Overview

To be remunerated in accordance with the prevailing minimum wage is one of the basic rights of every worker in Indonesia, as set out under Law No. 13 of 2003 on Employment. With this goal in mind, regional governments are required to set the applicable minimum wages for every province, regency and city in the country. Moreover, these minimum wages should be reviewed on an annual basis. The Indonesian Central Bureau of Statistics (Badan Pusat Statistik – “BPS”) recorded that in 1997, the average national minimum wage was set at IDR 135,000 per month, while in 2016, that figure had greatly increased to IDR 1,997,819 per month.[1] Following on from this trend, the government has prepared the formulation and calculation of the minimum wages for 2019, as set out under Regulation of the Minister of Manpower (“Minister”) No. 15 of 2018 on Minimum Wages (“Regulation 15/2018”),[2] which is an implementing regulation of Regulation of the Government No. 78 of 2015 on Wages (“Government Regulation 78/2015”).[3] As a result of the importance of the determination of UMP for both employees and employers, this edition of Indonesian Law Digest (“ILD”) will discuss in detail matters relating to the minimum wage, specifically the following issues:

1. Types of Minimum Wage
2. Minimum-Wage Calculations

1. Calculations of UMP/UMK
2. Ambiguity in KHL Formulation
3. Calculation of UMSP/UMSK

3.  Implementation of Minimum Wages

1. Minimum-Wage Implementation Obligation
2. Postponements of Minimum-Wage Payments

4. Case Analyses

 

1. Types of Minimum Wage

There are three types of minimum wage, specifically:[4]

1. Provincial Minimum Wages (Upah Minimum Provinsi – “UMP”);
2. Regency/City Minimum Wages (Upah Minimum Kabupaten/Kota – “UMK”); and
3. Provincial and Regency/City Sectoral Minimum Wages (“Upah Minimum Sektoral – “UMS”), which are further subdivided into UMS for provincial areas (“UMSP”) and for regency/city areas (“UMSK”).[5]

 

Every year, Indonesia’s governors are required to determine the prevailing UMP for their respective regions. Furthermore, governors may also determine UMK after receiving a recommendation from regents/mayors within their respective provinces. UMK prevail over UMP and thus must not be lower than the relevant UMP. However, in the absence of any UMK, the UMP will prevail. Finally, the regional government may also set UMSP or UMSK, which will only apply to certain types of occupation. UMSP or UMSK will then prevail over UMK or UMP.

Set out in the table below is the calculation method which is to be employed for each type of minimum wage, as well as elaborations on the applicability of different minimum wages.

	Calculations
UMP[6]	UMP must be calculated by the relevant provincial council through the use of a minimum-wage formula and must be delivered to the governor via the relevant Provincial Manpower Unit (“Unit”)
UMK[7]	UMK must be calculated by the relevant regency/city council through the use of the minimum-wage formula and must then be delivered to the relevant regent/mayor to be later proposed to the governor via the Unit; The value of the UMK must be greater than the relevant UMP.
UMS[8]	The determination of UMSP/UMSK involves a first stage of the selection of the leading sector within the relevant province, city or regency by the local wage council; The incorporation of the leading sector is implemented through a study of the following variables: Business category, which is in accordance with the five digits of KBLI; Company with a large-scale business operation; Additional value growth; and Worker productivity. Based on the results of this study, the relevant provincial wage council will determine whether or not a leading sector can be said to exist. If not, then UMSP/UMSK cannot be determined. If the wage council manages to determine a leading sector, then both a business association and a labor union operating in said sector will negotiate the applicable amount of UMSP/UMSK.

 

Note that in the event that any negotiations which are undertaken between a business association and a labor union do not reach an agreement, then one of the following outcomes will apply:^[9]

1. For regions which did not determine any UMSP/UMSK for the previous year, the UMP and UMK for the current year will apply;
2. For regions which determined UMSP/UMSP for the previous year:

1. The UMSP for the previous year will apply if its value is higher than the value of the UMP for the current year; or
2. The UMP for the current year will apply if the value of the UMSP for the previous year is lower than the value of the UMP for the current year.

 

It therefore seems clear that this particular provision puts labor/labor unions in an unfavorable position, since any failure of negotiations may potentially hinder their chances of receiving better wages during the upcoming year.      

 

2. Minimum-Wage Calculations

 

1. Calculations of UMP/UMK

When determining any UMP or UMK, the following variables must be taken into account:[10]

1. Decent living standards (Kebutuhan Hidup Layak – “KHL”), which refers to the minimum monthly standard of living enjoyed by workers; and
2. Economic productivity and growth.

 

The KHL in point (1) is calculated through the use of the following formula (“New KHL Formula”):[11]

New KHL Formula = UMt + (UMt x Inflationt) UMt : Prevailing minimum wage for the current year Inflationt : Year-on-year inflation rate, as set by the BPS.

