Minimum Wage: Are You Paying Your Employees the Right Amount?

One of the main pull factors for foreign companies to set up shop in Indonesia is the relatively low labour cost compared to labour cost in their home countries. However, minimum wages are subject to annual wage council review and their numbers change frequently. This post will explain the basics of Indonesian minimum wage, how it is calculated and how it might varies depending on your business locations.

1. Different Types of Minimum Wage

Article 89 of the Indonesian’s Labour Law classifies minimum wage into 4 kinds: provincial minimum wages (Upah Minimum Provinsi / UMP), provincial sectoral minimum wages (Upah Minimum Sektoral / UMS Provinsi), city/county minimum wages (Upah Minimum Kabupaten) and city/county sectoral minimum wages (Upah Minimum Sektoral / UMS Kabupaten-Kota). These 4 minimum wage terms are replacing the former more well-known term, the regional minimum wage (Upah Minimum Regional) pursuant to the Ministry of Manpower Regulation No 226 of 2000.

2. How Minimum Wage Is Calculated

Minimum wage is proposed by wage councils which is comprised of members of the government, the Indonesian Chamber of Commerce (Kamar Dagang dan Industri / KADIN), trade union representatives and academics. In reviewing minimum wage, wage councils would factor in elements such as inflation rate, national economic growth, consumer price index, productivity, the capacity, progress, and sustainability of the businesses in question. Additionally, the council also needs to consider ‘adequate living needs’ (Kebutuhan Hidup Layak, KHL). According to Ministry of Manpower Regulation 13 of 2012, KHL comprises of factors such as 3,000 calories per day, clothing, housing and facilities, education, health, transportation, savings, and recreation. The council is required to adjust minimum wage in adherence to the KHL.

3. Increases In Minimum Wage

Changes in minimum wage is determined by inflation and economic growth. Article 44 of the Government Regulation 78 of 2015 sets the formula below for the calculation of wage increases:

Wage = Current Minimum Wage + (Current Minimum Wage x (Inflation (%) + Annual Change in Gross Domestic Product (%))

4. Business Location Determines Employees’ Minimum Wage

Minimum wage varies depending on the location of your company and where your employees are employed. Below are the lists of 2020 minimum wage based on some big regions in Indonesia:

1. Jakarta – Rp. 4.267.349 (AUD 450 / month)

2. Central Java – Rp. 1.742.015 (AUD 186 / month)

3. East Java – Rp. 1.768.777 (AUD 189 / month)

4. Bali – Rp. 2.493.523 (AUD 266 / month)

5. Jogjakarta – Rp. 2.004.000 (AUD 214 / month)

5. Annual Bonus

Indonesian law mandates employers to give out annual ‘religious holiday bonus’ (Tunjangan Hari Raya, THR). Workers who have been employed for more than one month are eligible and the bonus is commonly distributed seven days before the religious holiday. As a general rule, workers employed for one year or more receive one month’s salary, while workers employed for between one and twelve months receive a proportion of one month’s salary. This regulation affects all five recognized religions in Indonesia which are Muslim, Catholic, Christian Protestant, Buddhist, and Hindu.

6. Consequences for Underpaying Employee

Failure to adhere to the minimum wage regulation would constitute a punishable crime. Article 185 of the Labour Law states that penalties for underpaying employees range from one to four years of imprisonment or a fine of between Rp 100 million and 400 million (AUD 10,700 to 42,800).

Sources:

1. Kompas, https://www.kompas.com/tren/read/2019/11/21/170946665/dulu-disebut-umr-kini-umk-dan-ump?page=2

2. Finansial, https://finansial.bisnis.com/read/20191103/11/1166176/ini-daftar-ump-2020-di-34-provinsi

3. Indonesia Labour Law 2003

4. Ministry of Manpower, Pedoman Penyusunan dan Pelaksanaan Upah Minimum (1999).

5. Ministry of Manpower Regulation No 226.

6. Ministry of Manpower Regulation 6 of 2016 on Religious Holiday Bonuses for Company Employees.