Employee Wage Deduction During the Covid-19 Pandemic Outbreak

Overview

The Covid-19 Pandemic that is currently occuring has created an impact on the sustainability of the economic activities in Indonesia. In response to the ongoing situation, the government of the Republic Indonesia has conducted several measures in dealing with human resources. One such action is to legislate the social restriction including limitating the business operational activities. The Health Minister’s Decree on the Large Scale Social Restrictions (“PSBB”) provides guidelines on the restrictions of society movement.

According to the PSBB guideline, there are several sectors of business that are exempted from implementing the PSBB. The rest of the business sectors that are not regulated in the PBSS guideline must implement work from home measures. However, there are some business sectors that are not capable of implementing the work from home policy, and these companies are forced to temporarily close their business activities.

The implementation of the PSBB had led to a decrease in consumer and business spending which would ultimately result in the loss of income and profit for businesses. Companies must take suitable action to protect their business activities during this Pandemic and while abiding to the PSBB guidelines. One of the actions taken by the companies is by deduction of the Employee Wage.

Based on the prevailing laws and regulation in Indonesia, does the Employee Wage Deduction during the Pandemic have a legal basis?

No Work No Pay

According to Law No. 13 of 2003 concerning Manpower (“Law No. 13/2003”), Indonesia adopts the “no work no pay” principle. Law No. 13/2003 states that the Employee will be paid according to the Work Agreement between the Company and the Employee. However, Law No. 13/2003 does not provide regulation on employee wage deduction.

Employee Wage Deduction

The implementation of the Employee Wage Deduction can be found in the Ministry of Manpower and Transmigration of the Republic of Indonesia Letter No. SE-907/MEN/PHI-PPHI/X/2004 (“MoM Letter No. 907/2004”) dated 28 October 2004 on Prevention of Termination of Mass Employment (“Pencegahan Pemutusan Hubungan Kerja Massal”).

In general, the MoM Letter No. 907/2004 regulates that if a company is planning to terminate their Employee due to a difficult situation, the Company should consider several preventive measures prior to terminating the Employee. One of the precautionary measures is the wage deduction.

MoM Letter No. 907/2004 regulates:

“But, if in the event the company experiencing a difficult situation that could impact the employment, then the termination must be the last resort after the following measures had been taken:

  1. Reducing wages and facilities for the top-level management, for example, Manager positions and Director positions;
  2. Reducing shifts;
  3. Limiting/eliminating overtime work;
  4. Reducing working hours;
  5. Reducing working days;
  6. Furlough the employee for a period of time;
  7. Not extending the employment agreement for the employees whose agreements have expired;
  8. Providing early retirement for the employees that have fulfilled the requirements

All the preventive measure as mentioned above needs to be discussed first with the labor union, or the representative of the employees in the event that the company does not have a labor union in order to reach a bipartite agreement so that the employee termination can be prevented”

Further, in 2015, the government of the Republic of Indonesia issued the Government Regulation No. 78 of 2015 on Wages (“GR No. 78/2015”). GR No. 78/2015 that specifically regulates Employee wage, including wage deductions. Article 57, paragraph 1 of the GR No. 78/2015 stipulates that:

“Wage deduction by Employer for:
a. Fines;
b. Indemnity; and/or
c. Prepaid wage,
is done in accordance with Work Agreement, Company Regulation, or Collective Bargaining Agreement.”

According to GR No. 78/2015, the Company may proceed with wage deduction measures for fine, indemnity and prepaid wage accordance with the Employement Agreement, Company Regulation or Collective Bargaining Agreement. However, employee wage deduction due to conditions such as the Covid-19 pandemic outbreak was not regulated as one of the requirements for wage deduction as stipulated in GR No. 78/2015.

The Covid-19 pandemic may be considered as a “difficult situation” as regulated in MoM Letter No. 907/2004. A Company may proceed with the wage deduction as a preventive measure due to the difficult condition caused by the Covid-19 pandemic. However, after various political considerations, the Ministry of Manpower of the Republic of Indonesia Letter No. M/3/HK.04/III/2020 on Worker/Labor Protection and Business Continuity for the Prevention and Control of Covid-19 is issued in March 2020 (“MoM Letter No. M/3/2020”)

One of the critical points regulated in the MoM Letter No. M/3/2020 is that companies could take measures of action by changing the amount and the method of payment of the Employee wage. However, the Company decision (i.e. change of the amount and the method of payment of the wage) must be carried out based on an agreement between the Company and the Employee.

Based on the above, the Company could change the amount of an employee wage by deduction of the employee wage. However, this action must be based upon approval from the employee.

Possible Dispute

Both the MoM Letter No. 907/2004 and the MoM Letter No. M/3/2020 stipulate that the reduction of employee wages could be taken by the Company as long as that action is based upon an agreement between the Company and the Employee.

However, these regulations could cause a dispute between the Company and the Employee in terms of:

  • What if the agreement regarding the Employee wage deduction between the Company and the Employee could not be reached?
  • What if the company cuts the employee wage unilaterally?

Conclusion

The employee wage deduction during the pandemic has a legal basis as long as there is an agreement between the company and the employee.

If the company and the employee do not reach an agreement regarding the deduction of employee wage and/or the company cuts the employee wage unilaterally, these conditions may lead to industrial relation disputes, namely disputes over rights.

Settlement procedures for disputes over rights are regulated in Law No. 2 of 2004 on Industrial Relation Dispute Settlement (“Law No. 2/2004”). Both the Company and the Employee can take legal measures under Law No. 2 of 2004.

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