The recent spate of layoffs has cast a dark cloud over Indonesia’s labour market. Between January and August 2024, the Ministry of Manpower recorded a staggering 46,240 cases of Pemutusan Hubungan Kerja (PHK), or layoffs.
This represents a significant uptick compared to previous years. Economists predict that the number could reach 70,000 by the end of the year. The storm is brewing across various sectors, including manufacturing, startups, and textiles.
The effects of these layoffs are being felt most acutely in urban areas like Jakarta. Many workers who have lost their jobs are struggling to stay afloat. While some laid-off workers have turned to the gig economy such as online ride-hailing services, these jobs often lack the stability and benefits of formal employment. This has led to growing discontent with the overall labour market situation under the UU Cipta Kerja framework.
Since its inception in 2020, Indonesia’s UU Cipta Kerja has sparked heated debates across the nation. While it was initially touted as a silver bullet for economic growth, its real-world impact has been more nuanced.
Understanding UU Cipta Kerja
An Omnibus Law is a legislative approach that combines various laws into a single unified law. It is designed to eliminate overlapping regulations and simplify bureaucratic procedures. This concept is widely used in common law countries like the United States to streamline complex legal systems. In Indonesia, the UU Cipta Kerja serves as an omnibus law that consolidates and amends several existing laws, including the 2003 Labour Law (UU No. 13/2003).
By integrating these laws into one, the government aims to make it easier for businesses to operate while ensuring labour protections are maintained, although not without controversy. The new law includes numerous provisions across 11 clusters, impacting everything from business licensing to labour conditions.
Key Points of UU Cipta Kerja:
- Simplification of business licensing
- Investment requirements
- Labour regulations
- Ease and protection for Micro, Small, and Medium Enterprises (MSMEs)
- Ease of doing business
- Research and innovation support
- Government administration
- Sanction regulations
- Land procurement
- Investment and government projects
- Special economic zones
Designed to cut red tape and attract investment, the law aimed to create a more business-friendly environment. By refining labour regulations, land acquisition processes, and environmental permits, the government hoped to level the playing field for businesses and foster a more competitive economy.
How UU Cipta Kerja Affects Companies
For companies, UU Cipta Kerja offers several advantages. Simplified licensing processes, relaxed environmental regulations for certain sectors, and new rules on wage structures and employment contracts have reduced operational costs and administrative burdens. This has encouraged businesses, particularly small and medium enterprises (SMEs), to expand and create new jobs.
Large companies have also benefited from the law’s more flexible labour arrangements, including the easing of restrictions on outsourcing and the introduction of simpler dismissal procedures.
This flexibility can be particularly attractive for industries that experience fluctuating demand, as it allows companies to scale their workforce up or down more efficiently.
1. Simplification of Business Licensing
One of the primary goals of the UU Cipta Kerja is to ease the process of starting and operating a business in Indonesia. The law removes the overlap of various regulations and reduces bureaucratic hurdles by merging different legal frameworks into one comprehensive law.
Key Regulations:
- OSS (Online Single Submission): The OSS system has been improved, enabling businesses to obtain permits faster and more efficiently.
- Environmental Permits: The law simplifies the requirements for environmental impact analysis (AMDAL) and environmental permits, especially for low-and medium-risk businesses.
Impact on Businesses:
- Easier and Faster Business Registration: The law facilitates business establishment by reducing the time and effort needed to acquire permits.
- Lower Barriers for SMEs: Small and medium-sized enterprises benefit from less stringent requirements, encouraging more startups and innovations.
2. Investment Requirements
To attract more investment into the country, the law relaxes several investment regulations and encourages foreign direct investment (FDI).
Key Regulations:
- Investment Restrictions: The law eliminates several restrictions on sectors previously closed to foreign investment.
- Ease of Doing Business: By creating a more favourable environment for both domestic and foreign investors, the law aims to boost Indonesia’s competitiveness globally.
Impact on Businesses:
- Attracting FDI: The elimination of sectoral restrictions encourages more foreign companies to invest in Indonesia, creating opportunities for partnerships and expansions.
- Stimulating Economic Growth: Greater investments are expected to spur economic growth, providing more opportunities for businesses to scale and innovate.
3. Labour and Employment Regulations
One of the most debated aspects of UU Cipta Kerja is its revisions to Labour Laws. These changes have implications for both employers and employees, altering the way businesses manage their workforce.
