Employment Contracts in Indonesia: PKWT, PKWTT & Outsourcing

Employment contracts in Indonesia generally fall into two categories: PKWT for fixed-term employment and PKWTT for indefinite or permanent employment. Outsourcing is different: it is an arrangement where certain supporting work is assigned to an outsourcing company, which then employs its workers under either PKWT or PKWTT.

Hiring employees in Indonesia requires more than simply agreeing on a salary and job description. Employers must determine the correct employment relationship, prepare the appropriate agreement, comply with mandatory employee protections, and understand whether the work can legally be performed under a fixed-term, permanent, or outsourcing arrangement.

This distinction is particularly important for foreign-owned companies, including PT PMA companies, because incorrectly classifying employees can create employment disputes, compensation liabilities, and regulatory compliance issues.

Indonesia’s employment framework is primarily governed by the Manpower Law as amended by the Job Creation framework, Government Regulation No. 35 of 2021 (PP 35/2021), relevant Constitutional Court decisions, and implementing regulations.

For outsourcing arrangements, employers must also consider Minister of Manpower Regulation No. 7 of 2026 on Outsourcing Work (Permenaker 7/2026), which introduced more specific restrictions on the types of work that may be outsourced.

What Is an Employment Contract in Indonesia?

An employment contract, or Perjanjian Kerja, is an agreement between an employee and an employer that establishes the terms of employment together with the rights and obligations of both parties.

An employment relationship generally contains three fundamental elements:

• work performed by the employee;
• wages paid by the employer; and
• orders or instructions from the employer.

Under Indonesian employment law, employment relationships are generally structured through either:

1. Perjanjian Kerja Waktu Tertentu (PKWT) — Fixed-Term Employment Agreement; or
2. Perjanjian Kerja Waktu Tidak Tertentu (PKWTT) — Indefinite-Term or Permanent Employment Agreement.

Outsourcing should not be treated as a third type of employment contract in the same sense.

Instead, outsourcing describes a business arrangement between a company requiring certain supporting services and an outsourcing company. The workers employed by the outsourcing company may themselves be employed under PKWT or PKWTT.

Understanding this distinction is essential.

PKWT vs PKWTT: What Is the Difference?

The fundamental difference between PKWT and PKWTT is whether the employment relationship is limited by time or is indefinite.

PKWT	PKWTT
Fixed-term employment	Indefinite/permanent employment
Used for qualifying temporary or specified work	Used for ongoing employment
Must be made in writing	May be written; specific documentation rules apply
Cannot contain probation	Probation may be used subject to legal requirements
Ends according to the agreed term or qualifying work completion	Continues until legally terminated
Employee generally entitled to PKWT compensation	Termination rights follow PKWTT termination rules

The correct contract should be selected based on the nature of the work rather than merely the employer’s preference.

What Is PKWT in Indonesia?

PKWT (Perjanjian Kerja Waktu Tertentu) is a fixed-term employment agreement used for employment that qualifies as temporary or is connected to work permitted to be performed under a fixed-term arrangement.

PKWT can generally be based on:

• a specified period of time; or
• completion of a particular job.

Examples may include certain temporary projects, seasonal activities, work expected to be completed within a defined period, or other qualifying activities permitted under employment regulations.

An employer should not automatically use PKWT simply because it prefers a flexible workforce.

The underlying nature of the job must support the use of a fixed-term employment arrangement.

How Long Can a PKWT Last?

The maximum duration of a PKWT is an important compliance issue.

Following Constitutional Court Decision No. 168/PUU-XXI/2023, a fixed-term employment relationship based on a specified period cannot exceed five years, including any extension.

Therefore, employers should not assume that repeatedly extending a fixed-term agreement allows an employee to remain under PKWT indefinitely.

The contract period and any extensions must be reviewed as one overall employment period for compliance purposes.

Where a PKWT is based on completion of a particular job, the agreement should also clearly describe the expected work and the mechanism for determining its completion.

Can a PKWT Include a Probation Period?

No.

A probation period cannot legally be imposed on an employee employed under PKWT.

If an employer includes a probation clause in a fixed-term agreement, the probation provision is invalid.

This represents one of the most significant differences between PKWT and PKWTT.

