What Severance Pay Rules Must Employers Follow in Indonesia?

Which Employees Qualify for Severance Pay?

• Permanent employees terminated by the company for reasons other than serious misconduct or resignation generally qualify for statutory severance.
• Employees with at least one month of continuous service are typically entitled to termination benefits when dismissed for business or efficiency reasons.
• Workers terminated due to company closure, merger, acquisition, or change of ownership usually qualify for severance and related compensation.
• Employees dismissed for prolonged illness or disability, where continued employment is not feasible, may be entitled to statutory packages.
• Fixed-term employees may be entitled to compensation for remaining contract value if the contract is ended early without lawful cause.
• Employees terminated for serious misconduct proven under due process can lose their right to severance but may still receive limited compensation items.

What Are the Legal Timelines for Paying Severance?

In practice, you should aim to settle all severance, long-service pay, and compensation items on or before the employee’s final working day, or immediately after the termination is legally effective. Indonesian law ties payment closely to the conclusion of the termination process, including any required bipartite negotiations or dispute resolution. If the case goes to the Industrial Relations Court, payment is usually due once a decision or settlement agreement becomes final and binding. To stay compliant, your company should document the calculation, obtain written acknowledgment from the employee, and transfer funds without undue delay. Many employers set an internal standard of paying within 7 to 14 days after final agreement or court decision to reduce legal and reputational risk.

What Penalties Apply if Severance Is Not Paid Correctly?

If your company fails to pay severance correctly or on time, you risk financial, administrative, and litigation exposure. Unpaid or underpaid severance can trigger employee claims, inspections by the local Manpower Office, and court proceedings in the Industrial Relations Court. Authorities may order you to pay the full statutory entitlements plus interest or adjustments, and non-compliance can delay corporate actions such as business licensing or restructuring. Mishandled terminations also increase the chance of reinstatement orders, which can be more expensive than paying severance properly at the outset.

• The Industrial Relations Court can order payment of outstanding severance, long-service pay, and compensation in full.
• You may be required to pay wages during the dispute period (upah proses) in certain circumstances.
• Repeated or serious non-compliance can attract administrative sanctions from the Manpower Office.
• Court disputes increase legal fees, management time, and the risk of reputational damage.
• Poor records or miscalculations can weaken your defense and lead to unfavorable judgments.

Does Outsourcing Employment via an EOR Change Severance Liability?

Using an Employer of Record (https://www.playroll.com/employer-of-record) in Indonesia shifts day-to-day employment administration to the EOR, but it does not remove your need to respect local severance rules. Legally, the EOR is the formal employer on paper and is responsible for calculating and paying statutory termination benefits to the employee. However, your commercial agreement with the EOR will usually require you to fund these costs and indemnify the EOR for any liabilities arising from your termination decisions. If you instruct an unlawful or poorly documented termination, you can still face indirect exposure through higher fees, back-charges, or claims that damage your brand. Treat the EOR as your compliance partner, not a shield from Indonesian labor law.

Be 100 Percent Compliant in Offering Severance with Playroll

Playroll helps your company navigate Indonesia’s complex severance framework by combining local legal insight with clear, practical processes. Our team tracks updates to the Manpower Law, Job Creation Law regulations, and regional practices so your severance decisions are based on current rules, not outdated assumptions. We help you map the correct termination category, apply the right severance and long-service multipliers, and factor in compensation items like unused leave and relocation costs.

With Playroll as your global employment partner, you can standardize how your HR and finance teams handle exits across countries while staying aligned with Indonesian specifics. We support you in planning costs before you initiate a termination, preparing compliant documentation, and coordinating timely payments to employees. That way, you reduce the risk of disputes, avoid avoidable penalties, and protect your company’s reputation as a fair and law-abiding employer in Indonesia.