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How to convert contractors to employees in Indonesia.

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How to convert contractors to employees in Indonesia

Converting contract workers to full time employees in Indonesia can offer several advantages for both the employer and the employee. However, it is a complex process that requires careful attention to Indonesian legal requirements and obligations.

Labour regulations in Indonesia are very much a work in progress, and 2003’s “Manpower Law”, which covered the basics of employer-employee relations, is regularly updated. These updates include 2017’s amendments protecting migrant labour, 2020’s initiatives on job creation, 2021’s introduction of Indonesia’s first unemployment benefit program, and 2022’s new mandates on employee benefits.

For an employer wishing to transition their contracted workforce to regular, full-time employees, up-to-date knowledge of this changeable regulatory environment is essential.

This article is a step-by-step guide on converting contractors to employees in Indonesia, including the legal requirements, processes, and benefits. It is applicable to companies either with or without an established Indonesian legal entity.

Key takeaways

  • Employers in Indonesia are required to comply with the regulations issued by the Ministry of Manpower (Kemnaker).
  • If the employer has a legal entity in Indonesia, they can start converting the contractors to regular employees right away by following the established steps, such as registering with the relevant authorities and setting up payroll and social security contributions.
  • If the employer does not have a legal entity in Indonesia, they can contract a Professional Employer Organisation (PEO) with the capacity to act as the legal employer of record (EoR) for the employees. The PEO then takes responsibility for payroll, benefits, and compliance.

Converting contractors to employees with a legal entity: eight steps

If a business already has a legal entity established in Indonesia and wants to convert their contractors to employees, the steps are as follows:

Step 1: Review the legal requirements

Employers must comply with applicable labour regulations, including the regular updates to the Manpower Law which governs the employment relationship. Under the Manpower Law, employees are entitled to certain benefits, including severance pay, annual leave, and social security.

Step 2: Negotiate with contractors

Once the legal requirements have been reviewed, it is necessary to negotiate with contractor workers to discuss the terms of their employment. This may include discussing changes to job responsibilities, compensation, and benefits. 

Step 3: Prepare the employment contracts

Once both parties have agreed to the new terms of employment, a new employment contract should be drafted and signed. The contracts must comply with the legal requirements and include the terms and conditions of the employment relationship, including the salary, benefits, and duration of employment. The employment contracts must also be registered with the local Ministry of Manpower office.

Step 4: Transfer contractors to employees

The next step is to transfer contractors to employees. This can be a complicated process, and it is critical to ensure that all employment contracts and benefits are correctly transferred. Companies may also need to train new staff to ensure they understand the company’s policies and processes.

Step 5: Register with the relevant authorities

Employers are required to register their employees with the relevant authorities in Indonesia. This may include registering with the local labour bureau, the social security office, and the tax authorities.

Step 6: Set up payroll and social security contributions

Payroll taxes and social security contributions must be withheld from employee wages and 

remitted to the government. This may involve setting up a payroll system, calculating contributions, and making regular payments to the appropriate authorities. The benefits must be provided through Indonesia’s National Social Security System (SJSN).

Step 7: Establish HR policies and procedures

After the employees have been transferred, it is critical to establish standard HR procedures that are tailored to the company’s needs. Setting up employee benefit schemes, producing an employee handbook, and implementing performance reviews and career development processes are all part of this.

Step 8: Provide employee benefits

Finally, employers must provide employee benefits such as health insurance, retirement plans, and other benefits as required by Indonesian law. In addition to complying with Indonesian labour laws, employee benefits can help to attract and retain employees.

Converting contractors to employees without a legal entity: five steps

Companies operating in Indonesia without an established legal entity can still convert their contract workers to employees by partnering with a Professional Employer Organisation (PEO), specifically, one that offers employer of record (EoR) services. In this arrangement, the EoR acts as the legal employer of the employees, taking responsibility for the payroll, benefits, and compliance functions. Here are the steps to follow:

Step 1: Choose a PEO with the capacity to act as an employer of record

The first step is to choose a reputable PEO that can help navigate the legal and regulatory requirements of employing workers in Indonesia. The PEO should have a verifiable track record, experienced local staff, and a deep, up-to-date understanding of Indonesian labour laws.

Step 2: Provide information about the contract employees

It is essential to provide the PEO with information about the contract workers transitioning to employees, such as their names, addresses, social security numbers, and job titles.

Step 3: Notify the employees

It is important to ensure that the employees are fully informed about the reasons behind their transition and have full visibility into how it will affect their employment. Employers should communicate the advantages of the transition, like gaining access to health insurance, better job security, and other benefits.

Step 4: Transition the employees

The PEO, acting as the employer of record, will convert the contractors to employees and manage the paperwork and legalities involved in converting the contract workers to employees.

Step 5: Monitor progress

The last step is to monitor the progress of the employees’ transition and communicate regularly with the PEO to ensure that everything is running smoothly.

How Acclime can help

Converting contract workers to regular employees in Indonesia can offer multiple benefits for both the employer and the employee, but it can be a daunting task given the country’s evolving labour laws and regulations. This guide has covered the basic steps.

As described above, an excellent option is to work with a Professional Employer Organisation (PEO) such as Acclime. Acclime can act as the legal employer of your Indonesian workforce, providing payroll, benefits, and compliance support, allowing you to focus on your core business operations. Working with a reputable PEO like Acclime can enhance your credibility with customers, suppliers, and investors, as it demonstrates your commitment to compliance and ethical business practices. Contact the Acclime team in Indonesia to learn more about how we can help with your business needs in Indonesia.

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About Acclime.

Acclime helps established multinational companies and startups start and operate their business in Indonesia and beyond. By seamlessly navigating our clients through the complexities of the local regulatory systems, we maximise opportunities while ensuring compliance and good governance.

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