Devil’s in the Detail: New Regulation Rolls Back Expat Employment Liberalization
Pursuant to the changes in the expatriate employment rules brought about by Presidential Regulation No. 20 of 2018 (“PR 20/2018”), the Ministry of Manpower (“MOM”) has issued a new implementing regulation (Regulation No. 10 of 2018 / “MOMR 10/2018”) governing the procedures for the employment of expatriates. The new regulation, which entered into force on 11 July 2018, revokes the previous regulations on the same topic, namely, MOM Regulation No. 16 of 2015 and MOM Regulation 35 of 2015.
While MOMR 10/2018 has clarified some aspects of PR 20/2018, it also gives rise to a number of significant issues that could undermine legal certainty for both expatriates and employers. Accordingly, we focus on these legal-certainty issues in Part B below, while other salient issues are addressed in Part C.
B. Legal Certainty Issues:
1. Divergence between PR 20/2018 and MOMR 10/2018
It is an axiom of the civil law system to which Indonesia adheres that a subordinate or implementing regulation should not substantively diverge from the purport of its superior (or mandating) regulation, and in particular should not impose additional obligations that are not contained in the superior regulation. Nevertheless, despite MOMR 10/2018 being issued as an implementing regulation for PR 20/2018, it imposes significant new obligations that are not mentioned in PR 20/2018. These additional obligations are as follows:
a. New Assessment Process for RPTKA Approval
The first significant divergence between MOMR 10/2018 and PR 20/2018 sees the introduction of a new layer of bureaucracy that is not mentioned in PR 20/2018, namely, the requirement that a “Suitability Assessment” (penilaian kelayakan) be conducted before an RPTKA is approved. Such assessment is to be conducted based on the “list of positions” (daftar jabatan) maintained by the MOM, presumably meaning that if the position in which the expatriate is to be employed is not listed, then the RPTKA will not be approved. Besides giving rise to additional uncertainty for employers, the Suitability Assessment also has significant implications for the length of time required for approval of the RPTKA. According to PR 20/2018, the RPTKA must be approved by the MOM within a maximum of two days after all of the required documents have been deemed completed. However, MOMR 10/2018 stipulates that the RPTKA must be approved within a maximum of two days after the Suitability Assessment has been successfully completed. As there is no mandatory time limit set for the completion of the Suitability Assessment, this could result in unforeseen delays
b. New Notification Process
One of the major changes that appeared to result from PR 20/2018 was the abolition of the requirement for an employer to obtain an IMTA (Expatriate Employment License / Izin Mempekerjakan Tenaga Kerja Asing) from the MOM in order to employ an individual expatriate. This IMTA could only be applied for after the MOM had approved the employer’s RPTKA. While MOMR 10/2018 also no longer requires an employer to obtain an IMTA, it imposes a new obligation on the employer, namely, the requirement to submit an application for what is termed a “notification” (notifikasi) after its RPTKA has been approved. Article 1 point 15 of MOMR 10/2018 defines this “notification” as an “approval for the employment of an expatriate that is issued by the Director General of Manpower Supervision and Expansion of Employment Opportunities as the basis for the issuance of a temporary residency permit (Itas).” It should be pointed out here that the RPTKA application only contains general information on the employer, while the notification application must set out the full particulars of the expatriate. In reality, this is very similar to what happened under the previous regime: the RPTKA contained the required background information on the employer, while the IMTA application set out the particulars of the expatriate, the position to be filled, and the expatriate’s qualifications.
Essentially, the new notification process seems to be broadly similar to the IMTA requirement. While different names may be employed, the end result is basically the same – an employer has to secure an additional approval in order to employ an expatriate. As is often the case with legislation, it is what is inside the bottle rather than the label that really counts.
2. Real and Present Dangers
The discrepancies between PR 20/2018 and MOMR 10/2018, as highlighted in Section 1 above, clearly give rise to a lack of legal certainty for both expatriates and employers. Among the most obvious problems are the following:
a. Article 9 of PR 20/2019 expressly provides that an approved RPTKA constitutes the employer’s permit or license to employ the expatriate in question. However, MOMR 10/2018 introduces the additional requirement of applying for and obtaining a notification. Thus, is the expatriate permitted to work or not based on the approved RPTKA? All that can be said with certainty here is that the answer will depend entirely on the discretion of the MOM.
b. Potential liability to pay outstanding obligations under an executed employment contract if MOM refuses to issue a notification: Under Indonesian employment law, should either party to a fixed-term employment contract breach the terms of such contract, they remain liable to perform all outstanding obligations under the contract up until the agreed end of the contract. This would appear to also apply should an employer be forced to unilaterally terminate an expatriate’s employment contract as a result of its inability to obtain a notification from the MOM following the MOM’s earlier approval of the employer’s RPTKA. Such a scenario could leave the employer liable to pay the employee’s salary from the time of the termination of the contract up until the agreed ending date of the contract.
c. The schedule to MOMR 10/2018 incorporates a standard-form draft employment contract that must be submitted with the application for RPTKA approval. Obviously such a one-size-fits-all contract will not be suitable for every type of fixed-term employment relationship. Consequently, the requirement to use this standard form would appear to be an undue restriction on the freedom of contract, and could pose significant problems for both employers and expatriates.