Key Regulations:
- Working Hours and Overtime: Maximum overtime limits have been increased to 4 hours per day and 18 hours per week.
- Fixed-Term Employment Contracts (PKWT): The law removes restrictions on the duration of fixed-term employment contracts, allowing businesses more flexibility.
- Minimum Wage: Minimum wage calculations now apply at the provincial level, eliminating district and sector-specific minimum wages.
Impact on Businesses:
- Greater Flexibility in Employment Contracts: Companies have more leeway in hiring temporary or contract workers without facing legal limitations on contract duration.
- Labour Cost Management: The new wage rules help businesses control labour costs by reducing the complexity of wage setting.
4. Taxation and Fiscal Policies
UU Cipta Kerja also introduces reforms in taxation to incentivise businesses and encourage investment.
Key Regulations:
- Corporate Income Tax Reductions: The law reduces corporate income tax rates and provides tax holidays and incentives for investments in certain sectors.
- Tax Incentives for SMEs: Small and medium-sized enterprises (SMEs) are offered various tax incentives to ease their financial burdens.
Impact on Businesses:
- Reduced Tax Burdens: Companies enjoy lower taxes, particularly in sectors promoted by the government, which may improve their profitability.
- Encouraging Business Expansion: The favourable tax environment is expected to stimulate expansions and new business ventures, boosting overall productivity.
5. Business Sectors Impacted
The law addresses multiple sectors to create a more dynamic and competitive economic environment.
Key Regulations:
- SMEs and Cooperatives: Specific provisions promote the growth of small businesses by improving their access to financing and reducing regulatory barriers.
- Land and Spatial Planning: The law simplifies land acquisition processes for businesses, especially in infrastructure and industrial development.
Impact on Businesses:
- Improved Support for SMEs: Small businesses benefit from a streamlined licensing process, easier access to capital, and less regulatory overhead.
- Easier Land Acquisition: Companies in industries such as real estate, infrastructure, and manufacturing face fewer hurdles when acquiring land for business purposes.
6. Employment Benefits and Social Security
Changes have also been introduced regarding employment benefits and social security programs.
Key Regulations:
- Job Loss Guarantee Program: The law introduces a new social security program for workers who lose their jobs, known as Jaminan Kehilangan Pekerjaan (JKP), managed by BPJS Ketenagakerjaan.
- Pension and Social Security Penalties: Companies that fail to enrol their employees in social security programs are no longer subject to criminal penalties.
Impact on Businesses:
- Employee Benefits Compliance: Businesses must adjust their HR practices to comply with the new regulations on job loss guarantees and social security.
- Reduced Penalties: The removal of criminal penalties for non-compliance with pension and social security enrollment offers some relief to employers, but they are still obligated to participate in these programs.
UU Cipta Kerja has undoubtedly reshaped the Indonesian business environment by streamlining regulatory processes, enhancing labour flexibility, and offering tax incentives. While these changes aim to create a more favourable climate for businesses and investors, companies must carefully navigate the new legal landscape to ensure compliance. For businesses, the law offers opportunities for growth and expansion, but it also demands adjustments in employment practices and administrative processes.
How UU Cipta Kerja Impacts Workers
The labour provisions in the UU Cipta Kerja introduce several key changes compared to the 2003 Labour Law (UU No. 13/2003). Here’s a breakdown of the major revisions:
1. Working Hours and Overtime
- Overtime Work: The maximum overtime hours are increased to 4 hours per day and 18 hours per week, compared to the previous limits of 3 hours per day and 14 hours per week.
- Weekly Rest: The law mandates 1 day off for every 6 working days, whereas the 2003 Labour Law allowed for 2 days off if employees worked for 5 days a week.
- Long Rest Periods: The new law does not guarantee long rest periods, which were previously provided after 6 consecutive years of employment. Instead, this decision is left to the discretion of individual companies.
2. Leave Entitlements
- Menstrual Leave: The law does not explicitly mention menstrual leave. The 2003 law granted women leave on the first two days of menstruation.
- Maternity Leave: There is ambiguity regarding maternity leave in the new law. The previous law provided for maternity leave and leave for miscarriage recovery.
- Breastfeeding Rights: The law omits specific provisions regarding breastfeeding breaks, which were guaranteed in the 2003 law.
