How to hire and pay independent contractors in Indonesia

Hiring independent contractors from different parts of the globe is an excellent way to bring new talent to your business. Indonesia is the most powerful economy in South East Asia, with a GDP of over $1 trillion. If you’re looking to grow your team in Asia, it might be a good idea to hire from this culturally diverse nation.

But while hiring independent contractors in Indonesia, you have to consider the labor laws of the country and Indonesian tax requirements. Moreover, knowing the correct classification of contractors is also essential to avoid fines and penalties. 

But you’re in luck because this guide will make hiring and paying independent contractors in Indonesia easier for you. This article will cover employment laws, compliance practices, how to avoid misclassification risks, and contractor payments.

Ready to dive in? Let’s go.

Unique considerations of managing contractors in Indonesia

Indonesia has strict regulations for locally and internationally hired workers. As an employer hiring independent contractors in Indonesia, you need to make sure you understand all the compliance regulations.

The Labor Law 2003 is the primary law for protecting workers in Indonesia. The Department of Manpower and Transmigration sets the country's labor policies and regulates labor affairs.

All employment laws in Indonesia give equal rights to employees regardless of their job type, caste, age, religion, race, and gender.

In Indonesia, independent contractors are neither subject to labor laws nor employment laws. However, you still need to know the country's employment laws if, in the future, you wish to convert your hired contractor into an employee. We’ll get into the details of Indonesian labor laws below.

How do I pay an independent contractor in Indonesia?

You can pay international contractors through any of the following methods:

• Bank transfer

• Credit card payments

• Online payment services such as Wise or PayPal 

• Western Union

But the process of paying contractors in Indonesia is not that easy, especially if you’re dealing with multiple contractors at a time. Using these payment methods may not turn out to be cost-effective because of hefty transfer fees and high currency exchange rates.

Alternatively, you could use a global payroll service like Remote to streamline your payments system. Remote can help you automate payments, manage your invoices in one place, and pay your contractors quickly and compliantly  — with no hidden fees.

What are the risks of misclassifying Indonesian independent contractors as employees? 

Misclassification of workers can cost a business heavy fines and penalties. Misclassification is when a company, intentionally or unintentionally, incorrectly identifies the worker’s employment status. Indonesia differentiates between independent contractors and employees based on the following factors:

• Employment laws. An employee is subject to Indonesian employment and labor laws, but a contractor is not protected by these laws.

• Job dynamics. An employee works for one employer during set working hours and at the place designated by the employer. On the other hand, a contractor is self-employed and may work for more than one employer at a time. The contractor has the authority to set their own working hours and place of work.

• Payer's tax requirements. An employee’s tax deductions, social insurance, and other benefits are taken care of by their employer, whereas a contractor has to pay self-employment taxes in Indonesia.

• Payment frequency. An employee is paid a guaranteed monthly salary. A contractor decides their payment rates, and when it must be paid. It can be hourly, daily, weekly, or after the job or project is completed.

An employee's classification determines their tax responsibilities in Indonesia. Indonesian employees receive more benefits than contractors, including:

• Minimum wage

• Overtime pay

• Holidays

• Family and medical leaves

• Social security

• Unemployment benefits

• Health insurance

• Termination protections

Some employers intentionally misclassify workers to avoid offering the above benefits to an employee. Whether you unintentionally or intentionally misclassify workers, your business can face serious consequences such as:

• Heavy penalties and fines. You may be held accountable for back taxes and fines for paying late.

• Back employee benefits. You may be asked to pay workers for unpaid wages or benefits.

• Legal issues. You may be subject to different lawsuits filed by the affected groups or individuals.

• Intellectual property (IP) protection issues. If your worker’s classification is challenged when you’re working with a contractor from Indonesia, there’s a risk of losing your IP.  In some cases, misclassification can lead to questions about who owns the work produced. If your worker claims ownership of your IP, it can lead to legal lawsuits. 

To avoid misclassification risks and protect your IP and invention rights, you can partner with a contractor management service like Remote. The Remote IP Guard offers strong protections against IP risks and strengthens your ownership over your intellectual properties.

