Local employment usually seen as the backbone of workforce, especially in Indonesia which is Southeast Asia’s largest economy with steady GDP growth,

This dynamic ecosystem in Indonesia’s job market is influenced by many factors like globalization, government policies, and local economic growth. To understand more about how global companies can navigate Indonesia’s labour laws, let’s discuss the details here.

What is Local Employment, Especially in Indonesia?

As the name implies, the term refers to tasks performed by persons inside their local geographic region while complying to labour rules and regulations relevant to that area.

In Indonesia, this approach is crucial for increasing economic inclusion and lowering unemployment. It also promotes regional development by matching worker demand to local economic requirements.

Key Factors Influencing Local Employment in Indonesia

If you’re a global company interested to expand or build your business in Indonesia, here are key factors you need to know before you employ the locals:

  • Economic Growth and Job Creation

Indonesia’s sustained economic expansion has a direct impact on its employment market. The country’s GDP growth rate of 5.05% in 2023 reflects strong economic success, thanks to domestic investments and government measures.

This expansion encourages job development in a variety of industries, hence lowering unemployment and raising incomes.

  • Sector-Specific Employment Trends

Despite the positive GDP growth, employment generation in Indonesia rates vary by area and sector. The IT sector, for example, is booming due to increased digital transformation and technological advancements.

Similarly, the FMCG industry benefits from rising consumer demand, particularly in urban areas. Meanwhile, construction remains a key employer, due to infrastructure projects like the new capital development (Ibu Kota Nusantara) in Kalimantan island.

This variation in sectoral performance emphasizes the significance of tailoring policies to meet individual regional and industry demands.

  • Government Policies on Local Employment

Government rules also have a crucial role in shaping Indonesia’s labour market. Workers get equitable treatment thanks to policies such as the minimum wage legislation, religious holiday allowances (THR), and employment contract regulations.

For example, the minimum salary differs by area, with Jakarta’s rate set at IDR 5,067,381 in 2024. These rules seek to safeguard workers while still promoting a competitive employment market.

Furthermore, laws such as the Job Creation Act simplify employment restrictions, making it simpler for firms to comply with labour requirements while focusing on local workforce development.

Legal Framework for Local Labour

Legal Framework for Local Labour - Abhitech

Speaking of the government policies on local hiring or employment in Indonesia, let’s discuss more on some important legal framework for local employees in this country:

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  • Key labour Laws and Employment Contracts

Indonesia’s labour regulations are primarily governed by Manpower Law No. 13 of 2003 (UU Ketenagakerjaan) and Job Creation Act No. 11 of 2020 (UU Cipta Kerja).

These laws outline critical aspects of employment, including work agreements, working hours, and compensation. Employment contracts in Indonesia can be either fixed-term (PKWT) or indefinite-term (PKWTT), with specific requirements for documentation and compliance.

Here, employers are required to include detailed terms in contracts, such as job descriptions, salary, and work hours. These clauses guarantee openness and safeguard companies as well as workers, thus promoting a fair and stable employment market.

  • Rights and Protections for Local Labours

Local workers in Indonesia also have various legal protections, including social security benefits, paid leave, and maternity or paternity allowances.

For instance, employees are entitled to 12 days of annual leave after one year of service, along with specific allowances for religious holidays (THR).

The Job Creation Act also enhances worker protections by streamlining dispute resolution processes and ensuring access to social security programs like health insurance and pension funds.

These measures reflect Indonesia’s commitment to aligning its labour standards with international norms and safeguarding the rights of its workforce.

The Role of EOR in Local Labour

Because of the aforementioned complexities, multinational corporations may find it difficult to navigate the complexity of local worker legislation and hiring in Indonesia.

The solution, an Employer of Record (EOR) simplifies the process of hiring and managing local hiring for global companies. Acting as a legal employer, EOR services handle administrative tasks like payroll, tax compliance, and employment contracts.

This enables businesses to focus on core operations while navigating complex Indonesian labour laws without the need to establish a local entity or representative in Indonesia. But if you are interested, please read our guide on How to Have Business Operations Representative in Indonesia.

Why Companies Opt for EOR in Indonesia

Why Companies Opt for EOR in Indonesia - Abhitech

Now, let’s explore more reasons why national and multinational companies need EOR to implement efficient local hiring in Indonesia:

  • Streamlining Compliance and Risk Management

First, outsourcing HR compliance to an EOR provides businesses with peace of mind, because as stated before, Indonesia’s labour laws cover extensive aspects, including working hours, paid leaves, and severance pay.

An EOR manages all of the obligations on behalf of the company, reducing the risk of non-compliance. Additionally, EORs take responsibility for legal and financial risks associated with employment, such as disputes or audits.

  • Cost and Time Efficiency in Hiring Local Talent

Recruiting and managing local talent incurs substantial time and operational expenditures. In this case, EOR services reduce operational costs by managing HR functions, freeing up resources for strategic initiatives.

This approach also accelerates the hiring process, ensuring companies attract top local talent without administrative delays.

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Challenges in Managing Local Employment in Indonesia

Simply put, there are two main challenges to deal with if you want to employ local workers in Indonesia, namely:

  • Navigating Complex Labour Laws

Indonesia’s labour laws are comprehensive, covering various aspects such as minimum wage regulations, mandatory benefits, and termination protocols. Non-compliance can result in penalties, legal disputes, and reputational risks.

  • Managing Cross-Cultural Differences

Indonesia’s workforce is diverse, with various cultural norms influencing workplace behavior. So, employers need to understand and respect these cultural nuances to maintain harmony and productivity within the team.

Abhitech Employee of Records: Solution for Local Employment in Indonesia

In conclusion, understanding what is local hiring or employment and adhering to national labour laws is crucial for any businesses aiming to thrive in Indonesia, particularly international companies.

Now, if you are seeking seamless compliance and efficient workforce management, Abhitech‘s comprehensive EOR services are the best solution. Explore how we can support your local employment needs by visiting our homepage.

Also, stay updated with our blog page for further understanding of Indonesia’s labour regulations, such as the Foreign Worker Guide to Indonesia’s RPTKA.