Indonesian parliament agrees higher severance benefits in new labour law

[JAKARTA] Indonesia’s parliament passed a bill aimed at strengthening worker protections into law on Tuesday (Oct 6), providing higher severance benefits for terminated employees and unwinding some of the pro-business reforms introduced by the previous government.

The bill was passed by a parliament overwhelmingly controlled by President Prabowo Subianto’s coalition. Prabowo, approaching his second anniversary in office this month, has seen his approval rating plummet due to public perceptions of a deteriorating economy.

While economic growth has held at above 5 per cent, Indonesia’s financial markets have been affected by capital outflows, with investors concerned about the country’s fiscal health as fuel subsidies surge and the government pushes ahead with costly programmes.

The full text of the law has yet to be made public, but Manpower Minister Yassierli confirmed that severance allowances have been revised to the benefit of terminated workers and that employers could no longer “easily” lay off workers on the grounds of cost efficiency.

“This bill reflects a balance between the protection of workers’ fundamental rights and the sustainability of the business sector,” the minister told parliament after lawmakers voted to pass the bill.

The minister also said the new law called for the creation of a severance security programme, which would ensure that a company has the funds to pay allowances in the event of layoffs. Local media reported that the scheme would involve employers paying severance pay contributions to the state insurer BPJS.

Employers warn of higher labour costs

The Indonesian Employers Association, which typically represents the business community’s interests in industrial relations, did not immediately respond to a request for comment.

But it warned in a statement late last month that the bill could deter formal hiring and hurt Indonesia’s competitiveness because of higher labour costs.

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Assegaf Hamzah & Partners, one of Indonesia’s biggest law firms, wrote in a client note last week that the bill would bring significant changes, including stricter restrictions on dismissals, higher severance payments for certain types of terminations and the introduction of minimum wages in some sectors. The assessment was based on a draft bill dated Aug 27.

It advised clients to review planned terminations, employment costs and wage structures.

Informal workers and those working on digital platforms would be entitled to social security protection, fair pay, transparency over algorithms used to manage their work, and safeguards against unjustified account deactivation, the law firm wrote.

President Joko Widodo delivered a sweeping pro-business Job Creation Law in 2020, which cut severance benefits and red tape in a bid to improve the investment climate in Southeast Asia’s biggest economy. The passage of the law triggered mass protests by students, workers and activists.

The bill passed on Tuesday was drafted after the Constitutional Court in 2024 ordered legislators to make changes to the Job Creation Law within two years following a petition filed by several trade unions. REUTERS