoid joint liability.
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Are foreign workers allowed to hold HR positions now?
No. The prohibition remains strict. Foreigners are legally barred from holding positions related to personnel and human resources management to protect local employment in these sectors.
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Do I need to update my Company Regulation (Peraturan Perusahaan)?
Absolutely. If your company regulation has not been updated since 2021, it likely contains invalid clauses regarding severance and contract types. It should be amended to reflect the current laws and re-registered with the Manpower Office.
