Photo: Pexels
Ask any Indonesian labour lawyer about the most common dispute they handle and they will probably say unpaid severance (pesangon). A factory closes or a company declares losses, workers are dismissed, and the severance owed to them under the law never arrives. Those workers then wait for years in industrial relations courts, competing with banks and tax authorities for whatever assets are left.
The new labour protection law aims to change this, and the details released this week deserve attention.
What the law requires
Law No. 27 of 2026 on Labour Protection (UU Pelindungan Ketenagakerjaan) requires employers to set aside a severance reserve fund (dana cadangan pesangon, DCP). Under Article 253, the fund guarantees payment to workers who are dismissed for reasons other than retirement, particularly those not enrolled in a pension scheme.
The key provision is Article 253(3). The money will not stay on company books. It must be paid into a single institution designated by the government. Speaking at a briefing on November 13, Indah Anggoro Putri, the Manpower Ministry’s director general for industrial relations and social security, said company pension funds (Dapen) and financial-institution pension funds (DPLK) will not be allowed to manage it, despite lobbying from employers. “The law says the manager is a government institution,” she said.
Companies have a one-year transition period. From October 2027, all covered employers must transfer their severance reserves. Micro and small businesses are exempt under Article 253(4). Medium and large firms that fail to comply face administrative sanctions that increase step by step, from written warnings to suspension of operations and finally revocation of business licences. The detailed rules, a government regulation (PP) and a ministerial regulation, have not yet been issued.
Why I think this is broadly right
The basic idea is sound. A severance promise is only as good as the cash behind it. Setting money aside in advance, outside the company’s control, protects workers at exactly the moment a business fails, which is when they need it most. Many countries use similar schemes.
It also helps honest employers. At present, a company that pays its severance properly competes against one that plans to disappear. A single, compulsory fund makes the rules the same for everyone.
Three things to watch
First, who runs the fund? The law says “a government institution”, but none has yet been named. Indonesians remember the Asabri and Jiwasraya scandals, in which state-linked insurers lost trillions of rupiah of members’ money through bad investments and fraud. A pool of severance money from every medium and large company in the country will be enormous. It needs independent governance, published accounts and strict investment rules from the start.
Second, how much must be paid in? If the contribution rate is set too high, labour-intensive industries such as textiles and footwear, which are already cutting jobs, will cut more. Over 72,000 workers have been laid off so far this year. Set it too low and the fund will not cover actual claims.
Third, what happens to money already held by company pension funds for this purpose? Moving it to the new institution must not become a new opportunity for losses or delays.
The government has set itself a hard but worthwhile goal. Its success will depend on the regulations that have not yet been written.
Sources: Liputan6; Liputan6 (sanctions); Bisnis.com.