For employers who want to assess an employee before confirming permanent employment, simply inserting a three-month probation into a PKWT is not the correct approach.

Does a PKWT Have to Be in Writing?

Yes.

A PKWT must be prepared in writing using the Indonesian language and Latin alphabet.

For companies employing foreign management or using international employment templates, a bilingual Indonesian-English agreement may be practical.

However, employers should ensure that the Indonesian-language version complies with mandatory Indonesian employment law.

A foreign company’s global employment contract should not simply be copied and used in Indonesia without localizing mandatory clauses.

What Should an Indonesian Employment Contract Include?

An employment contract should clearly identify the employment relationship and its essential terms.

Depending on the arrangement, important provisions generally include:

• employer name, address, and business activity;
• employee identity and address;
• position or type of work;
• workplace;
• salary and method of payment;
• rights and obligations of the employer and employee;
• commencement date;
• duration of employment where applicable;
• working hours;
• leave and rest entitlements;
• termination provisions;
• signatures of the parties; and
• other terms required by applicable employment regulations.

Employers may also include additional provisions relating to:

• confidentiality;
• company property;
• intellectual property;
• conflicts of interest;
• workplace policies;
• personal data;
• disciplinary procedures; and
• post-employment obligations,

provided that such provisions do not reduce mandatory employee rights.

What Is PKWTT in Indonesia?

PKWTT (Perjanjian Kerja Waktu Tidak Tertentu) is an indefinite-term employment relationship commonly referred to as permanent employment.

Unlike PKWT, PKWTT does not have a predetermined expiry date.

It is generally appropriate for work that is ongoing or forms a continuing part of the company’s operations.

The employment relationship continues until it ends in accordance with applicable employment law, whether through resignation, retirement, termination, mutual agreement, or another legally recognized event.

Can a PKWTT Employee Have Probation?

Yes.

A PKWTT arrangement may include a probationary period, subject to Indonesian employment law.

The probation period may generally be imposed for a maximum of three months.

During probation, an employer must still comply with applicable minimum wage requirements and other mandatory employment protections.

Employers should therefore clearly distinguish probation under PKWTT from fixed-term employment under PKWT.

They are legally different concepts.

What Is Outsourcing in Indonesia?

Outsourcing, known as Alih Daya in Indonesian employment law, is an arrangement where a company assigns certain work to an outsourcing company under a written outsourcing agreement.

The outsourcing company then employs workers to perform the outsourced services.

This creates two separate legal relationships:

Commercial relationship:

Company using the outsourced service
→ Outsourcing Company

Employment relationship:

Outsourcing Company
→ Outsourced Employee

This structure explains one of the most common misunderstandings about outsourcing.

An outsourced worker who physically works at another company’s premises is not automatically an employee of the company using the outsourcing service.

The employment relationship is generally with the outsourcing company.

New Outsourcing Rules Under Permenaker No. 7 of 2026

Indonesia introduced an important regulatory development on 30 April 2026 through Minister of Manpower Regulation No. 7 of 2026 concerning Outsourcing Work.

The regulation establishes clearer limits on which work may be outsourced.

Under the regulation, outsourcing is intended for specified supporting activities, including:

1. cleaning services;
2. food and beverage provision;
3. security services;
4. provision of drivers and employee transportation;
5. operational support services; and
6. supporting work in mining, oil, gas, and electricity sectors.

This development is particularly significant because companies should no longer assume that virtually any position can automatically be transferred to an outsourcing arrangement.

Before outsourcing a role, the company should examine whether the work falls within the permitted supporting-work categories.

Examples of Outsourcing Jobs in Indonesia

Common examples of activities that may fall within the permitted outsourcing framework include:

Cleaning Services

Companies may engage an outsourcing provider to supply cleaning personnel for offices, factories, accommodation facilities, commercial premises, or other workplaces.

Food and Beverage Services

Certain catering and food or beverage support activities can be provided through outsourcing companies.

Security Services

Security personnel are a common example of outsourced workers.

However, security activities may also be subject to additional licensing and sector-specific requirements.

Drivers and Employee Transportation

Companies may outsource drivers or employee transportation services rather than employing the personnel directly.

Operational Support Services

Certain operational support functions can also fall within the outsourcing framework.

However, businesses should not interpret the term “operational support services” as an unlimited authorization to outsource every position.

