Hire Contractors in Indonesia

Of the 280 million population in Indonesia, currently, 70.72% fall into the productive age. 

This demographic condition bears several advantages for companies that wish to hire contractors in Indonesia. A young workforce tends to adapt to new technology and learn skills faster than older ones. 

In addition, the government of Indonesia has also taken various measures to improve the investment climate. 

One notable example is the new Investment Law No. 25/2007, which ensures equal treatment to all investors, irrespective of their origin countries.

As a result, more businesses are looking for ways to expand their operations and hire in Indonesia.

While some utilize the services of an employer of record (EOR) for hiring contractors, others believe in the age-old traditional method of hiring directly. 

In this article, you will learn everything about the contractor hiring process in Indonesia, its associated challenges, and their potential solutions.

How to Hire Contractors in Indonesia

Hiring contractors in Indonesia can be done in two main ways. 

1. Direct Hiring

This is one of Indonesia's most traditional approaches to hiring contractors and is usually recommended for short-term or scale projects. It includes the following steps.

• Determine the business needs and assess project requirements.
• Evaluate the resource gap and source candidates accordingly via job platforms.
• Create a contract that specifies the terms and conditions of the business partnership.
• Determine the payment structure for your contractors in Indonesia, including rate, method, and any other financial arrangements.
• Ensure compliance with all the applicable laws and professional standards. 

2. Hire Contractors Via Contractor Management Software/AOR

An agency-of-record (AOR) is a service provider that assists you in hiring international contractors while ensuring compliance with labor standards and regulations. 

This includes guaranteed timely payments, handling all the paperwork, and managing worker classification, among other things.  

Hiring Contractors Through Skuad AOR

• Skuad’s AOR solutions enable you to hire independent contractors from all over the world quickly and hassle-free. 
• With expertise in over 160+ countries, Skuad is an all-inclusive platform with robust capabilities. With the help of Skuad’s in-house legal team, you can always guarantee that your contractor agreements comply with Indonesia's labor laws.
• Skuad runs a multi-currency payroll, meaning you no longer have to worry about currency exchange rates or international payments.
• Additionally, Skuad enables you to safeguard your company’s IP under Indonesian laws with the help of its built-in IP protection.

How To Pay Contractors in Indonesia

One of the most traditional approaches to paying an independent contractor in Indonesia is via international bank transfer, international money order, or online money transfer companies. 

However, the downside is that all these options usually come with slow processing time or expensive exchange rate fees. Additionally, you must be aware of Indonesia's tax laws to avoid potential legal disputes. 

Most companies opt for a cost-effective alternative - partnering with contractor management software/AOR such as Skuad to avoid such headaches. 

Skuad’s unified platform enables you to pay independent contractors in Indonesia easily. With the help of its services, you can,

• Guarantee accurate payments on time.
• Automate invoicing and 
• Consolidate payroll data for effective decision-making.

Hiring Contractors Directly vs Hiring Contractors via Skuad

Below is a table highlighting the differences between hiring contractors directly and hiring with Skuad AOR.

Cost of Hiring Contractors in Indonesia

The cost of hiring contractors in Indonesia depends on many factors, such as the scope and requirements of your projects, the industry you operate in, or the contractors' experience.

For example, if your project involves tasks requiring specialized skills, contractors are likely to charge you more than general administrative projects. 

Similarly, if you are looking to hire contractors from the construction industry, the average rate is currently set at Rp 81.556 per hour. Meanwhile, the average hourly rate for an individual in the healthcare domain is Rp 91.005.

Challenges of Hiring Contractors in Indonesia

Here is a detailed overview of a few challenges that you are likely to encounter when you decide to hire contractors in Indonesia.

1. Complex Labor Laws of Indonesia

Ensuring compliance with Indonesia's local labor laws is a must for any business hiring contractors from this region. However, these laws can often prove to be extremely challenging since they encompass multiple provisions and regulations that can, at times, be difficult to understand or manage. 

For example, independent contractor agreements in Indonesia are governed by contract law, unlike in an employment relationship. In disputes, all matters are handled by the district courts or through arbitration instead of the Industrial Court. 

