Draft Bill on Employment Protection Regulates Severance Pay Benefits; Employers Must Pay Workers’ Contributions

Commission IX of Indonesia’s House of Representatives (“DPR RI”) has proposed that the Draft Bill on Employment Protection (“Draft Bill on Employment Protection”) provide for severance pay benefits. Putih Sari, Deputy Chairperson of Commission IX of DPR RI, stated that the proposal is intended to ensure that compensation for termination of employment (Pemutusan Hubungan Kerja - “PHK”) for workers does not depend solely on the company’s financial capacity, but is instead protected through a social security system administered by the state.

“This is a new form of social security that we are proposing and which has never previously been regulated,” said Putih Sari.

Based on the draft of Draft Bill on Employment Protection obtained by Hukumonline, severance pay benefits are regulated under Article 135 to Article 138. The Draft Bill requires employers to pay contributions toward severance pay benefits for their workers. If the benefits provided under the severance pay scheme are insufficient to satisfy the statutory severance entitlement to which a worker is entitled, the company must cover the shortfall. However, if there are excess funds, the Draft Bill provides that such excess funds must be returned to the employer.

The contributions for severance pay benefits will be administered by the Social Security Agency for Employment (Badan Penyelenggara Jaminan Sosial Ketenagakerjaan - “BPJS Ketenagakerjaan”) as the authority responsible for administering government affairs in the field of employment social security. Further provisions on this policy will subsequently be regulated by regulation of the government.

Putih Sari hopes that the provisions on severance pay benefits will help reduce disputes between employers and workers concerning the payment of severance pay in cash, which frequently arise upon termination of employment.