Overview

On 29 December 2023, the Supreme Court of Indonesia issued Supreme Court Circular No.3 of 2023 on the Formulation of Results of a Plenary Meeting of the Supreme Court Chamber in 2023 as Guidelines for the Execution of the Judiciary’s Duties (Circular 3/2023).

Circular 3/2023 is intended to provide guidance to the judiciary who serve in a wide range of courts across many jurisdictions, including criminal, civil, religious, military and state administrative courts. The guidance involves clarifications made to a variety of matters as well as many procedural issues, partly to ensure consistency of court rulings.

Although Circular 3/2023 covers many different matters, in this client update we focus only on the guidelines for fixed-term employment agreements (in particular, the liability of an employer who wishes to terminate a fixed-term employment agreement before the end of the agreed term) (Fixed-term Employment Agreement Early Termination Guideline).

We have released this client update following the release of another client update on a different Circular 3/2023 guideline that regulates the validity of foreign language agreements between Indonesian parties and foreign parties. Our client update on this guideline can be viewed here.

What is a fixed-term employment agreement?

A fixed-term employment agreement is an employment agreement between an Indonesian business owner (as employer) and an Indonesian employee for work that can be:

1. completed within a specific time (Specific Time Work); or
2. specifically identified and is one-off or temporary (Specific Job Work),

In both cases, the work must not be “of a permanent nature”.

Whereas a fixed-term employment agreement (or agreements) for Specific Time Work cannot together exceed a 5-year period, there is no statutory time limit on fixed-term employment agreements for Specific Job Work. However, in both cases, the fixed-term employment agreement must specify the agreed term to complete the work.

What is the Fixed-term Employment Agreement Early Termination Guideline?

This guideline states that an employer wishing to terminate an employee before the end of the agreed term under a fixed-term employment agreement must pay the terminated employee:

1. a fixed rate of compensation for the number of months/years worked (as regulated under Government Regulation 35/2021¹); and
2. the remainder of the salary that would have been paid up to the end of the agreed term specified in the fixed-term employment agreement (as regulated under Article 62 of the Employment Law²) (had the fixed-term employment agreement not been terminated early) (Article 62 Component).

Our comments on the Fixed-term Employment Agreement Early Termination Guideline:

• While we have always taken the view that the liability of employers when unilaterally terminating fixed-term employment agreement employees involves the above two components (i.e. compensation and remainder of salary until the end of the agreed term), there had been some confusion as to whether the compensation component replaced the Article 62 Component or was in addition to the compensation component.
• The Fixed-term Employment Agreement Early Termination Guideline now clarifies that both components are payable to any employee whose fixed-term employment agreement has been terminated by their employer before the end of the agreed term.
• The question remains as to whether the employee under a fixed-term employment agreement is obliged to pay the employer the Article 62 Component if the employee unilaterally terminates the fixed-term employment agreement before the end of the agreed term. Article 62 of the Employment Law indicates that the employee would have such an obligation. However, curiously, the Fixed-term Employment Agreement Early Termination Guideline does not mention the liability of the employee to the employer for the employee’s early termination.

Conclusions

• The Fixed-term Employment Agreement Early Termination Guideline essentially reiterates the employer’s liability for early termination of a fixed-term employment agreement that is found not only under Article 62 of the original Employment Law, but also in Government Regulation 35/2021.
• The Article 62 Component that is payable to an employee under a fixed-term employment agreement upon early termination by the employer (i.e., the balance of the unpaid salary from the termination date until the end of the agreed term), can be significant if the remaining term is significant. Therefore, employers must pay particular attention to the length of the agreed term in a fixed-term employment agreement, in case the employer has an unplanned need to terminate the employee before the end of the agreed term for any reason, including poor performance.
• Unfortunately, the Fixed-term Employment Agreement Early Termination Guideline is silent on the liability of an employee who wishes to terminate a fixed-term employment agreement before the agreed term ends. However, the text of Article 62 of the Employment Law clearly states that the Article 62 Component is payable by whichever party terminates the fixed-term employment agreement before the agreed term ends, whether employer or employee.