Indonesia has the region’s most complex termination-pay formula — three components combined: severance (up to 9 months’ wages), long-service award (up to 10 months’ wages) and compensation of rights. The total can reach 19 months’ wages for long-tenured workers. Vietnam has a single simple formula: 0.5–1 month’s wage per year. When downsizing, Indonesia is “pricier” than Vietnam at most tenure marks.
Indonesia: three components under PP 35/2021 Article 40
Government Regulation PP 35/2021, Article 40, provides three payments on termination:
1. Severance pay (Uang Pesangon): by tenure — under 1 year: 1 month’s wage; 1–under 2 years: 2 months; one more month per year, capped at 9 months’ wages (8+ years).
2. Long-service award (UPMK): from 3 years — 3–under 6 years: 2 months; 6–under 9: 3; 9–under 12: 4; 12–under 15: 5; 15–under 18: 6; 18–under 21: 7; 21–under 24: 8; 24+ years: 10 months’ wages.
3. Compensation of rights (UPH): unused annual leave, travel/repatriation costs and other contractual rights — no statutory minimum, as agreed.
The key point: multipliers by termination reason. The above is the standard (multiplier 1: business efficiency, merger and the like). Bankruptcy: 0.5x. Retirement: 1.75x. Misapplying the multiplier is the most common mistake by foreign firms calculating themselves.
Vietnam: one simple formula — 0.5 or 1 month’s wage per year
Article 46 of the Labour Code 2019: severance allowance 0.5 month’s wage/year (12+ months; UI time excluded). Article 47: job-loss allowance 1 month’s wage/year, minimum 2 months’ wages (economic/structural reasons; no UI deduction). Wage base: 6-consecutive-month average.
Against Indonesia (multiplier 1, token 1-month UPH): 5 years’ tenure: Indonesia = 6 (pesangon) + 2 (UPMK) + 1 = 9 months’ wages; Vietnam (Article 47) = 5 months’ wages. 10 years: Indonesia = 9 + 4 + 1 = 14 months; Vietnam = 10 months. 24 years: Indonesia = 9 + 10 + 1 = 20 months; Vietnam = 24 months — Vietnam overtakes at very high tenure (linear, uncapped).
But with ordinary severance (Article 46: 0.5 month/year, minus UI time), Vietnam is cheaper than Indonesia at every mark. Once again, Vietnam’s two schemes are two different “prices” — and economic-reason cuts always use the higher price.
Side by side: three components or one formula?
Computation complexity: Indonesia wins by far — three components, two different tenure scales, reason multipliers, plus contractual UPH. Firms need a dedicated spreadsheet or payroll software; hand-computing for hundreds of workers is almost certainly wrong. Vietnam: one simple multiplication.
Termination procedure: Indonesia requires bipartite negotiation (up to 30 days), written notice, and possible mediation by the Manpower Office (Disnaker) if disputed — no mass unilateral termination skipping procedure. Vietnam: the labour-utilisation plan for structural/technological change (Article 44) must be discussed with the union and notified to the labour authority — also procedural, but simpler.
Tax: Indonesian severance bears final income tax (PPh 21 Final) on its own progressive scale (0% on the first IDR 50 million, 5% on the next 50 million, 15% beyond) — with no personal relief. A hidden cost often missed in budgeting.
Fixed-term workers: Indonesia has a separate compensation scheme for PKWT (fixed-term) contracts — pro-rated by service time. Vietnam: an expiring fixed-term contract uses Article 46 as usual (with 12+ months and non-UI-covered time).
Practical recommendations
First, in Indonesia, never self-compute termination pay with a single formula — use a worksheet following Article 40 of PP 35/2021 with all three components and the reason multiplier. Second, start bipartite negotiation before announcing cuts — skipping it is a procedural violation that can void the whole termination round. Third, budget the PPh 21 Final tax — not a small sum on large packages.
Frequently asked questions
What makes up Indonesia’s termination-pay formula?
Under Article 40 of PP 35/2021: (1) severance pay — by tenure, up to 9 months’ wages (8+ years); (2) long-service award (UPMK) — from 3 years, up to 10 months’ wages (24+ years); (3) compensation of rights (UPH) — unused leave, travel and the like. Maximum about 19 months’ wages plus UPH.
What are Indonesia’s reason-based multipliers?
Standard (1x) for business efficiency, merger and the like; bankruptcy 0.5x; retirement 1.75x. Misapplying the multiplier is foreign firms’ most common mistake.
Which is pricier on downsizing — Indonesia or Vietnam?
At most tenure marks, Indonesia (e.g. 10 years: ~14 months vs Vietnam’s 10 under Article 47). But at very high tenure (24+ years), Vietnam (linear, uncapped) can overtake. For ordinary severance (Article 46), Vietnam is cheaper at every mark.
What special procedure does Indonesian termination require?
Bipartite negotiation (up to 30 days), written notice to the worker, and possible mediation by the Manpower Office (Disnaker) if disputed. No mass unilateral termination skipping procedure.
Is Indonesian severance taxed?
Yes — final income tax (PPh 21 Final) on its own progressive scale (0% on the first IDR 50 million, 5% on the next 50 million, 15% beyond), with no personal relief. Budget it.
For detailed advice on workforce reductions and compliance in Indonesia or Vietnam, companies may contact FLAT Law Firm.
This article has been quality-reviewed by the FLAW AI Legal Council. Content was prepared by the FLAT Law Firm AI Legal Council and has not been reviewed by a human lawyer.