The actual characteristics of the work should be reviewed against the applicable regulation.

Supporting Activities in Specific Industries

Special supporting activities in the mining, oil, gas, and electricity industries may also qualify for outsourcing.

PKWT and Outsourcing Are Not the Same

One of the most common employment-law misconceptions is that PKWT means outsourced employment.

It does not.

PKWT describes the duration and form of the employment relationship.

Outsourcing describes the business structure through which work is supplied to another company.

An outsourcing company may employ a worker using:

• PKWT; or
• PKWTT,

depending on the nature and circumstances of the employment.

Therefore:

PKWT ≠ Outsourcing

A directly employed worker can be under PKWT without being outsourced.

Likewise, an outsourced worker can potentially be employed under PKWTT by the outsourcing company.

Who Is the Employer of an Outsourced Employee?

The outsourcing company is generally the employer of the outsourced worker.

This means the employment agreement is entered into between the worker and the outsourcing company.

The outsourcing company is responsible for employment protections and employee rights in accordance with applicable regulations.

These rights can include:

• wages;
• overtime pay;
• working hours and rest periods;
• annual leave;
• occupational health and safety;
• social security;
• religious holiday allowance (THR); and
• applicable rights when employment ends.

The company receiving the outsourcing services nevertheless has responsibilities within the outsourcing arrangement and should ensure that the outsourcing provider complies with the required employee protections.

Who Pays the Salary of an Outsourced Employee?

Because the employment relationship generally exists between the outsourcing company and the worker, the outsourcing company is generally responsible for paying the employee’s salary.

The client company normally pays the outsourcing company according to the commercial outsourcing agreement.

A simplified arrangement looks like this:

Client Company → Service Fee → Outsourcing Company → Salary → Employee

The service fee and employee salary are therefore not necessarily the same amount.

The outsourcing company’s commercial fee may include employee costs, management fees, statutory benefits, insurance, administrative costs, and other agreed components.

What Must an Outsourcing Agreement Include?

Under Permenaker 7/2026, outsourcing must be based on a written Outsourcing Agreement between the company assigning the work and the outsourcing company.

The agreement should at least address matters including:

• the work being outsourced;
• duration of the outsourcing agreement;
• location where the work will be performed;
• number of outsourced workers;
• employee protections and rights; and
• rights and obligations of both companies.

Employee protections addressed in the agreement include matters such as wages, overtime, working and rest hours, annual leave, occupational health and safety, social security, religious holiday allowance, and rights relating to the end of employment.

Accordingly, companies should not treat an outsourcing contract merely as a general service agreement.

The employment-protection components form an important part of the regulatory framework.

How Long Can an Outsourcing Contract Last?

There are two different contracts that need to be distinguished.

Outsourcing Agreement Between Companies

The outsourcing agreement between the client company and outsourcing provider must specify its duration.

There is not one universal maximum duration that applies to every commercial outsourcing agreement simply because it is an outsourcing arrangement.

Employment Agreement With the Outsourced Worker

The worker’s employment duration depends on whether the outsourcing company employs the worker under PKWT or PKWTT.

If PKWT is used, the applicable PKWT duration restrictions must be followed.

Following the Constitutional Court ruling, a time-based PKWT may not exceed five years including extensions.

Therefore, asking “How long can an outsourcing employee work?” cannot be answered solely by looking at the duration of the commercial outsourcing contract.

The employee’s own employment agreement must also be examined.

What Happens When the Outsourcing Provider Changes?

Outsourcing arrangements can create particular employment-protection issues when a client company changes service providers.

Where employees are engaged under qualifying fixed-term arrangements and the outsourced work continues through another provider, the applicable rules regarding continuity and transfer of employment protection must be considered.

The objective is to prevent workers from automatically losing employment protections merely because the client company changes outsourcing providers while substantially the same outsourced work continues.

Companies planning to replace an outsourcing vendor should therefore review employee-transition obligations before terminating the existing commercial arrangement.

Outsourcing vs Direct Employment

Businesses should determine whether they actually need an outsourced workforce or whether direct employment is more appropriate.

