Indonesia has become one of Southeast Asia’s most attractive destinations for global business expansion. With a population of over 270 million and consistent GDP growth, foreign investors continue to explore opportunities in manufacturing, digital services, renewable energy, and consumer goods. Yet, despite its potential, Indonesia’s business environment carries unique compliance risks that can put even well-intentioned companies at legal and financial risk.
For companies entering Indonesia without local expertise, the challenge lies in navigating a dense regulatory framework, frequently evolving labor laws, and sector-specific restrictions. This is where an Employer of Record (EOR) provides a critical safety net, ensuring businesses stay compliant while focusing on their core operations.
Below are the top 10 compliance risks in Indonesia—and how partnering with an EOR shields your company from them.
1. Complex Labor Laws
Indonesia’s labor laws are among the most protective in the region, regulating minimum wage, working hours, overtime, termination procedures, and severance entitlements. Under the Omnibus Law (Law No. 11 of 2020), later amended by Peraturan Pemerintah Pengganti Undang-Undang (Perppu) No. 2 of 2022, severance packages are structured based on tenure and the reason for termination. For employees with eight (8) or more years of service, the regulation specifies severance pay of nine (9) months’ wages, in addition to other potential benefits depending on the grounds of termination.
Risk: Mishandling contracts, terminations, or wage calculations can lead to disputes and lawsuits.
EOR Solution: An EOR manages employment contracts in line with Indonesian labor codes, ensuring compliant payroll and correct severance handling.
2. Foreign Worker Permits (RPTKA & IMTA)
Foreign employees in Indonesia must have a work plan approval (RPTKA) and a work permit (IMTA). Companies that bypass this process face fines or deportation of staff.
Risk: Employing expatriates without valid permits can result in sanctions or loss of business licenses.
EOR Solution: An EOR secures and manages foreign worker permits, avoiding delays and penalties.
3. Misclassification of Workers
The rise of project-based and freelance work has created confusion between employee and contractor classification. Indonesian law clearly distinguishes permanent and fixed-term contracts, with strict requirements on contract length and registration.
Risk: Misclassifying employees as contractors to avoid benefits can lead to penalties and back-pay obligations.
EOR Solution: An EOR ensures correct worker classification and contract registration through the Online Single Submission (OSS) system.
4. Tax Compliance and Withholding Obligations
Indonesia has a progressive income tax system, with rates ranging up to 35% for individuals and a corporate income tax of 22%. Employers must withhold, report, and pay employee income tax monthly.
Risk: Late or incorrect reporting to the Directorate General of Taxes (DGT) can lead to penalties up to 200% of the unpaid tax.
EOR Solution: An EOR manages payroll taxes, monthly reporting, and ensures compliance with tax updates such as VAT reforms under Law No. 7/2021 on Harmonized Tax Regulations.
5. Social Security (BPJS Kesehatan & BPJS Ketenagakerjaan)
Employers must register employees in Indonesia’s social security programs: BPJS Kesehatan (healthcare) and BPJS Ketenagakerjaan (employment benefits). Contribution rates are split between employer and employee.
Risk: Non-compliance can trigger fines, denial of public services, and reputational damage.
EOR Solution: An EOR registers employees in BPJS programs and ensures accurate monthly contributions.
6. Data Privacy & Cybersecurity Obligations
Indonesia enacted the Personal Data Protection Law (PDP Law – Law No. 27/2022), aligning with global standards like GDPR. Companies must obtain explicit consent, secure storage, and report breaches.
Risk: Mishandling personal data can lead to fines of up to 2% of annual revenue and potential criminal charges.
EOR Solution: An EOR ensures compliant handling of employee data under PDP Law requirements.
7. Termination & Severance Disputes
Employee dismissal in Indonesia requires strong legal grounds, often involving negotiations or approval from the Industrial Relations Court. Employers who fail to follow due process risk costly settlements.
Risk: Unlawful termination can trigger lawsuits, reinstatement orders, or excessive payouts.
EOR Solution: An EOR advises on legal grounds for termination and manages severance calculations in line with the Manpower Law.
8. Sector-Specific Restrictions
Indonesia’s Negative Investment List (DNI)—recently replaced by the Positive Investment List (PIL) in 2021—regulates foreign ownership limits in certain industries, including telecom, retail, and logistics.
Risk: Entering a restricted sector without proper structuring can invalidate business operations.
EOR Solution: An EOR enables foreign firms to operate compliantly without needing a local PT PMA (foreign-owned company) immediately.
9. Frequent Regulatory Changes
Indonesia’s regulatory landscape evolves rapidly, from tax reforms to immigration rules. For example, the government revised the minimum wage calculation in 2023, and adjustments continue annually.
Risk: Missing updates can put a company in violation overnight.
EOR Solution: An EOR monitors regulatory changes in real-time, updating contracts, payroll, and compliance practices accordingly.
10. Corruption and Bureaucracy Risks
According to Transparency International’s 2023 Corruption Perceptions Index, Indonesia scored 34/100, ranking 115th globally—highlighting risks in licensing, permits, and government interactions.
Risk: Missteps in navigating bureaucratic processes can expose businesses to compliance breaches or reputational damage.
EOR Solution: By leveraging established local networks, an EOR minimizes bureaucratic delays while ensuring lawful practices.
Why an EOR is the Smartest Route to Compliance in Indonesia
For companies entering Indonesia, setting up a legal entity and managing HR compliance can take months—sometimes years. An Employer of Record allows businesses to:
- Hire employees quickly without establishing a PT PMA.
- Ensure full compliance with Indonesian labor, tax, and social security laws.
- Avoid costly mistakes in worker classification, severance, and foreign permits.
- Stay up to date with fast-changing regulations.
In short, an EOR acts as a compliance shield, letting businesses focus on strategy, market entry, and growth rather than legal pitfalls.
Conclusion
Indonesia’s dynamic market offers immense opportunities—but it also comes with some of Southeast Asia’s most intricate compliance challenges. From labor laws to tax obligations and data protection, businesses face multiple risks that can escalate quickly if mishandled.
By partnering with an Employer of Record, companies gain a trusted compliance partner that navigates local laws, protects against liabilities, and accelerates market entry. For organizations looking to expand into Indonesia confidently, working with an EOR is not just a safeguard—it’s a strategic advantage.
