Employment termination is a situation that neither employers nor employees hope to experience. However, under certain circumstances, termination of employment may occur for various reasons, including business efficiency measures, organizational restructuring, or other conditions stipulated under Indonesian labor regulations. When a termination occurs, one of the primary concerns is severance pay. Unfortunately, many employees and employers still lack a clear understanding of how severance pay is regulated under the current legal framework.
Understanding the rights and obligations related to severance pay can help both parties navigate the termination process more transparently and in compliance with applicable regulations.
So, what are the severance pay provisions under Indonesia’s Job Creation Law? Here’s what you need to know.
What Is Severance Pay?
Severance pay is compensation provided by an employer to an employee whose employment relationship ends for reasons specified under applicable labor laws.
The amount of severance pay varies by employee. It depends on several factors, including the employee’s length of service, the salary used for the calculation, and the reason for the termination of employment.
In certain situations, employees may also be entitled to additional benefits as provided under applicable regulations.
For this reason, it is important for both employers and employees to understand the legal framework governing severance pay calculations.
Legal Basis for Severance Pay in Indonesia
The regulations governing severance pay in Indonesia are primarily based on the following legislation:
- Law No. 6 of 2023 concerning the Stipulation of Government Regulation in Lieu of Law (Perppu) No. 2 of 2022 as Law (the Job Creation Law).
- Government Regulation (GR) No. 35 of 2021 concerning Fixed-Term Employment Agreements, Outsourcing, Working Hours and Rest Periods, and Termination of Employment.
In addition to these regulations, companies should also refer to the provisions of employment agreements, company regulations, or collective labor agreements (CLAs). If these documents provide benefits that are more favorable to employees and do not conflict with applicable laws, those provisions may continue to apply.
Employee Entitlements Upon Termination
When employment is terminated, an employee’s entitlements are not limited to severance pay alone. Depending on the reason for termination and the employee’s length of service, several compensation components may apply.
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Severance Pay
Severance pay is the primary compensation provided to employees whose employment has been terminated.
The amount is generally determined by the employee’s length of service and the provisions of the applicable regulations. In general, the longer an employee has worked, the greater the potential severance entitlement.
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Long Service Award (UPMK)
In addition to severance pay, employees who have completed a certain period of service may also be entitled to a Long Service Award (Uang Penghargaan Masa Kerja or UPMK).
This benefit recognizes an employee’s years of service and dedication to the company. The amount is determined in accordance with Indonesia’s labor regulations.
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Compensation for Employee Rights
In certain cases, employers are also required to provide compensation for the violation of employee rights.
This compensation may include benefits that have not yet been received under employment agreements, company regulations, or collective labor agreements.
Because company policies vary, the components included under this category may differ, provided they remain compliant with applicable labor laws.
General Steps for Calculating Severance Pay
Severance pay should be calculated carefully and in accordance with legal requirements. Generally, the process involves several key steps.
Determine the Employee’s Length of Service
The first step is to determine the employee’s total period of employment, starting from the hiring date until the employment officially ends.
Length of service is one of the main factors used in calculating severance entitlements.
Determine the Salary Used for Calculation
Next, the employer determines the salary that serves as the basis for calculating severance pay, in accordance with applicable legal provisions.
The salary components included in the calculation must comply with Indonesian labor regulations to ensure accurate results.
Consider the Reason for Termination
Not all employment terminations are treated equally under the law. The amount of compensation an employee receives may vary depending on the reason for the termination, as regulated under Government Regulation No. 35 of 2021.
Employers should therefore ensure that the legal basis for the termination is properly identified before calculating employee entitlements.
Calculate All Compensation Components
Once all relevant information has been collected, the employer can calculate:
- Severance pay,
- Long Service Award (UPMK), and
- Compensation for employee rights, where applicable.
Since the calculation depends on multiple factors, employers generally perform it in accordance with prevailing legal provisions to ensure accuracy.
Important Considerations for Employers and Employees
To ensure a smooth termination process, both employers and employees have important responsibilities.
For Employers
Employers should ensure that every stage of the termination process complies with applicable laws and internal procedures.
In addition to accurately calculating employee entitlements, employers should properly document the entire process and transparently communicate all relevant information to the affected employee.
A transparent approach can help minimize misunderstandings and preserve a professional working relationship.
For Employees
Employees should familiarize themselves with their employment agreement, company policies, and the rights provided under applicable labor regulations.
If there are any questions regarding the severance calculation, employees are encouraged to discuss them with the HR department or their employer for clarification.
Open communication is often the best way to resolve misunderstandings.
The Importance of Financial Planning
Losing a job affects more than just one’s career; it can also have a significant impact on personal finances. Therefore, sound financial planning is equally important.
Building an emergency fund, managing expenses wisely, and maintaining healthy financial habits can help individuals become better prepared for unexpected situations.
At the same time, employers can support employees’ financial well-being through various employee benefits. One example is Earned Wage Access (EWA), a benefit that allows employees to access a portion of their earned wages before payday to cover urgent financial needs.
By developing healthy financial habits while actively employed, employees can improve their financial resilience and be better prepared for unexpected career transitions.
Conclusion
Severance pay is one of the key employee rights protected under Indonesia’s labor laws. The amount is not determined arbitrarily but is calculated based on factors such as length of service, salary, and the reason for termination of employment.
For this reason, both employers and employees should understand the applicable regulations to ensure that the termination process is conducted fairly, transparently, and in compliance with the law.
Beyond understanding severance entitlements, employees are also encouraged to build strong financial habits early on. Combined with sound financial planning and employer-supported financial wellness programs, these efforts can help individuals navigate career transitions with greater confidence and financial security.