3. Employment Status
- Fixed-Term Employment (PKWT): The UU Cipta Kerja eliminates restrictions on the duration of fixed-term employment contracts, effectively allowing companies to hire contract workers indefinitely. This represents a significant departure from the 2003 law, which limited contracts to a maximum of 3 years.
4. Wages and Compensation
- Minimum Wage: The law simplifies the minimum wage structure by focusing on the Provincial Minimum Wage (UMP), removing the District/City Minimum Wage (UMK) and the Sectoral Minimum Wage.
- Wage Calculation: The formula for calculating the minimum wage is based on economic growth, inflation and other indexes.
- Bonuses: The law introduces provisions for companies to provide bonuses based on employees’ length of service, a new requirement absent in the previous law.
- Exemptions for MSMEs: Small and micro businesses are no longer required to adhere to minimum wage regulations, allowing for wages to be determined by mutual agreement between employers and workers.
5. Social Security
- Pension Plans: The law removes criminal penalties for companies that fail to enrol workers in pension plans, which were previously enforced under the 2003 Labour Law.
- Job Loss Insurance: A new social security program, Job Loss Insurance, has been introduced, providing protection for workers who lose their jobs. This is a significant addition to the existing social security programs.
6. Dismissal and Termination (PHK)
- Dismissal Grounds: The new law expands the reasons for which companies can legally terminate employees, adding 5 new categories, including company efficiency measures and prolonged employee illness, raising the total number of permissible reasons to 14.
Generally, workers have borne the brunt of UU Cipta Kerja’s reforms. While the law aims to generate more jobs, it also weakens certain labour protections. The most concerning changes for workers include the reduction in severance pay, increased use of outsourcing, and the extension of temporary contracts.
For employees, this often translates to less stability and fewer long-term benefits. Many fear that the rise in contract-based work will reduce their ability to negotiate wages, benefits, and job security.
However, supporters of the law argue that by reducing the regulatory burden on companies, more jobs will be created in the long run.
Mass Layoffs Following the Implementation of UU Cipta Kerja
The recent surge in layoffs can be attributed to a perfect storm of economic pressures, global competition, and the unintended consequences of the UU Cipta Kerja.
Rising operational costs, fueled by higher interest rates and a decline in domestic purchasing power, have forced businesses to tighten their belts. To stay afloat, many have resorted to the painful measure of job cuts. Meanwhile, the influx of cheaper imports from China has dealt a severe blow to domestic industries, particularly the textile and garment sectors. These industries have struggled to compete both domestically and internationally.
Despite the law’s aim of creating a more business-friendly environment, the actual inflows of investment have not been sufficient to offset job losses, especially in labour-intensive sectors. This has created a paradox: economic liberalisation has not translated into the expected job growth.
Critics have argued that the UU Cipta Kerja’s labour deregulation provisions may have inadvertently encouraged layoffs. As reported by BBC Indonesia, labour unions point out that the law has made it easier for companies to terminate contracts, as it allows for greater flexibility in outsourcing and fixed-term employment contracts. Workers have also lost protections such as sectoral minimum wages and severance pay, which were stronger under the previous legal framework.
The Future of Labour in Indonesia
The long-term effects of UU Cipta Kerja on Indonesia’s labour market remain uncertain. The law is still in its early stages, and the balance between fostering economic growth and protecting workers’ rights will depend on its implementation and potential adjustments.
For companies, the flexibility offered by the law may help them navigate economic challenges, particularly in volatile industries. On the other hand, workers may face a period of adjustment, especially those in traditionally stable sectors who now must contend with the possibility of more precarious employment conditions.
While the government has responded with a flurry of job fairs and training programs, the results have been slow to materialise. It seems that the path to economic prosperity is not as straightforward as initially hoped.
Ultimately, the future of labour in Indonesia will likely involve ongoing negotiations between the government, businesses, and workers to ensure that the benefits of UU Cipta Kerja are shared equitably while mitigating its more challenging impacts on the workforce.
As Indonesia continues to ride the waves of economic change, it is imperative for both companies and employees to adapt and innovate. The business landscape is constantly evolving, and those who fail to keep up risk being left behind. Businesses must strive for efficiency and stability to weather the storm, and innovative solutions like Setlary can be a lifeline.
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The partnership between companies and employees is crucial for charting the economic waters. By working together and adopting innovative solutions like Setlary, both sides can thrive in uncertain times. It is time for Indonesia to embrace the future and create a more sustainable and equitable labour market for all.
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