TERMINATION OF EMPLOYMENT BASED ON MUTUAL CONSENT
Employment relationship is the relation between the employer and the employees where the
employees perform certain task for and under the subordination of the employer, and they earn
remuneration upon the completion of the tasks. Employees are the vulnerable party in this
relationship because they work under subordination and the employer can give any instruction
to them. Therefore, the existence of labour law is important balance the power dynamics and to
specify the rights and obligation of each party. Labour law regulates the work relation from the
hiring process to the phase of employment termination.
Termination of contract is the constitutional rights of the parties as the implementation of
freedom of contract principle, so in substance, terminating the employment is not prohibited
especially if it is by mutual consent/agreement. A mutual consent does not mean the parties are
happy with the termination, but this execution merely serves as an official statement concerning
the separation of the parties which is created in the form of settlement agreement or mutual
termination agreement. This agreement normally contains the effective date of termination,
compensation, remuneration, non-competition clause, and handover of company property.
Mutual termination agreement is also made to testify that the parties have completed each
obligation, no outstanding obligation, and no further obligation after the execution. This
arrangement is an effective tool to prevent potential dispute which usually arises in the area of
notice period and ground of termination. Accordingly, we wish to elaborate the termination
provision in Indonesia to see how far the Indonesian’s law protects the worker’s interest when
termination takes place, especially in terminations based on mutual consent.
I. How is the termination provision in Indonesia?
The employment legislation in Indonesia is regulated in Law number 13 of 2003 on Manpower
(“Law 13/2003”). Termination of employment and resignation are common methods in
Indonesia to end employment relationship, similar to the practice elsewhere. Nevertheless, the
termination provision in Indonesia is considered gives stricter protection for worker and,
because of this, employer should bear several compensation as stated in Law 13/2003. The
methods of termination and the protection for workers will be described in details below.
1. Termination based on the initiative of employer
Serious misconduct by employee, breach of contract, and operational reason are the justified
grounds for employers in Indonesia to terminate the employment. Nonetheless, there are
various provisions in Indonesia which need to be underlined by the employer because they
are prohibited to terminate the employment if:
a. The worker is absent from work because of an illness, proven by a written medical
statement, and the worker is not absent longer than twelve months consecutively;
b. The worker is absent from work to fulfill their obligation to the state as regulated in
special legislation;
c. The worker is absent from work to practice what required in their religion;
d. The worker is absent from work because they are getting married;
e. The worker is absent from work because she is pregnant, giving a birth, having a
miscarriage, or breast feeding her baby;
f. The worker is related by blood (birth) and or through marriage with another worker;
g. The worker establishes or join the trade union;
h. The worker files a report to authorities because the employer commits a crime;
i. The worker has different understanding with the employer about religion, belief,
political orientation, race, sex, ethnic, color, physical condition, or marital status;
j. The worker is permanently disabled because of working accident or occupational
disease.
The termination by employer is only authorized after having obtained an approval from the
labour authority, unless the worker is still in probation period, resign, reaching pension age,
or deceased.
2. Termination based on the initiative of employee
Worker can submit their resignation without providing justifiable ground (on whatever
basis). However, they should apply the following limitation:
a. The resignation must be submitted at least 30 (thirty) days prior to the effective date
of the last date of services;
b. The worker is not currently being bound by a contract to work/serve the employer for
a certain period of time in return for the training/education provided to him/her
paid by the employer;
c. The worker shall continue their obligation until the effective date of his/her
resignation.
Under this scheme, a worker does not need an approval from or to notify the labour
authority prior and after their resignation.
However, a worker can submit the immediate resignation to the labour authority if the
employers:
a. Battered, rudely humiliated, or intimidated the worker;
b. Persuade or order the worker to exercise an act against the law;
c. Have not paid the wages as prescribed for three months consecutively or more;
d. Fail to perform the obligation as committed to the workers;
e. Instruct to do tasks outside the worker’s job description as agreed in the employment
contract;
f. Instruct to perform a job which endangers worker’s life, safety, and health.
3. Notification
Workers are the only group who is bound to the notification period in Indonesia. Employer
must fulfill several compensation payment if they terminate the worker, but a notice period
for employer does not exist.
4. Special protection for employee
The absence of employer notice period is one disadvantage for the worker in Indonesia.
However, there are several protections for workers in the termination phase which include:
a. Should the termination take place, the employer must pay several components to the
dismissed worker: (i) severance pay (“Severance”) and/or (ii) a sum of money as a
reward (“Reward”), and (iii) compensation pay for rights which the dismissed
worker has not utilized (“Compensation”). The total amount obtained by the
employee must be the combination of the calculation of: the length of service and the
reason of termination. The first two tables are designed to present the worker’s
entitlement based on their job tenure.
