Keep Getting Your Work Contract Renewed? Here is the Maximum Legal Limit for Renewals

Introduction

The repeated extension of employee employment contracts is still frequently encountered in employment relations. This condition may raise questions regarding the time limits for utilizing Fixed-Term Employment Contracts (Perjanjian Kerja Waktu Tertentu, "PKWT") and the certainty of worker status. To govern the utilization of PKWT, the government stipulates provisions regarding the contract period, types of work eligible for PKWT, and the obligation to provide compensation pay in Government Regulation Number 35 of 2021 on Fixed-Term Employment Contracts, Outsourcing, Working Hours and Rest Hours, and Termination of Employment Relations. These provisions regulate the rights and obligations of both employers and workers during an employment relationship based on a PKWT.

Legal Basis

Government Regulation Number 35 of 2021 on Fixed-Term Employment Contracts, Outsourcing, Working Hours and Rest Hours, and Termination of Employment Relations ("GR 35/2021") regulates the requirements for utilizing PKWT, including the types of work eligible for PKWT and the limits on its validity period. The provisions relating to the contract period limits and types of work are as follows:

Article 4 Paragraphs (1) and (2) of GR 35/2021

"(1) A PKWT is based on:

a. a specific time period; or

b. the completion of a specific job.

(2) A PKWT cannot be held for work that is permanent in nature."

These provisions require companies to utilize PKWT only for non-permanent work. Conversely, workers can ensure that the assigned type of work inherently meets the PKWT usage requirements in accordance with the provisions of laws and regulations. Therefore, companies cannot utilize a PKWT for work that is permanent in nature and continuously carried out as part of their business activities.

Article 8 Paragraphs (1) and (2) of GR 35/2021

"(1) A PKWT based on a time period as referred to in Article 5 paragraph (1) may be made for a maximum of 5 (five) years.

(2) In the event that the period of the PKWT as referred to in paragraph (1) is about to expire and the work being executed has not been completed, an extension of the PKWT may be conducted with a time period in accordance with the agreement between the Employer and the Worker/Laborer, provided that the total period of the PKWT along with its extensions does not exceed 5 (five) years."

This rule stipulates that the overall period of a time-based PKWT, including its extensions, must not exceed 5 (five) years. Employers and workers may agree to extend the contract if the work remains uncompleted, provided the accumulated contract period from commencement to the end of the extension remains within this limit. Thus, a PKWT extension that causes the total contract period to exceed 5 (five) years is not in compliance with GR 35/2021.

Article 15 Paragraphs (1) and (4) of GR 35/2021

"(1) Employers are obligated to provide compensation pay to Workers/Laborers whose employment relationship is based on a PKWT.

(2) ….

(3) ….

(4) If a PKWT is extended, the compensation pay is provided upon the completion of the PKWT period prior to the extension, and for the PKWT extension period, the subsequent compensation pay is provided after the PKWT extension period concludes or is completed."

Employers are required to provide compensation pay to workers employed under a PKWT. In the event a PKWT is extended, the compensation pay for the concluding contract period is disbursed before the extension period commences, while the compensation pay for the extension period is provided after the extension concludes or is completed. Consequently, workers are entitled to receive compensation pay each time a PKWT period ends, in accordance with the provisions of GR 35/2021.

Sanction Risks for Violators

Employers failing to fulfill specific obligations in implementing a PKWT may be subject to sanctions under GR 35/2021. Pursuant to Article 61 paragraph (1) of GR 35/2021, employers violating the obligation to provide compensation pay to workers employed under a PKWT as set forth in Article 15 paragraph (1) are subject to progressive administrative sanctions. Such sanctions take the form of written warnings, restrictions on business activities, temporary suspension of part or all production facilities, and suspension of business activities. Additionally, pursuant to Article 10 paragraph (4) of GR 35/2021, if daily workers work for 21 (twenty-one) days or more in each month for 3 (three) consecutive months or more, the daily employment agreement becomes invalid, and the employment relationship changes by operation of law into an Indefinite-Term Employment Contract (Perjanjian Kerja Waktu Tidak Tertentu, "PKWTT") or permanent employment.

Strategic Steps to be Taken

To ensure the utilization of PKWT complies with GR 35/2021, employers and workers may take the following steps:

1. Registering the PKWT online with the ministry organizing government affairs in the manpower sector no later than 3 (three) working days from the date of signing, pursuant to Article 14 paragraph (1) of GR 35/2021. If the online system is unavailable, the registration is conducted in writing to the regency/city manpower agency no later than 7 (seven) working days from the date of signing, pursuant to Article 14 paragraph (2) of GR 35/2021.

2. Calculating the accumulated employment contract period to ensure that the overall period of the PKWT along with its extensions does not exceed 5 (five) years, as stipulated in Article 8 paragraph (2) of GR 35/2021.

3. Providing and receiving compensation pay in accordance with the payment schedule set forth in Article 15 paragraph (4) of GR 35/2021, including before the PKWT extension period commences and after the extension period concludes.

4. Reviewing the PKWT to ensure that the assigned work meets the PKWT usage criteria as stipulated in Article 5 paragraph (1) of GR 35/2021. Should any discrepancies arise regarding the fulfillment of such work criteria, the resolution may be conducted through industrial relations dispute settlement mechanisms in accordance with the provisions of laws and regulations.
   

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Recommendations

To assist employers and workers in executing PKWTs in compliance with GR 35/2021, several steps to consider include:

1. Evaluating the types of work utilizing PKWT to ensure that PKWT is not applied to work of a permanent nature, as prohibited in Article 4 paragraph (2) of GR 35/2021.

2. Preparing compensation funds in accordance with the provisions of Article 16 paragraph (1) of GR 35/2021 to ensure the obligation to pay compensation can be fulfilled when the contract period expires.

3. Adjusting the employment status of daily workers to a PKWTT if they have met the criteria stipulated in Article 10 paragraph (4) of GR 35/2021, ensuring compliance with the prevailing provisions.
   

Closing

GR 35/2021 stipulates that a PKWT may only be utilized for non-permanent work and, for a time-based PKWT, its validity period along with all its extensions must not exceed 5 (five) years. In addition to observing this time limit, employers are also obligated to provide compensation pay to workers employed under a PKWT, including at the time the contract period concludes prior to an extension and after the extension period is completed. Employers who fail to fulfill the obligation to provide compensation pay may be subject to administrative sanctions in the form of written warnings, restrictions on business activities, temporary suspension of part or all production facilities, and suspension of business activities. Conversely, the employment relationship of daily workers who work for 21 (twenty-one) days or more in each month for 3 (three) consecutive months changes by operation of law into a PKWTT. Therefore, employers and workers must ensure the PKWT is registered in accordance with prevailing provisions, calculate the accumulated contract period to ensure it does not exceed the stipulated limit, fulfill the compensation payment obligation in a timely manner, and ensure that the performed work meets the PKWT usage requirements. To support compliance with these provisions, companies may also conduct evaluations on the types of work utilizing PKWT, prepare compensation funds from the outset, and adjust the employment relationship status of daily workers who have met the requirements into a PKWTT.