Ensuring Fair Compensation: Wage Regulations in Indonesia

Wage Policy in Indonesia

Pursuant to Article 1 Number 30 of Law Number 13 of 2003 concerning Employment, as partially amended by the Government Regulation in Lieu of Law Number 2 of 2022 and subsequently ratified through Law Number 6 of 2023 (“Employment Law”), wages are recognized as an employee’s entitlement that manifests in monetary terms as remuneration from the employer to the employee. This remuneration principally is stipulated and disbursed in accordance with the terms outlined in an employment agreement or relevant laws and regulations. 

Moreover, in accordance with Article 7 (1) of Government Regulation Number 36 of 2021 concerning Wages, as partially amended by Government Regulation Number 51 of 2023 ("GR on Wages"), the components comprising wages are expressly articulated and may be subject to variation through mutual agreement between the employer and the employee. Primarily, the agreements can take the form of: (i) wages excluding allowances; (ii) basic wages plus fixed allowances; (iii) basic wages plus fixed allowances and non-fixed allowances; or (iv) basic wages plus non-fixed allowances. 

Notably, the GR on Wages has outlined a framework for calculating the comprehensive composition of total take-home pay, as elucidated in the chart below:

It is crucial for employers to be aware that, in practice, additional complexities beyond the outlined parameters may occur. For instance, the percentage allocation of basic wages within the wage structure, as delineated in the aforementioned chart, may be subject to particular provisions based on certain positions or roles. These provisions can be established through agreements within employment agreements, organisational policies, company regulations, or collective employment agreements. It is noteworthy that any such adjustments should comply with the condition that the amount of wages remains at least equal to the highest wage limit for calculating pension security contributions.

It is also essential to underscore that certain conditions must be met when employers intend to offer a "minimum wage" to their employees. In accordance with the provisions outlined in the GR on Wages, especially in cases where minimum wages comprise basic wages and fixed allowances, the basic wage components, under such circumstances, are mandated to be, at a minimum, equivalent to the minimum wage set by governmental regulations. Additionally, Article 24(1) of the GR on Wages explicitly states that the "minimum wage" is to be applied to employees who have served the company for less than one year. Therefore, adhering to these provisions ensures compliance with the regulatory framework governing minimum wage standards and duration of employment.

Time and Output-Based Wages

In addition to the wage determination mechanisms elucidated above, Indonesian laws and regulations duly recognise the incorporation of time and/or output-based compensation structures.

As delineated in Articles 14 to 17 of GR 36/2021, time-based wages are to be established on an hourly, daily, or monthly basis. Notably, hourly wages are expressly designated for part-time employees. Conversely, according to Articles 18 and 19 of GR 36/2021, output-based wages are contingent upon the agreed work results, the determination of which is aligned with the outcomes specified within the mutually agreed work arrangement.

The regulatory framework regarding time and/or output-based compensation as mentioned above principally provides a structured approach to compensating employees based on the time invested or the tangible outcomes achieved. These nuanced mechanisms not only reflect legal precision but also ensure a fair and transparent remuneration system that aligns with the complexities of contemporary employment relationships.

Non-Wage Income

In addition to the provisions regarding wages described in the sections above, there are other types of remuneration recognised in the employment law framework in Indonesia, commonly referred to as Non-Wage Income, as detailed in the following table:

For comprehensive insight and expert guidance in navigating the intricate landscape of wage regulations, ADCO Law is prepared to provide the assistance you require. Stay informed and stay compliant to ensure fair compensation for your employees in Indonesia.

For further information about Ensuring Fair Compensation: Wage Regulations in Indonesia, please do not hesitate to contact our firm.

This article was originally published on the ADCO Law website, 6 February 2024, and has been reproduced with the authors’ consent. Authors: Morales Sundusing, Billiam Setiawan and Mutia Ufara.

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Please also note that whilst the information in this ADCO Insight is correct to the best of our knowledge and belief at the time of writing, the information is only intended to provide general guidance for the subject matter and should not be treated as a substitute for specific professional advice for any particular course of action as the information may not suit your specific business and operational needs. It is to your advantage to seek legal advice for your particular situation. In this regard, you may call the lawyer you normally deal with in ADCO Law.

Notes:

¹ Article 9 of GR on Wages 

² Article 10 of GR on Wages 

³ Article 11 of GR on Wages 

⁴ Article 12 of GR on Wages 

⁵ Article 13 of GR on Wages