Indonesia: Employment Protection Bill to replace the Manpower Law

Employer action code: Act

Parliament has approved the draft Employment Protection Bill (EPB) to replace the Manpower Law, Indonesia’s labor code. Impetus for the reforms comes from a Constitutional Court ruling in 2024 that struck down some amendments to the Manpower Law passed in 2020, and ordered the government to fix the Law’s shortcomings by October 31, 2026. Notable changes to be introduced under the EPB include, among other things, requiring employers to pre-fund severance benefits and increasing statutory severance on retirement or in the event of a merger or transfer of undertaking.

Key details

• Severance benefits (for permanent employees) will be financed by employer contributions to a new severance reserve fund (Dana Cadangan Pesangon), but the detailed funding and implementation arrangements are expected to be addressed in implementing regulations
• The multipliers used in calculating statutory severance will be increased for certain specific reasons for termination, as follows:
• From 1.00 to 2.00 for collective dismissals due to mergers or change of ownership and for constructive dismissals
• From 1.75 to 2.00 at normal retirement
• From 0.50 to 1.00 for separation due to business closure, bankruptcy, reasons of force majeure, repeated employee misconduct, or an employee wishing not to continue employment after a merger or change of ownership
• Employers will need to negotiate with employee representatives on enterprise wage structures and scales. The agreed structures must be published in the work rules or applicable collective bargaining agreement, if any. Sectoral minimum wage rates will have to be at least 5% higher than the prevailing provincial or municipal minimum wage rate
• The maximum duration of fixed-term employment will be lowered from five to four years
• Outsourcing will be limited to five types of service, narrowing the scope of outsourcing from the recent Ministry of Manpower Regulation No. 7 of 2026 on Outsourcing of April 30, 2026, that allowed outsourcing in six categories. The EPB will retain five of the six categories of the Regulation No. 7 unchanged but will remove the operational support services category
• Existing provisions in the Manpower Law for termination for reasons of actual or anticipated financial losses have been removed

Employer implications

The EPB is largely based on the Manpower Law, but some significant changes will need to be clarified on implementation, particularly regarding pre-funding of severance benefits. The severance reserve fund is intended in part to ensure that workers receive their entitlements to severance in the event of employer bankruptcy or closure of an establishment, but the amounts payable for statutory severance benefits are based on multiples of base pay of 1.0, 1.5 or 2.0. The government still needs to determine an appropriate level of funding for the program. In any case, employers will be liable for any shortfall in the amounts payable. The EPB is expected to be signed by the president and published in the Official Gazette by the deadline.

Note: the government has yet to release the full text of the EPB to the public. Accordingly, the changes outlined above may be subject to change based on the final version of the law. Companies should consult with appropriate legal counsel on the new law.