 

As such, the overall formula for the calculation of minimum wages, as set out under Regulation 15/2018, is as follows:[12]

UMn = KHL + (UMt x % ΔPDBt)

UMn : New minimum wage for the following year. Δ PDBt : Latest growth figure for gross domestic product (Produk Domestik Bruto/PDB”) figure, as provided by BPS.

 

Prior to the issuance of Regulation 15/2018, UMP and UMK were specifically addressed under Regulation of the Minister of Manpower No. PER-01/MEN/1999 on Minimum Wages, as amended by Regulation of the Minister No. KEP-226/MEN/2000 (“Regulation 1/1999”); and Regulation of the Minister of Manpower and Transmigration No. 7 of 2013 on Minimum Wages (“Regulation 7/2013”),^[13] (Collectively referred to as “Previous Regulations”). Under the Previous Regulations, minimum wages were calculated as follows:

Regulation	UMP Calculation
Regulation 1/1999	UMP, as addressed under Regulation 1/1999, is determined based upon the following factors:[14] Minimum living needs; Consumer price index; Ability, development and sustainability of companies; and so forth.
Regulation 7/2013	The determination of UMP is based on the KHL and economic productivity and growth.[15] Determination of any annual adjustment to UMP is formulated by the government based on the Provincial Wages Council’s KHL review.[16] The applicable KHL for Regulation 7/2013 is addressed under Regulation of the Minister No. 13 of 2012 on Components and the Implementation of Achievement Stages for Decent Living Standards (“Regulation 13/2012”), which establishes its own KHL value.[17]

 

2. Ambiguity in KHL Formulation

While Regulation 15/2018 sets out its own method of KHL calculation, it is important to note that another KHL calculation formula exists, which is addressed under Regulation of the Minister of Manpower No. 21 of 2016 on Decent Living Standards (“Regulation 21/2016”)[18] and which utilizes the following formula (“KHL Formula II”): [19]

KHL Formula II = Food and Beverages + Clothing + Housing + Education + Health + Transportation + Recreation and Savings

 

In contrast with the New KHL Formula, KHL Formula II calculates the KHL value by totaling the average of seven living needs components, based on data provided by the BPS. Therefore, KHL calculations are currently in an ambiguous state, since there are two prevailing and contradicting calculation methods.   

 

3. Calculation of UMSP/UMSK

As mentioned above, the determination of UMSP/UMSK is to be undertaken by the relevant wage council, which should first select the leading sector within a given province, city or regency. This selection should take the following aspects into consideration:

1. Business category which is in accordance with the five digits of KBLI;
2. Company with a large-scale business operation;
3. Additional value growth; and
4. Worker productivity.

 

Based on the results of this study, the provincial wages council will determine whether or not a leading sector exists. If not, then UMSP/UMSK cannot be determined. However, if the relevant wage council determines a leading sector, then a business association and a labor union operating within said sector will negotiate the applicable amount of UMSP/UMSK.

In the event that any process of negotiation as undertaken between a business association and a labor union does not reach an agreement, then one of the following outcomes will apply:^[20]

Event	UMSP/UMSK Amount
For any region which did not determine the UMSP/UMSK for the previous year	The UMSP/UMSK amount will be equal to the current UMP/UMK
For any region which determined the UMSP/UMSP for the previous year	The UMSP/UMSK for the previous year will apply if the value is higher than the UMP/UMK value for the current year; or The amount of UMSP/UMSK will be equal to the current UMP amount if the UMSP/UMSK amount for the previous year is lower than the current UMP/UMK amount.

 

A number of labor unions have argued that the current calculation method for UMSP/UMSK, as addressed under Regulation 15/2018, is fundamentally unjust. This is due to the fact that labor/labor unions have been placed in an unfavorable position, as any failure of negotiations could potentially hinder their chances of receiving better wages during the following year.

 

3. Implementation of Minimum Wages

 

1. Minimum-Wage Implementation Obligation

The main principle as regards the implementation of minimum wages under the Employment Law is that employers are prohibited from paying their employees wages which are lower than the UMP, UMK or UMS.[21] Rather, a worker may only be remunerated at a value which is equal to the UMP, UMK or UMS, if said worker has been working for a given company for a period of less than a year. Moreover, workers who have been employed by a given company for more than a year must be paid at a rate which is above the UMP, UMK or UMS:[22]

 

2. Postponements of Minimum-Wage Payments

The obligation to pay workers in accordance with the minimum wage may be postponed if an employer is financially unable to meet this obligation. [23] If this is the case, then employers are required to adhere to the procedure set out under Decree of the Minister No. KEP-231/MEN/2003 on Procedures for Postponing the Implementation of Minimum Wages (“Decree 231/2003”). The overall postponement process is described in the flowchart below: