Employee Severance Agreement Template for Indonesia
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What is a Employee Severance Agreement?
The Employee Severance Agreement is a crucial document used when formally terminating employment relationships in Indonesia. It is designed to comply with Indonesian labor laws, particularly the Job Creation Law (Omnibus Law) and Government Regulation No. 35/2021, which set strict requirements for employment termination and severance calculations. This agreement is necessary whenever an employment relationship is terminated by mutual consent or under circumstances requiring statutory severance payments. It encompasses mandatory elements such as severance pay, service pay, and compensation rights, while also addressing post-employment obligations and releases. The document serves as both a legal requirement and a protection mechanism for employers and employees, ensuring that termination processes follow Indonesian regulatory requirements and that all statutory entitlements are properly documented and agreed upon.
About the Employee Severance Agreement
An Employee Severance Agreement is a critical legal document that governs the termination of employment relationships in Indonesia. Under Indonesian labor law, particularly the Job Creation Law No. 11/2020 and Government Regulation No. 35/2021, employers must comply with strict requirements when terminating employees, making this agreement essential for legal protection and regulatory compliance.
When do you need this document?
You need an Employee Severance Agreement whenever you're terminating an employment relationship in Indonesia that involves severance payments. This includes situations where you're downsizing your workforce due to business restructuring, conducting mass layoffs, terminating employees for performance issues, or when employees resign under circumstances that trigger severance entitlements. The agreement is also required when mutual termination occurs with compensation packages, during company mergers or acquisitions that result in redundancies, or when temporary contracts end with severance obligations. Indonesian labor law mandates proper documentation of all termination procedures, making this agreement legally necessary rather than optional.
Key legal considerations
Your severance agreement must include precise calculations of severance pay based on the employee's length of service and final salary, as mandated by Government Regulation No. 35/2021. You must also account for service pay (pesangon), compensation pay (uang penghargaan), and any accrued benefits including unused annual leave and bonuses. The agreement should clearly define post-employment obligations such as confidentiality clauses, non-compete restrictions (where legally enforceable), and return of company property. You need to address the settlement of any outstanding loans, advances, or benefits, and ensure proper release clauses that protect your company from future claims. Tax implications under Law No. 36/2008 must be clearly stated, particularly regarding the taxation of severance payments and who bears responsibility for tax obligations.
Legal requirements in Indonesia
Under Indonesian law, your severance agreement must comply with specific statutory requirements outlined in the Job Creation Law and its implementing regulations. The severance pay calculation must follow the prescribed formula based on years of service, with minimum amounts set by law that cannot be reduced. You must ensure the agreement addresses social security obligations under Law No. 40/2004, including BPJS contributions and final settlements. The document requires proper witnessing, typically by HR representatives and may need labor union involvement if applicable to your workplace. You must provide advance notice periods as specified by law or payment in lieu thereof. The agreement should be executed in Indonesian language or include certified translations, and you need to maintain copies for labor inspection purposes. Additionally, you must ensure the termination procedures follow proper consultation processes and that all statutory entitlements are calculated and paid according to current regulatory rates.
GOVERNING LAW
Applicable law
This Employee Severance Agreement is drafted to comply with Indonesia law. Key legislation includes:
Government Regulation No. 35/2021: Implementing regulation of the Job Creation Law specifically concerning employment matters, providing detailed rules on employment termination and severance calculations
Law No. 13/2003 (Manpower Law): Original labor law that still applies in parts not amended by the Omnibus Law, covering basic employment rights and obligations
Law No. 40/2004 on National Social Security System: Governs social security obligations and benefits that need to be addressed during employment termination
Law No. 36/2008 on Income Tax: Regulates the taxation of severance payments, including specific tax rates for severance packages
BPJS Employment Regulations: Regulations concerning mandatory employment insurance and final benefit calculations upon termination
Minister of Manpower Regulation No. 19/2012: Provides guidelines for employment termination procedures and dispute resolution mechanisms
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