Richard Cornwallis and Lia Alizia of Makarim & Taira S. look at some of the important procedural aspects of redundancies in Indonesia.

Introduction

The recent global economic crisis has created a risk of significant increases in terminations of employment for economic or business efficiency reasons. Such terminations of employment are specifically referred to in Law No. 13 of 2003 on Manpower ("Manpower Law").

Employers should be aware of the many different tactics, potential problems and practical issues and procedures which relate to every type of termination of employment in Indonesia and particularly those which may be termed redundancies or retrenchments. This article attempts to provide practical and useful advice for employers who find themselves conducting a redundancy process in Indonesia.

General Principles

As a general principle, the unilateral termination of employment by an employer for 'redundancy' reasons can only be conducted with approval from the Indonesian Labour Courts.

Redundancies will be made in accordance with prevailing manpower laws and regulations, as well as the provisions of the relevant employer's Company Regulation or Collective Labour Agreement, as appropriate. Also important are the various practices and the written and unwritten policies and procedures of the Ministry of Manpower and Transmigration ("Ministry").

Redundancies are classified as terminations of employment for 'efficiency' reasons and, by policy, are regulated by Article 164(3) of the Manpower Law. This states that an employer is required to pay to the employee 2 times 'severance pay', 1 times 'long service pay' and 'compensation'. As a very basic generalization, this can lead to payments by employers in excess of two months salary for each year of service of the employee. Under Article 164(1), if the company has losses for two consecutive years and closes down permanently then only a 'one times' severance package is payable.

Redundancy – the Initial Steps

Comprehensive preparation for any redundancy is vital. Some initial preparatory steps may include:

  • formation of an operational 'team' with identified leader
  • determining whether or not a voluntary redundancy should be implemented prior to the involuntary redundancy exercise and/or early retirement program
  • review of Company Regulation or Collective Labour Agreement and employment contracts
  • determination of agreed process, tactics, strategies and compensation package
  • preparation of initial criteria and selection process details, as well as internal approvals
  • preparation of evidence of 'no alternatives' to redundancy
  • discussion on PR issues/worst-case scenarios/responses
  • initiation of preparation for any post-employment support etc.
  • "socialization" of the redundancy with the Ministry.

Redundancy Procedure – the Basic Principles

It is nearly always advisable, especially in redundancy terminations, for there to be an amicable and mutually agreed termination of employment. The reasons for this are clear. A mutually agreed termination is a win-win situation that can eliminate lengthy mediation/conciliation, labour court and appeal processes, enable the company to continue its business with the minimum of disturbance and, in most cases, allow the employees to receive a financial settlement higher than they would have done otherwise.

If there is no mutually agreed termination then the termination will be through mediation or conciliation and possible referral to the competent Labour Court, a procedure which has many potential problems and uncertainties.

It is usually strongly recommended to achieve a voluntary mutual termination agreement during the implementation of the redundancy programme and to avoid conflicts with either the departing or the remaining employees. This will also mean, first, that a financial incentive will usually need to be provided to encourage employees to accept the redundancy programme. It will also mean that the programme will need to be sensitively and fairly implemented and that every effort is made to ensure good relations are maintained with the employees. It is obviously important for there to be certainty, transparency and a certain amount of information sharing as many concerns of employees arise where there is no clear information given or where an atmosphere of secrecy prevails. Once again, the importance of achieving a voluntary and agreed settlement cannot be overestimated.

There are three basic scenarios which may occur during the initial termination process. First, all of the employees may agree to the severance package offered, in which case mutual termination agreements will be drawn up and registered with the relevant Labour Court. Secondly, none of the employees may agree to the severance package, in which case the parties may seek mediation or conciliation from the local office of the Ministry and the case may continue to the Labour Court if the parties cannot settle the dispute amicably in mediation or conciliation. Thirdly, some of the employees may agree to the package offered whilst others reject the package. It is beyond the scope of this article to discuss each process in detail but suffice it to say that each process has its own advantages and disadvantages.

Procedures for a Redundancy Termination

Negotiations or Bipartite Meetings

As mentioned, "bipartite" negotiations should first be held (within 30 working days) between the employer and the employees (and/or labour union) to reach try to a mutually agreed settlement. Minutes of the Meeting(s) signed by both parties should be made.

If a settlement consensus is reached at the bipartite meeting then a "Mutual Termination Agreement" (sometimes called a Collective Agreement or Joint Agreement) should be drawn up and signed.

Once signed, the Mutual Termination Agreement and supporting documents should be registered promptly at the Labour Court together with an application for approval of termination from the Labour Court. Approval should be granted by way of the issuance of a registration deed by the competent Labour Court.

If no consensus is reached in the bipartite negotiation stage then the parties may settle the dispute through mediation or conciliation.

