Legal Insights

Clearing the Confusion: Supreme Court Resolves Questions Regarding Severance Pay for Employees Made Directors 

Indonesian labor law is known to be tricky to navigate, especially when it comes to the obligation to hand out severance pay when parting ways with an employee. A specific issue in this regard, which is highly relevant for everyone operating a company in Indonesia, has recently been clarified by the country’s highest court. The question of whether employees who become directors of a company are entitled to severance pay has been addressed in the Circular of the Supreme Court 1/2022. 

This circular, which came into effect on December 15, 2022, provides guidelines for the implementation of duties for the courts. It states that if an employee is appointed as a director through a Shareholders Meeting, their employment relationship legally ends upon assuming the new position. The employee is then entitled to receive severance pay in accordance with the applicable Indonesian laws. The calculation of the severance pay is based on the worker's length of service and takes into account the last wage received prior to becoming a director. 

The ulterior motive here seems to be that the law distinguishes between employees based on an employment agreement, and directors whose legal relationship with a company is based on the articles of association and the resolution of the Shareholders, sometimes complemented by a services agreement. The Shareholders can dismiss directors at any given time, putting them into relative uncertainty. 

However, the Circular still requires some refinement regarding the amount of severance pay. Generally, the concrete amount of severance pay depends on the grounds for termination. 

A termination of employment due to an employee becoming a director is not regulated yet, which raises the question of how to calculate the severance pay. It is to be assumed that the factor to be applied tends to be relatively high and, in particular, that compensation for lost health insurance and other benefits must be taken into account, which must be covered by a director himself in contrast to a salaried employee.