What are the labor laws in Indonesia?

Here are a few key features of Indonesian laws that you must know when employing workers in Indonesia:

• Employment contract. Only fixed-term employment contracts must be in writing.

• Minimum wage. The minimum wage rates of the country are fixed at the provincial level and reviewed every year. The minimum wage rate for the capital city of Jakarta is IDR 4,901,798 ($333) per month.

• Payroll frequency. The payroll frequency of the country is monthly.

• Paid annual leave. Employees must get 12 days of paid annual leave. This applies to those employees who are associated with any employer for 12 months or more.

• Public holidays. Besides paid annual leave, employees also get 15 public holidays annually.

• Termination of the employee. The Indonesian labor laws have a unique stance regarding the termination of employees. The law asks employers to do what they can to retain their employees instead of terminating them, such as offering coaching, improving working conditions, etc. If there’s cause to justify termination, then employers should provide a 30-day advance termination notice to the employee. Employees also have to be given severance pay depending on their duration of employment.

• Probation period. According to Article 60 of the Employment Law, the maximum probationary period is three months. During this period, the employee should be paid equal to or above the minimum wage. 

• Sick leave. An employee gets unlimited sick leave until fully recovered. During that time, the employee will get 100% wage for the first four months, 50% of the salary for the next four months, and 25% until complete recovery.

• Maternity leave. Female employees get three months of paid maternity leave, which starts six weeks before the delivery date. 

• Bereavement leave. Employees get two days of paid bereavement leave on the death of any close relative.

• Parental leave. Parents can get two days of paid religious observance leave for the circumcision or baptism of their children.

Keep in mind that these laws are generally not applicable to an independent contractor. However, you still need to know them if you plan to turn your short-term contractor into an employee.

Tax and compliance practices for hiring independent contractors from Indonesia

Independent contractors are responsible for filing and submitting their own tax returns.

If you're a US company hiring contractors in Indonesia, you also need to consider the tax compliance regulations defined by the Internal Revenue Service (IRS).

• You must collect Form W-8 BEN from every contractor working with you outside the US, such as in Indonesia.

• You may also have to fill out the 1096 form that includes information related to contractors.

The IRS has also signed a treaty with Indonesia regarding taxes, which you can check out here.

But tax compliance for US companies has become easier, thanks to Remote. When you onboard a new contractor with Remote, our system will automatically direct them to fill out the relevant tax forms. The contractor can download the forms in one click, sign, and upload them on the spot — saving you the hassle of keeping track of the paperwork on your own.

How do I convert an independent contractor in Indonesia to an employee?

If things are working out well with your contractor, you may consider converting them into an employee at some point. This allows you to leverage their skills and have them make a positive impact on your company's performance.

This process can also help you protect your intellectual property. Once the contractor becomes a part of your company, you will have sole ownership of all the work done by them.

However, the process of converting a contractor to an employee is not straightforward. You’ll have to draw up an employment contract and offer benefits such as social insurance, paid holidays, pension, and other benefits mandated to employees in Indonesia. You also have to make sure that you’re complying with Indonesian labor laws and paying your employees compliantly.

But once you decide to make the switch, Remote can help you with the conversion process so that you can focus on the more important aspects of growing your business. 

The best way to hire independent contractors in Indonesia

Hiring and paying contractors in Indonesia can be a pretty time-consuming task if you try to do everything yourself. Not only do you have to stay compliant with Indonesian employment laws and tax practices, but you’ll need to make sure you're classifying your workers correctly. Plus, you’ll need a reliable payroll system to pay your contractors on time. 

It’s a lot to take on at once. Luckily, Remote's global contractor management platform is here to help you out. It’s the ultimate solution for businesses looking to hire, onboard, and pay workers abroad. With Remote, you can: 

• Onboard your contractors in minutes with localized contracts

• Automate payments and the invoice approval process

• Stay compliant with Indonesian tax and labor laws

• View and manage all your contractors in one place

Contact our friendly team to learn how to take your business to the next level with Remote's contractor management platform. If you’re ready to begin onboarding your contractors, sign up with Remote and get started in minutes!