News: Indonesia to reduce maximum severance pay

Compensation & Benefits

Indonesia to reduce maximum severance pay

Indonesia’s severance pay laws, counted among the most generous in the world, may soon be relaxed to reduce the amount companies have to pay redundant employees.
Indonesia to reduce maximum severance pay

This week, Indonesia lawmakers plan to table a “Job Creation” bill that will relax rules on severance pay, long considered a deterrent to laying off underperforming employees. The new bill aims to cap severance payments at 19 times an employee’s monthly salary, down from the current cap of 32 times.

According to World Bank data, Indonesia’s legally mandated severance pay ranks among the most generous in the world, with employees entitled to an average of 57.8 weeks, or approximately 15 months’ worth of salary on being made redundant. The amount typically comprises four components: the actual severance pay, a long service pay component based on years of service, compensation rights pay which includes a percentage of both the severance and long service pay, and a voluntary separation pay component. Added up, the total severance pay can be a very hefty sum.

The move to cap severance pay comes amid a push to attract more foreign investment and make the country more business-friendly. Government officials have also said that the high mandated severance makes it difficult to find jobs: for example, finance minister Sri Mulyani Indrawati said last November that the existing labor market was not friendly to new entrants, and first-time job-seekers faced a major disadvantage compared to those more experienced.

However, the new bill is expected to face significant pushback. Labor laws in Indonesia are highly sensitive, and trade unions and student groups have been protesting against the planned changes to the laws since they were first announced last year.

The welfare of laid-off employees may be the largest stumbling block to the new bill. Like many other countries with extremely high severance pay rates, such as Sri Lanka and Mozambique, Indonesia does not have consistent social safety nets for the unemployed, meaning that workers who are laid off have to rely upon the large severance packages from their employers to tide them over. If these packages are reduced, it is uncertain where these workers will find financial support.

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Topics: Compensation & Benefits

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