Hiring Employees in Indonesia is something that foreign companies highly expect. Because your company will not be able to move without the help of its employees, however, finding the right employees in Indonesia will confuse you.
“Hiring the wrong people is the fastest way to undermine a sustainable business” – Kevin J. Donaldson
Do you agree with that?
The development of your business in the future will depend on the employer and talent you hire today, especially if you are expanding into a new market like Indonesia.
Therefore, many companies are looking for partners for the global workforce to find international talent and services such as Employer of Record.
What is an Employer of Record (EoR)?
So what exactly is this Employer of Record (EOR)?
According to an article from Abhitech An Employer of Record (EoR) is a service provider that takes on the responsibility of being the legal employer for your employees in a foreign country, in this case, Indonesia.
This means all matters such as payroll, benefits that employees must receive, tax payments, and everything related to HR. So your work will be much lighter.
Employer of Record (EOR) allows you to have a local workforce and establish a legal entity without the complexities and risks associated with direct employment.
If you look at the data from The Global Employer of Record Report – HRTech.sg This is expected to grow at a compound annual growth rate (CAGR) of 16.7% to hit close to USD 10 billion by 2028
Why Should You Hiring Employees in Indonesia?
If you are planning to open a company in Indonesia, you must already know how big the market is in Indonesia.
Yes, this country has a very large market. According to the website World Population Overview, At the time this article was written, Indonesia was recorded as the 4th most populous country in the world.
But not just a lot. If you close from WorldoMeters The median age of Indonesians is 29.9 years, which indicates that many of them are still of productive age to either work with your company or become a market for your company selling products or services.
The minimum wage is quite varied, but if we refer to Jakarta, the city that is in the spotlight in Indonesia, their minimum wage is IDR 5,067,381.00 source Wage Indicator.
To see the minimum wage in Jakarta in USD, you can use the IDR to USD calculator here.
What You Need to Know Before Hiring Employees in Indonesia
Hiring employees in Indonesia can be a rewarding but complex process. To ensure a smooth and compliant hiring experience, here are key aspects you need to know:
1. Understanding Local Labor Laws
Indonesia’s labor laws are detailed and stringent. Key regulations include:
- Law No. 13 of 2003 on Manpower: Governs employment contracts, wages, working hours, and termination.
- Omnibus Law (UU Cipta Kerja): Recent reforms to ease business operations and employment terms.
2. Employment Contracts
Employment contracts must be in Indonesian and follow specific formats. Types of contracts include:
- Permanent Employment Contracts (PKWTT): Typically used for long-term employees.
- Fixed-Term Employment Contracts (PKWT): Used for temporary or project-based roles.
- Freelance or Outsourced Contracts: For non-permanent, task-specific roles.
You can read Knowledge Base about PKWTT and PKWT here.
Example of Employment Contract: Ensure all contracts are clear about job roles, responsibilities, compensation, benefits, and termination conditions.
3. Minimum Wage and Salary Structure
Minimum wages in Indonesia vary by region. Employers must comply with regional minimum wage laws, which are updated annually.
- Jakarta Minimum Wage 2024: Approximately IDR 5,000,000 per month.
- Bali Minimum Wage 2024: Approximately IDR 2,750,000 per month.
4. Working Hours and Overtime
Standard working hours are 40 hours per week, typically divided into 8 hours per day for 5 days a week. Overtime pay is mandatory for work beyond these hours.
5. Employee Benefits
Mandatory benefits include:
- Health Insurance (BPJS Kesehatan): Employers must register employees with the national health insurance program.
- Social Security (BPJS Ketenagakerjaan): Covers work-related accidents, old age benefits, pensions, and life insurance.
- Holiday Allowance (THR): Employees are entitled to a religious holiday allowance, usually one month’s salary, paid before the major religious holiday.
6. Taxation and Payroll
Employees must be registered for tax purposes. Employers are responsible for withholding and remitting income taxes from employee salaries.
- Tax Identification Number (NPWP): Required for all employees.
- Payroll Laws: Ensure accurate calculation and timely payment of salaries and taxes.
7. Compliance and Legal Risks
Non-compliance with local laws can lead to significant fines and legal issues. It’s crucial to stay updated with labor law changes and ensure all hiring practices are legally compliant.
An Employer of Record (EoR) can simplify the hiring process by handling compliance, payroll, and administrative tasks, allowing you to focus on core business activities.
➡Learn how to hire local talent in Indonesia for your company here.
Why Would a Company Use an Employer of Record (EOR) to Hire Someone Instead of Just Hiring a Freelancer or via a B2B Contract?
Companies may choose to use an Employer of Record (EoR) instead of hiring freelancers or using B2B contracts for several reasons:
1. Legal Compliance and Risk Mitigation
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- Employer of Record (EoR): Ensures compliance with local labor laws and regulations, reducing legal risks and potential fines.
- Freelancers/B2B: Freelancers and B2B contractors are not employees, so the company may face legal challenges if they are deemed to be misclassified employees, potentially leading to fines and back taxes.
2. Employee Benefits and Retention
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- Employer of Record (EoR): Provides comprehensive employee benefits (health insurance, retirement plans, etc.), which can help attract and retain top talent.
- Freelancers/B2B: Typically do not receive employee benefits, which can lead to higher turnover and less loyalty.
3. Administrative Efficiency
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- Employer of Record (EoR): Handles all HR administration tasks, freeing up the client company to focus on core business activities.
- Freelancers/B2B: The client company must manage contracts, payments, and compliance for each freelancer or B2B partner individually.
4. Scalability and Flexibility:
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- Employer of Record (EoR): Can quickly scale the workforce up or down as needed, and easily manage employees in multiple locations.
- Freelancers/B2B: While flexible, managing a large number of freelancers or B2B contracts can become complex and time-consuming.
5. Employee Integration and Control:
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- Employer of Record (EoR): Employees hired through an Employer of Record (EOR) can be integrated into the company’s culture and managed directly by the client company.
- Freelancers/B2B: Typically work independently and may not be as fully integrated into the company’s operations or culture.
Example Scenario
Scenario: By employing local developers, your business hopes to grow its operations in Indonesia.
Option 1: Employing an Employer of Record (EoR): Payroll, taxes, and benefits are all taken care of by the Employer of Record (EoR) when it comes to local employment compliance.
The IT business may oversee and manage the developers’ work just like it would its own staff.
The developers are assimilated into the corporate culture and enjoy local advantages.
Option 2: Employing B2B and freelancers
Each freelancer or B2B partner must be separately contracted by the IT business.
In the event that local authorities classify freelancers as workers, there is a possibility of misclassification and legal problems.
It’s possible that freelancers have greater turnover rates and don’t receive perks.
By using an Employer of Record (EoR), the tech company can avoid the complexities and risks associated with local employment regulations, ensuring a smooth and compliant expansion into Indonesia while focusing on its core business operations.
When is Partnering with an Employer of Record (EoR) The Best Hiring Option for a Company?
Partnering with an Employer of Record (EoR) is the best hiring option for companies looking to expand into new markets, manage compliance risks, hire remote teams, or streamline their HR processes. By leveraging the expertise and infrastructure of an Employer of Record (EoR), companies can focus on their core business activities while ensuring legal compliance and operational efficiency.
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