Additionally, in the event of termination of the agreement, independent contractors in Indonesia are not legally mandated to receive severance pay. Instead, it shall be determined based on the terms and conditions set in the contract.

Understanding these provisions is crucial to minimizing the risk of misclassification of workers. Failure to achieve the same can result in hefty penalties and potential legal disputes.

2. Understanding Tax Requirements for Contractors in Indonesia

When hiring contractors in Indonesia, you'll face several challenges related to tax compliance. Unlike employees who have taxes deducted via the PAYE system, contractors handle their own tax filings. This means you'll need to ensure each contractor fulfills their tax obligations correctly and on time.

Understanding Indonesia's varied income tax rates, ranging from 5% to 35% based on earnings, adds another layer of complexity. Additionally, while contractors aren't required to join the 'Manpower Social Security Program,' deciding whether to facilitate enrollment impacts compliance and your relationship with contractors.

But these are just a few of the many provisions laid down by the country's tax laws. To ensure a fully compliant process, you must be aware of the different legislations and stay up-to-date with any changes in the rules.

However, the same can prove extremely difficult, especially if you do not have an automated contractor payment system or contractor management software. Unfortunately, both of these usually require a lot of investment in terms of monetary resources and energy.

How to Convert a Contractor into an Employee in Indonesia

Converting a contractor to a full-time employee or switching from Form 1099 to W2 carries immense benefits for an organization, such as greater loyalty and commitment, increased flexibility, reduced risks, and more. Mentioned below is a detailed account of how you can achieve this. 

• Research the employment laws and regulations in Indonesia and maintain compliance with their various guidelines. For example, the maximum probation period for employees in Indonesia is three months.
• Notify the worker through written communication about the transition—draft locally compliant contracts outlining all the responsibilities, benefits, working hours, and other necessary details.
• Collate the required documents, which include the offer letter, signed employee handbook, and other state and federal forms.
• Begin with the onboarding process, and add them to your existing payroll system.

Hire Contractors in Indonesia with Skuad

Skuad is the ultimate global hiring partner, boasting expertise in as many as 160+ countries. It is a unified platform power-packed with fantastic features, all facilitating the contractor hiring process. 

With Skuad, you can always guarantee that your contractor agreements adhere to Indonesian labor laws. Its powerful payroll mechanism allows you to pay your contractors on time and in the correct currency. 

Additionally, Skuad’s team of professionals handles several other important aspects, such as invoicing, expense approvals, reimbursements, and more. 

If you ever decide to transition contractors to employees, Skuad can help. 

It ensures that all the necessary documents, including employment history, are kept intact to guarantee a smooth transition.

‍Get in touch with us today to learn more about Skuad!

FAQs

Q1: What is the difference between contractors and employees in Indonesia?

Ans: One of the significant differences between employees and contractors in Indonesia lies like the working relationship and the level of control exercised by the employer. For example, in an employment relationship, employees are usually required to perform work according to the rules and regulations set by the employer, which include their working hours and environment. Such requirements do not bind an independent contractor in Indonesia and are only answerable to the outcome of the projects.

Q2: What is a fixed-term contract in Indonesia?

Ans: A fixed-term contract is a written agreement registered with the Manpower Office in Indonesia that cannot exceed three years of service.

Q3: What does it mean to hire a contractor?

Ans: Hiring contractors means employing workers with a set fee for a pre-determined period (usually the entire duration of a particular project). Once the project concludes, the contractor is no longer part of the company’s other projects or planning.

Q4:  How does Skuad help hire, pay, and manage independent contractors in Indonesia?

Ans: Skuad is a global hiring solution that oversees every detailed aspect of the hiring process, including contractor onboarding, accurate payments, invoicing management, and reimbursements. It has various features, such as multi-currency payroll, an in-house legal team, and a built-in IP protection system, ensuring a seamless international hiring journey. 

Q5: What type of work authorization is used in Indonesia?

Ans: There are two main types of work visas in Indonesia, namely, ITAS and KITAP.  The former grants employees the opportunity to stay in the country for one year, whereas the latter, also called the permanent stay permit card, is valid for five years.