The calculation of Severance shall be as follow:
Entitlement Worker’s length of service
1 month wages < 1 year
2 month wages > 1 year < 2 years
3 month wages > 2 years < 3 years
4 month wages > 3 years < 4 years
5 month wages > 4 years < 5 years
6 month wages > 5 years < 6 years
7 month wages > 6 years < 7 years
8 month wages > 7 years < 8 years
9 month wages < 8 years
The calculation of Reward shall be as follow:
Entitlement Worker’s length of service
2 month wages > 3 years < 6 years
3 month wages > 6 year < 9 years
4 month wages > 9 years < 12 years
5 month wages > 12 years < 15 years
6 month wages > 15 years < 18 years
7 month wages > 18 years < 21 years
8 month wages > 21 years < 24 years
10 month wages < 24 years
The element of Compensation consists of:
1) Entitlement to paid annual leaves that have not expired and the worker have not
used;
2) Expenses for transporting the worker and his/her family back to the location
where he/she was hired;
3) Compensation for housing allowance and medical allowance is determined at 15%
of the severance pay and/or reward pay;
4) Other compensation set under work agreement, company regulation, and
collective labour agreement.
Having ascertained the entitlement based on the length of services, each party should
refer to the below table, which indicates the ground of termination and its
calculation.
Ground of termination Severance Reward Compensation
Resignation Not mandatory -
Immediate Resignation 2x 1x
Long term illness 2x 2x
Serious misconduct of employee - 1x
Breach of contract of employee 1x 1x
Operational reason:
Closure 1x 1x
Efficiency 2x 1x
Bankruptcy 1x 1x
Merger and etcetera 2x 1x
Death of employee 2x 1x
b. In the event that the worker is detained by the authorities because he/she is alleged to
have committed a crime, and the report was filed not by the employer, the employer is
not obliged to pay the wage, but instead to give financial assistant to the worker’s family
(dependents) based on the following provision:
1) For 1 dependent: 25% of the worker wage;
2) For 2 dependents: 35% of the worker wage;
3) For 3 dependents: 45% of the worker wage;
4) For 4 dependents or more: 50% of the worker wage.
This financial assistant must be paid within 6 (six) months since the first day of the
workers detention. The inability of worker to work for 6 (six) months due to the litigation
process can be used by the employer as a ground of termination, without compensation.
Having passed the 6 (six) month period, if the court declares that the worker is not
guilty, the employer must reemploy the worker into his position. If the court declares
the worker was guilty, employee can terminate the worker without any kind of
compensation.
c. The termination because of business needs (efficiency) must be proved by the employer
through providing 2 (two) years financial statements which is audited by public
accountant.
d. Death of employee terminates the employment and the employer must pay the
compensation to the worker’s next of kin.
II. What kinds of terminations are covered by the concept of mutual
consent?
Termination of employment and resignation can be designed in the form of termination
contract where the parties agree to release their mutual obligations. Therefore, these
arrangements could be classified as termination based on mutual consent
Mutual consent is deemed as the common practice or relational arrangement without
obligation to consider: the justified ground of termination and notice period. Many parties
articulate this arrangement as the pre-termination agreement, bilateral termination
agreement or cancelation of contract.
III. Under which condition is the mutual consent considered effective to
end the employment?
1. In the situation when the termination of employment is based on justified ground, due to
the request of worker or employer, where the initiative of the terminating party is
approved by the dismissed party. This condition happens when either party has no choice
but to terminate the employment, for instance because of illness or bankruptcy. Form of
the mutual consent in this regards is the mutual/settlement agreement.
2. In the situation of internal dispute, where there is still an option for either party to
continue or discontinue the employment, but one party decides to terminate the
employment. For instance, the company issues the staff guide to prohibit the worker from
wearing visible religion symbol to represent the company’s secularity in the customer’s
perspective. This situation refers to the prohibition of wearing Islamic headscarf at
workplace during office hours.
In this situation, the company offers two options: either workers must follow the staff
guide or, alternatively, terminate the employment based on mutual consent. In this case,
worker still has an option to continue the employment, but if she prefers to practice her
religion, termination based on mutual consent will be the feasible solution for both
parties.
3. Mutual consent is required when termination happens because of the expiration of fixed
term contract and/or when the agreed job has been accomplished.
IV. Are the interest of worker well protected under this scheme?
Interests of worker remain protected in the mutual consent arrangement, particularly if the
end of employment falls under the form of resignation, dismissal, or termination, which
have been agreed by the counterpart. Mutual termination agreement in this condition is
merely a form of settlement to release the past, present, and future obligation of the parties
to avoid the dispute.
A mutual consent arrangement still protects the worker’s interest because the agreement are
accompanied with some package or compensation offered by the employer for the worker to
compensate the waiver of notice period or unjustified ground, and it normally sets above the
minimum standard as stipulated by the regulations.
In Indonesia, this arrangement falls under the civil law on the basis of freedom of contract,
therefore, the workers’ protection (as a private person) falls under the Indonesian Civil Code
(outside the competence of labour court), because the labour court is only authorized to
examine the dispute: (i) on dismissal, (ii) on the implementation of employment contract,
company regulation, and collective agreement (rights/interests), and (iii) between trade
unions.