Direct Employment	Outsourcing
Employee works directly for the company	Worker is employed by outsourcing provider
Company signs employment agreement	Outsourcing company signs employment agreement
Company pays employee	Outsourcing provider generally pays employee
Can use PKWT or PKWTT where legally appropriate	Outsourcing company may use PKWT or PKWTT
Company manages employment compliance directly	Outsourcing provider has primary employment responsibilities
Suitable for direct workforce	Limited to qualifying outsourcing activities

The choice should depend on the nature of the work and business structure rather than merely an attempt to reduce employment responsibilities.

Outsourcing vs Insourcing: What Is the Difference?

Outsourcing means engaging an external provider to perform certain functions.

Insourcing means performing those functions internally using the company’s own employees and resources.

For example:

A hotel that contracts a licensed external company to provide cleaning personnel is using an outsourcing model.

A hotel that directly hires and manages its own housekeeping employees is using an insourcing or direct-employment model.

Insourcing gives the company greater direct control over employees but also places employment administration directly with the company.

Outsourcing transfers the employment relationship to the service provider, but the arrangement must still comply with Indonesian outsourcing regulations.

Employee vs Employer: What Is the Difference?

An employee (pekerja/buruh) is the individual who performs work and receives wages or another form of remuneration.

An employer is the party employing the employee and responsible for the employment relationship.

In direct employment:

Company = Employer
Worker = Employee

In outsourcing:

Outsourcing Company = Employer
Outsourced Worker = Employee

The client company receives the worker’s services under the outsourcing arrangement but is generally not the worker’s direct employer.

Understanding which company is legally the employer is crucial when determining responsibility for wages, employment agreements, social security, leave, termination, and other employment rights.

Employee Rights Apply Beyond the Written Contract

An employment agreement cannot be considered in isolation.

Indonesian employees may have statutory rights arising directly from employment regulations even if the agreement does not expressly mention every entitlement.

Depending on the employment relationship, these can include:

• minimum wage protections;
• overtime pay;
• working-hour limitations;
• weekly rest;
• annual leave;
• religious holiday allowance (THR);
• BPJS social security;
• occupational health and safety protections;
• maternity and other statutory leave;
• termination-related rights; and
• fixed-term compensation where applicable.

An employer generally cannot remove mandatory statutory rights simply by inserting a different provision into an employment contract.

For this reason, employment templates should be reviewed against current Indonesian employment law rather than treated purely as commercial agreements.

PKWT Compensation When the Contract Ends

A PKWT employee is generally entitled to compensation money (uang kompensasi) upon completion of the fixed-term employment period, subject to applicable requirements.

For an employee who has worked continuously for 12 months, compensation generally corresponds to one month’s wage.

For employment lasting less or more than 12 months, compensation is calculated proportionally based on the employee’s period of service.

The compensation obligation is another reason employers should not view PKWT merely as a way to employ workers temporarily without end-of-contract liabilities.

Common Employment Contract Mistakes in Indonesia

Businesses entering Indonesia frequently encounter problems because international HR practices are applied without adjusting them to Indonesian law.

Common mistakes include:

• using PKWT for work that should be permanent;
• including probation in a PKWT;
• extending PKWT beyond the legally permitted period;
• using an English-only fixed-term agreement;
• failing to provide PKWT compensation;
• treating outsourced workers as if outsourcing and PKWT were the same concept;
• outsourcing work that does not fall within permitted outsourcing activities;
• assuming an outsourcing provider eliminates all responsibilities of the client company;
• failing to provide statutory employment rights because they are absent from the contract; and
• using a foreign employment template without reviewing Indonesian mandatory provisions.

For businesses with several employees, correcting the employment structure after years of operation can be significantly more difficult than establishing the correct structure from the beginning.

Which Employment Contract Should a Company Use?

The appropriate arrangement depends primarily on the actual nature of the work.

Consider PKWT when:

The work legitimately qualifies as fixed-term or temporary under Indonesian employment law.

Consider PKWTT when:

The employee performs ongoing work that forms a continuing part of the company’s organization.

Consider outsourcing when:

The company wants to engage an external provider for a qualifying supporting activity permitted under the current outsourcing regulations.

The correct classification should be determined before hiring the employee, not after an employment dispute develops.

For foreign investors and PT PMA companies, employment-contract planning should therefore form part of the company’s broader HR and legal compliance framework.