Labor & Employment
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Constitutional Court of the Republic of Indonesia (Mahkamah Konstitusi RI)
Constitutional Court Ruling on Job Creation Law Labor Cluster: Mandatory Contract and Outsourcing Overhaul
Putusan Mahkamah Konstitusi atas Klaster Ketenagakerjaan UU Cipta Kerja: Kewajiban Perombakan Kontrak PKWT dan Alih Daya
Executive Legal Takeaway
The Constitutional Court issued landmark Decision No. 168/PUU-XXI/2023, partially striking down key labor provisions in Law No. 6 of 2023 (Job Creation Law) and ordering the enactment of a standalone Labor Law within two years. The ruling immediately affects fixed-term employment contracts (PKWT), limits permissible outsourcing scopes, and modifies severance and wage determination rules.
### Executive Summary
In Decision No. 168/PUU-XXI/2023, the Indonesian Constitutional Court (Mahkamah Konstitusi / MK) addressed fundamental labor rights under Law No. 6 of 2023 on the Enactment of Perppu No. 2 of 2022 into Law (Job Creation Law). The Court ordered the legislature and the executive branch to draft a new, independent labor statute within two years, while simultaneously issuing self-executing interpretations that alter current operational parameters under Government Regulation No. 35 of 2021 (PP 35/2021).
### Key Statutory and Regulatory Revisions
1. **Fixed-Term Employment Contracts (PKWT):**
- The Court mandated that the maximum duration for a PKWT contract—inclusive of extensions—must not exceed five (5) years, re-establishing strict statutory ceilings previously loosened under the regulatory framework.
- Article 59 of Law No. 13 of 2003, as amended, must explicitly protect the rights of fixed-term employees to regular statutory transitions where work of a permanent nature is concerned.
2. **Outsourcing Parameters (Alih Daya):**
- The Court restricted unregulated outsourcing practices. Contracting enterprises (user companies) may only outsource ancillary or auxiliary functions; core business operations cannot be arbitrarily transferred to outsourcing entities.
- The Minister of Manpower is instructed to explicitly define permissible business sectors and classifications for outsourcing arrangements.
3. **Severance Pay (Uang Pesangon) and Termination (PHK):**
- The Court restored substantive checks on unilateral termination of employment by corporate employers. Reductions in standard severance multipliers introduced by PP 35/2021 are curtailed where they deviate from the fundamental protective intent of the original Manpower Law.
- Prior negotiation via bipartite mechanisms remains mandatory before termination notices can produce legal effect.
4. **Minimum Wage Indexation:**
- Formula components for Provincial and Regency/City Minimum Wages (UMP/UMK) must integrate broader decent living standards (KHL) rather than relying strictly on inflexible mathematical caps tied solely to regional economic growth and inflation indices.
### Practical Corporate Legal Counsel Recommendations
- **Contract Audits:** Conduct an immediate compliance audit of all existing PKWT agreements to ensure accumulated contract durations do not exceed the five-year ceiling.
- **Vendor & Service Level Agreement (SLA) Review:** Re-examine third-party staffing and outsourcing agreements. Assess whether outsourced personnel are performing core activities versus support services to prevent risks of joint-liability claims or court-mandated transition of outsourced staff into direct employees.
- **Company Regulations and Collective Labor Agreements:** Revise internal employment policies (Peraturan Perusahaan) and Collective Labor Agreements (PKB) to incorporate the revised minimum standards established by the Court.
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