Indonesia: Government targets sensitive cuts in severance pay in new bill

  • Indonesia plans to loosen rigid rules on mandatory severance compensation in a new bill aimed at improving the investment climate in Southeast Asia’s biggest economy, an official and a source with knowledge of the issue said.
  • Labor laws are politically sensitive and in order to make the changes more palatable to unions the government will also make companies pay some benefits upfront, they said.
  • The proposals are included in so-called “omnibus” bills that President Joko “Jokowi” Widodo has prioritized in his efforts to cut red tape and create jobs. The bills club together changes in unrelated legislation to allow parliament voting in a single swoop to speed reforms.
  • Foreign investors often cite regulatory uncertainty, bureaucratic hurdles and strict labor rules among their top concern for investing in Indonesia.
  • Officials have said the “Job Creation” bill will be filed to parliament by 15 Feb 20, while a taxation bill was submitted to lawmakers recently.
  • Indonesia’s current rules on severance pay are among the most generous in the world and business say they deter formal hiring due to the expense of sacking underperforming employees.
  • The new bill aims to cut maximum severance payments to 19 times monthly salary, down from 32 times now, said the source, who has been involved in drafting the bill.
  • To appease workers, the government will also make companies pay between one to five times monthly salary to staff with at least one year of employment, he said.
  • The payment, which will be capped at IDR100mn (USD7,300), should be made within a year after the bill is passed, said the source, who declined to be named due to the sensitivity of the issue.
  • Susiwijono Moegiarso, secretary general of the coordinating ministry of economics, confirmed severance benefits would be trimmed and a cash “sweetener” provided, but declined to provide more detail.

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