Mediation/Conciliation by the Ministry or Tripartite Meetings

The processes for mediation and conciliation are very similar. Within 7 working days from a request for mediation or conciliation, the mediator from the local office of the Ministry or the conciliator) should commence the mediation or conciliation process and this should be completed within 30 working days following the receipt of the application of dispute settlement submitted by the parties.

If no settlement is reached at the mediation or conciliation level, the officer should issue his/her suggestions or recommendations to settle the dispute. If either party disagrees with the recommendation the case will be referred to the Labour Court. If a settlement is reached then the officer should prepare a binding mutual agreement. The procedures of the bipartite meeting and the mediation are generally similar to those regulated in previous manpower regulations.

Settlement at the Labour Court

The lawsuit filed by the employer at the competent Labour Court must be accompanied by minutes of settlement from the mediation or conciliation attempt. The Chairman of the District Court determines the board of judges consisting of 1 chairman of the board and 2 other members (one nominated by the employees and the other nominated by the employer side). Although 'expedited' proceedings are provided if there are "urgent interests" (e.g. cases of national importance), the following summary only discusses regular proceedings.

Within 7 working days after determining the board of judges, the chairman must convene the first hearing. The summons for the first hearing should be conducted pursuant to the Indonesian Civil Procedural Code. The board of judges may also summon witnesses and/or expert witnesses.

Unless the board of judges stipulates otherwise, the Labour Court hearing is open to the public. Importantly, an injunction can be sought before the judges issue their decision if it is apparent that the employer is not fulfilling its obligations to pay the employees' salary during the termination process. An attachment can be sought if the employer fails to comply with the injunction. There is no legal remedy available to the employer against any granting of an injunction or attachment.

The board of judges should issue its decision at the latest within 50 working days as of the first hearing. If the decision of the judges is not read in an open hearing it will be considered null and void. Decisions may contain obligations that must be undertaken by or rights that must be received by one or more of the parties in the dispute and should contain certain information including the legal basis of the decision. The chairman of the board of judges may issue decisions that can be implemented immediately pending final appeal at the Supreme Court (cassation). The Supreme Court proceedings should be completed within 30 working days upon receipt of the request.

Since the Labour Courts have become operational practical difficulties in the implementation and function of the Labour Courts have occurred both with the timeframe for the resolution of disputes given the accumulated backlog of cases and also in the promotion of alternative dispute resolution mechanisms.

Further Practical Considerations

The following additional practical considerations may be useful in any redundancy situation:

  • To avoid potential conflict with the redundant employees, it is usually advisable to inform, communicate, and 'socialize' the redundancy programme with the employees and, quite often, also with the Ministry.
  • There is no obligation imposed on an employer under prevailing Indonesian laws to provide post-employment training and support.
  • Although there is no legal requirement to have the mutual termination agreement and/or other correspondence with the employees in the Indonesian language, in practice, many termination related documents are prepared and executed in Indonesian to minimize misunderstandings or claims of failure to comprehend the documents.
  • Foreigners are presently prohibited from being HR managers or directors and the Ministry sees this as meaning that expatriates should not be involved in HR matters generally. Accordingly, and unless this is completely unavoidable, expatriates should not participate in meetings with employees or be seen to be involved in the termination process.
  • Any meeting with employees or groups of employees or their representatives should generally be well documented and minuted as supporting documentation needs to be submitted to the Labour Court.
  • Employees sometimes argue that they know of persons or have relatives in other companies who have received more generous redundancy packages. Whilst it is always prudent to ascertain what other companies in your industry may have offered, it is also important for employers to be firm and not to allow protracted negotiations. A strong 'take it or leave it' attitude is often more successful than a more flexible and uncertain process.
  • It is important to be able to justify the redundancies, to show that there was no discrimination, to ensure that the relevant authorities are convinced that there are no alternatives and that every effort has been made to consider alternatives, etc.
  • The operational 'team' should meet regularly to ensure smooth implementation of the redundancy programme. Specific responsibilities, could be allocated.
  • It is critical to ensure that severance entitlements are accurately calculated. Inaccurately calculated entitlements are not uncommon in practice.
  • Any termination should be completed as swiftly as possible as any delays will eventually lead employees to pass their respective 'anniversaries' and fall into a higher severance pay and long service category.

Conclusion

There are often a number of different options in respect of any termination of employment and there is no optimal procedure which should be followed in every redundancy. Similarly, changes in procedure and different tactics may need to be deployed depending upon the sequence of events that occurs and the response of the employee(s) and/or labour union(s) concerned. Furthermore, without adequate preparation and strategizing, as well as preparing for unexpected actions on the part of the employees, there is more chance that a redundancy exercise will become complicated. However, if one lesson can be learned from recent experience, it is that a mutual and pragmatic agreement and amicable settlement is still the preferred and in most cases the cheapest, quickest and most efficient method of dealing with terminations of employment in general and redundancies in particular.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.