Severance pay is a fundamental right for workers in Indonesia who experience employment termination, as regulated in employment regulations that have undergone significant changes since the enactment of Law Number 11 of 2020 concerning Job Creation (Job Creation Law). The following is an explanation of the changes in severance pay regulations and their impact on workers and employers.
Severance Pay Based on Law Number 13 of 2003
Prior to the Job Creation Law, the provisions were regulated in Law Number 13 of 2003 (UU Nomor 13 Tahun 2003) concerning Manpower. Several important points regulated include:
Compensation Rights: Workers affected by employment termination are entitled to severance pay, service pay, and compensation for rights in accordance with Article 156.
Compensation Calculation: The amount is determined based on years of service, for example, years of service less than 1 year receives 1 times monthly salary, and years of service of 8 years or more receives 9 times monthly salary.
Reasons for Termination: Employment termination can be carried out for valid reasons such as efficiency, company closure, or serious violations by workers.
Based on Law No. 13 of 2003 and the Job Creation Law, the formula for severance pay and service pay benefits is as follows:
| Service (YoS) / Years of Service | Severance Pay* | Service Pay* |
|---|---|---|
| YoS < 1 | 1 | 0 |
| 1 ≤ YoS < 2 | 2 | 0 |
| 2 ≤ YoS < 3 | 3 | 0 |
| 3 ≤ YoS < 4 | 4 | 2 |
| 4 ≤ YoS < 5 | 5 | 2 |
| 5 ≤ YoS < 6 | 6 | 2 |
| 6 ≤ YoS < 7 | 7 | 3 |
| 7 ≤ YoS < 8 | 8 | 4 |
| 8 ≤ YoS < 9 | 9 | 4 |
| 9 ≤ YoS < 12 | 9 | 5 |
| 12 ≤ YoS < 15 | 9 | 6 |
| 15 ≤ YoS < 18 | 9 | 6 |
| 18 ≤ YoS < 21 | 9 | 7 |
| 21 ≤ YoS < 24 | 9 | 8 |
| YoS ≥ 24 | 9 | 10 |
Severance Pay and Service Pay Formula under Law No. 13 of 2003
| Benefit Value | Benefit Formula | Benefit Type |
|---|---|---|
| Normal Retirement | (2 x Severance Pay + 1 x Service Pay) x 115% | Normal Retirement |
| Death Benefit | (2 x Severance Pay + 1 x Service Pay) x 115% | Worker Death |
| Disability/Illness | (2 x Severance Pay + 2 x Service Pay) x 115% | Prolonged Illness |
| Voluntary Resign | (1 x Severance Pay + 1 x Service Pay) x 115% + Separation Pay | Worker Resignation |
Significant Changes in the Job Creation Law
This law brings several important changes related to severance pay, including:
Maximum Reduction: Prior to the changes, maximum severance pay could reach 9 times monthly salary. After the changes, in some cases the maximum becomes 7 times monthly salary.
Component Simplification: Severance pay components are simplified to make them easier to understand and calculate by both workers and employers.
Elimination of Service Pay in Certain Cases: In some reasons for employment termination, workers are no longer entitled to service pay, so the total compensation received may be smaller compared to previous regulations.
Job Loss Guarantee Program (JKP)
One important innovation in the Job Creation Law is the introduction of the Job Loss Guarantee Program (JKP). This program provides additional benefits for workers affected by employment termination, in the form of:
Cash benefit: 60% of salary for a maximum of 6 months.
Access to labor market information: Assists workers in obtaining new employment.
Job training: Improves skills to be more easily absorbed in the labor market.
JKP aims to maintain workers’ livelihoods during the transition period after employment termination and provide more comprehensive social protection.
Important Provisions in the Job Creation Law
New Calculation
Article 156 of the Manpower Law was amended to establish a new benefit scale, for example, years of service less than 1 year still receives 1 times monthly salary, but the maximum limit is reduced.
More Flexible Termination Reasons
Law Number 11 of 2020 provides more room for employers to conduct employment termination for reasons of efficiency, company losses, force majeure, or changes in government regulations.
Service Pay Arrangements
Service pay is now provided with a different scale and in some cases is not provided at all.
Role of Actuaries in Calculating Severance Obligations
Actuaries play a very important role in calculating and managing company severance obligations. In the context of PSAK 24 (now PSAK 219), severance pay is categorized as post-employment benefits that require actuarial valuation to determine the present value of obligations that must be recorded in the company’s financial statements.
Actuarial valuation is required because severance obligations have complex characteristics and involve various demographic and economic assumptions. This obligation cannot be calculated simply based only on the current number of employees and salaries, but must consider various factors such as employee turnover rates, salary projection, discount rates, and the probability of future employment termination.
Implications for Workers and Employers
For workers:
Reduced Compensation: Total compensation received upon employment termination may be lower due to reduced maximum severance pay and changes in service pay.
JKP Benefits: Workers affected by employment termination can utilize the JKP program as additional social protection.
For employers:
Termination Flexibility: Employers gain ease in conducting employment termination for certain reasons, which can assist in company restructuring.
Administrative Obligations: Employers must ensure compliance with new regulations and manage JKP administration for workers.
Key Points to Know
Workers must understand their rights related to severance pay and other benefits upon employment termination, and utilize the JKP program if eligible.
Employers need to adjust employment policies and ensure compliance with the Manpower Law and derivative regulations of the Job Creation Law.
These regulatory changes have a significant impact on workers and employers, so thorough understanding is essential for protecting workers’ rights and smooth business operations.
By understanding the changes and latest provisions, both employees and companies can take appropriate steps in facing dynamics related to employment benefits in pension programs in Indonesia.