3. Uncertainty as to Precisely Which Entities May Employ Expatriates
As discussed in some depth in our earlier ABNR legal update (see ABNR News: Bureaucratic Reform Gains Traction in Indonesia as Government Streamlines Expat Employment Rules, published on 06/04/2018), PR 20/2018 appears to expand the categories of undertaking that are permitted to employ expatriates by:
(a) deleting the specific prohibitions on certain types of undertaking from employing expatriates. These undertakings included civil partnerships, unlimited liability partnerships, limited liability partnerships, associations, sole proprietorships, and cooperatives.
(b) adding a new, catch-all category of undertaking that is permitted to employ expatriates, namely, “business entity” (badan usaha);
However, as no definition of “business entity” is provided in PR 20/2018, the use of this term has the potential to give rise to some uncertainty as it is open to multiple or conflicting interpretations by individual officials or MOM offices around the country. This could result in particular business entities being allowed to employ expatriates in one area, while other entities of the same type in another area are not allowed to do so, thus potentially leading to challenges and delays in the licensing process. Consequently, it had been widely hoped that this issue would be resolved by the inclusion of a comprehensive definition of business entity in MOMR 10/2018, but this has not happened.
C. Other Salient Issues
1. New Obligations for Employers
In line with PR 20/2018, MOMR 10/2018 imposes a number of new obligations on the employer of an expatriate that were formerly the responsibility of the expatriate under the previous regulations (MOM Regulation No. 16 of 2015 and MOM Regulation 35 of 2015). These new obligations include the following:
2. Centralization of Authority in MOM
PR 20/2018 appears, in general, to envisage a situation where the MOM plays the leading role in regulating the employment of expatriates. Whereas previously, expatriates could only be employed in certain prescribed sectors (such as oil and gas) after the securing of a “technical recommendation” from the relevant governmental authority in that sector, it appears that such recommendations are no longer required as they are not mentioned as requirements for the approval of an RPTKA or for obtaining a notification. Rather, it would seem that the MOM now has the power to determine the requirements for the employment of expatriates across all sectors, although MOMR 10/2018 expressly states that this is subject to input from the sectoral governmental authorities. Obviously, the successful implementation of this new arrangement will require close alignment between the policies of the MOM and those of other relevant authorities.
3. Concurrent Employment
Expatriates were already permitted to concurrently serve as directors or commissioners with more than one company under the old regime. This is reiterated by PR 20/2018 and MOMR 10/2018, subject to the additional requirement that such directors/commissioners are not shareholders.
In addition, an expatriate may now also work for more than one employer in the vocational education and training sector and the digital economy sector, and in the oil and gas sector for production sharing contractors.
4. RPTKA Exemption for Prescribed Positions
PR 20/2018 and MOMR 10/2018 provide exemptions from the requirement for the employer of an expatriate to obtain an RPTKA in the following circumstances (Articles 10 of PR 20/2018 and MOMR 10/2018)
5. Assignment of Local Employee as Expatriate’s Assistant
MOMR 10/2018 continues to require the assignment of at least one local employee as an expatriate employee’s assistant for the purpose of facilitating the transfer of technology and expertise. In addition, employers are required to optimize the knowledge-transfer process through the provision of relevant training to expatriates’ assistants.
As regards the precise number of local employees that must be assigned to each expatriate, this is not specified in either MOMR 10/2018 or its antecedent regulations. However, the policy of the MOM to date has been to apply a ratio of 1:1, meaning that at least one local employee must be assigned to each expatriate. However, there is also a Ministry of Trade regulation on the books that requires a 3:1 ratio in the case of a representative office. Thus, in general it may be assumed that a minimum of one local employee must be assigned to assist each expatriate employee, save in the case of a representative office, where three local employees should be assigned to each expatriate.
Article 34(1) of PR 20/2018 stipulates that an employer which violates the rules on the utilization of expatriate manpower, education and training for expatriates’ assistants and reporting shall be subject to administrative sanctions. These are spelled out in Article 39 of MOMR 10/2018, which provides for sanctions in the form of a suspension of services, temporary suspension of expatriate licensing process, revocation of notifications, and/or such other sanctions as may be prescribed by the provisions of the laws and regulations in effect. In this regard, it should be noted that the Investment Law provides for the revocation of business licenses and investment facilities in the case a violation of Indonesian law by a company established under Indonesia’s foreign direct investment regime.
D. ABNR Commentary
Given the Government’s oft professed commitment to improving Indonesia’s ease-of-doing-business ranking, it is to be regretted that MOMR 10/2018 appears to have significantly backtracked on what seemed to be a major liberalization of Indonesia’s expatriate employment rules under PR 20/2018. The exact extent of that backtracking will only become apparent going ahead, having regard to the manner in which the provisions of MOMR 10/2018 are interpreted and implemented by the MOM. Accordingly, we will continue to closely monitor and report on the relevant issues in future issues of ABNR News.