Compliance Check: Indonesia - Hiring Local Employees Without A Local Entity

There are complicated rules which govern when and how a foreign entity can operate in Indonesia without establishing a local entity. Companies should pay particular attention to employment structures in such circumstances.

Can a foreign entity operate in Indonesia without a local entity?

The rules in relation to foreign entities operating in Indonesia are complex and depend in part on the work performed.

Can a foreign entity hire a local employee?

There is no express prohibition against a foreign entity hiring local employees in Indonesia. There are, however, practical considerations to take into account. For example, the foreign entity will have to comply with social security and personal income tax obligations.

What about foreign employees?

A non Indonesian employee will require a work permit to live and work in Indonesia. Without an Indonesian sponsoring company (an Indonesian company with the requisite business licence), it is not possible to apply for a work permit for a non Indonesian employee.

What law governs the employment contract?

As a starting principle, if an employee is based and working in Indonesia, Indonesia employment laws will apply. This means the employee is entitled to all of the local protections set out under Indonesia law.

If the employee's contract of employment is with a foreign entity, that contract may also contain a governing law clause. It is important to understand which laws apply, and whether there are any dual employment risks.

What should employers do?

Employers should review their commercial operations in Indonesia and ensure that any employees are properly engaged. Herbert Smith Freehills can help companies to assess the position and consider options to ensure compliance. To discuss how, please contact [email protected]