You hired an employee in Indonesia and broke the law without realizing It
Hiring in Bali is often treated informally: agree on a salary, shake hands, and the employee starts working.
In Indonesia, however, that approach can quickly create legal problems.
Employment relationships are regulated far more strictly than many foreign business owners expect, and the absence of paperwork does not eliminate the employer’s obligations.
A real example: the cost of “informal” hiring
A company hired a local administrator without a proper employment contract. The arrangement was simple: a fixed cash salary paid directly to the employee, without registration in official systems.
Several months later, a conflict arose and quickly escalated into an inspection.
The result:
Claims for unpaid social contributions
Tax compliance issues
Questions regarding the employee’s legal status
Formally, the employee had been hired in violation of labor regulations, leaving the company exposed to labor authorities.
The main mistake: why “informal agreements” don’t work
One of the biggest misconceptions is believing that if the employee agrees to unofficial employment, the employer has no legal obligations.
In Indonesia, labor law strongly prioritizes employee protection.
Even without a written contract, the relationship may still be recognized as employment—with all associated obligations and liabilities.
1. No contract or the wrong type of contract
Indonesia recognizes two primary employment structures:
PKWT — fixed-term employment
PKWTT — indefinite employment
A fixed-term agreement (PKWT) cannot be used for every type of work and is subject to strict limitations regarding duration and renewal under Government Regulation No. 35/2021.
If:
the contract is drafted incorrectly
the wording does not comply with regulations
the contract is not properly registered with the Ministry of Manpower
—it may automatically be treated as a permanent employment relationship (PKWTT).
This can significantly complicate future termination procedures.
2. Ignoring BPJS (mandatory social insurance)
Registration in the BPJS system (healthcare and social security) is mandatory for employees in Indonesia.
This obligation applies even if:
the employee already has private insurance
the employee does not request contributions
The employer is still legally required to make payments.
Failure to register employees can lead to:
Administrative penalties
Compliance investigations
Suspension or complications with business licenses
3. Forgetting about THR (13th salary)
Many foreign employers are unaware that Indonesia requires an annual religious holiday allowance called THR (Tunjangan Hari Raya).
In most cases, THR equals one month’s salary and must be paid once per year before the relevant religious holiday.
Failure to pay THR is one of the most common reasons employees file complaints with labor authorities.
What employment costs actually include
When calculating the real cost of an employee in Indonesia, it is important to consider more than just take-home salary.
A proper employment structure should include:
Base Salary and Allowances
Fixed and variable compensation components should be clearly separated.
Income Tax (PPh 21)
Employers are responsible for withholding and remitting employee income tax when the salary exceeds the non-taxable threshold.
NPWP (Tax Number)
Employees should have a personal tax number (NPWP). Without it, the applicable tax rate may become higher.
Risks and consequences
Hiring mistakes rarely create immediate problems.
Most issues appear later:
During labor inspections
During employee termination
After disputes with former staff
Typical consequences include:
Retroactive tax and BPJS payments
Administrative penalties
Compensation claims
In some cases, liabilities can exceed the company’s annual budget for that employee.
How to structure hiring properly
Before bringing someone on board, employers should:
Determine whether the role qualifies for a fixed-term contract (PKWT)
Prepare a legally compliant contract in Indonesian language (or bilingual format)
Calculate the full employment cost, including taxes, BPJS, and THR reserves
Complete registration with tax and social security systems
Conclusion
Hiring problems do not always become visible immediately—but they almost always surface eventually.
If you already have employees working under informal arrangements, or if you are planning to expand your team, it is worth reviewing your current structure now.
Fixing issues proactively is usually far less expensive—and far less stressful—than dealing with labor claims after the fact.
Sari Desti S. Sianturi
HR Expert, Legal Indonesia
