Sometimes, a Company may be required to demote its Employees for a number of reasons, such as non-performance, breach of Company Regulations, and so on. In the event of Employee demotion, how can the Company reduce the Employee’s salary? Learn more on whether the prevailing Manpower Law allows a Company to reduce the salary of a demoted Employee, as well as the mechanism on how to do it.

The current prevailing laws and regulations concerning Manpower, including Law No. 13 of 2013 concerning Manpower (“Manpower Law”) have no specific regulation concerning Demotion. Therefore, pursuant to Manpower Law, demotion can be regulated by the Employer and the Employee in Employment Agreement, Collective Labor Agreement, and/or Company Regulations.

Therefore, it is important for Employers to make sure from the beginning of employment that the Employee understands completely regarding the policy for demotion. The policy can be put within the Employment Agreement or the Company Regulations. It is important to make the terms and conditions as specific and practical as possible, so that the policy can be feasibly executed.

The impact of Demotion, especially in regards to the reduction of Employee salary, must be pursuant to Article 93 of Manpower Law, which stipulates that the Employer has the obligation to draw up the Wage Structure and Scale in the Company which puts to consideration regarding Employee group, position, period of work, education and competence. This regulation implies if there is any demotion, the salary of the Employee will reduce, pursuant to the Wage Structure and Scale in the Company.

It is important to remember that Article 1 number 30 of Manpower Law defines Salary as a right of the Employee determined and stated in the form of a certain amount of money paid by the Employer to the Employee pursuant to the Employment Agreement, or the prevailing laws and regulations, including the allowance for the Employee and its families.
Salary itself consist of 3 (three) components:

  1. Main Salary;
  2. Fixed allowance; and
  3. Temporary allowance.

In reducing the salary, the Company must always be aware of the prevailing Minimum Wage regulation applying at the current moment. It must be noted that Companies are prohibited to give the salary below the Minimum Wage. Therefore, the component that can be adjusted is the fixed allowance. And even then, the take home pay received by the Employee cannot be lower than the current prevailing Minimum Wage.

Further regulating this matter is the Government Regulation No. 78 of 2015 concerning Wages, which stipulates the obligation for the Company to draw up the Wage Structure and Scale. This creates the obligation for the Company to ensure that the demotion complies with such structure and scale, including the wages in each position.

Article 92 Paragraph 2 of Manpower Law also stipulates that an  Employer can conduct periodical review on salary, based on the ability and productivity of company. It is further elaborated that the review of salary is conducted based on the Decent Living Needs price adjustment, work performance, development, and the ability of company. Therefore, in the event of any decrease of Employee work performance, the Employer can review the salary of Employee.

Pursuant to the prevailing regulations, there are several tips for Companies in the middle of organizational restructuring when dealing with demotions and subsequent decrease of Employee salary:

  1. Make Sure that it is regulated in Employment Agreement or Company Regulations.
  2. Having the demotion policy active and clearly stated in the Employment Agreement or Company Regulations for the decision gives more legal certainty for the Company to implement the demotion and the subsequent decrease of Employee salary.

  3. Conduct Prior Bipartite Negotiations.
  4. To keep the good relationship and possibly motivate the Employee, the Company is allowed to conduct bipartite negotiation with the Employee to discuss the demotion and the impact to his/her salary.

  5. Have Measurable Evidence concerning Non-Performance
  6. It is advised for the Company to maintain evidence concerning performance of the Employee, as a basis of determining non-performance which can lead to demotions.

  7. Issue a Company Decree on the Demotion
  8. Company issues a written Company Decree concerning the Demotion and the details thereof.

    In demoting the Employee, Company must prove by having supporting evidence that clearly shows the decrease and inconsistency of Employee performance based on his/her position. If the Company does not have any evidence, the demotion can be revoked. This matter has already occurred in Indonesia as contained in Verdict of Supreme Court Number809 K/PDT.SUS/2009. The verdict was to terminate the decision of Company regarding Employee Demotion. Pursuant to the judge’s consideration, the reasoning submitted by the Company in regards to the Employee non-performance is untrue and unreasonable.

To ensure a smooth investment and business operation from the legal perspective, but also still focus on maintaining your business in Indonesia and reach your revenue target, it is advised for you to find capable and trusted lawyers or legal consultants for advice and assistance in ensuring your legal compliance with prevailing laws and regulations.

SMART Consulting is an Indonesian Corporate Legal Services firm. SMART has assisted Clients in dealing with matters related to Manpower Law, such as drafting, reviewing and registering the Employee Toolkit, including Employment Agreement, Collective Labor Agreement, and Company Regulations. We also provide advisory services regarding Employment matters, as well as assistance in conducting termination of employment and manpower dispute resolutions.

Contact Us Now to get your legal solution for your business goals, and still comply with the prevailing laws and regulations.
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