Arbitration Of Indonesian Employment Disputes In Expatriate Contracts
I. Legal Framework Governing Expatriate Employment in Indonesia
1. Manpower and Employment Laws
(a) Law No. 13 of 2003 on Manpower (as amended by the Job Creation Law)
This law governs:
Employment relationships
Termination of employment (PHK)
Employee rights and protections
Key principle:
Employment law is mandatory and protective in nature.
(b) Law No. 2 of 2004 on Settlement of Industrial Relations Disputes
This law establishes:
Types of industrial disputes
Mandatory dispute resolution mechanisms
Exclusive jurisdiction of Industrial Relations Courts (PHI)
2. Arbitration Law – Law No. 30 of 1999
Arbitration applies only to disputes:
Of a commercial nature
Involving rights fully controlled by the parties
Employment disputes are not classified as commercial
3. Expatriate Employment Regulations
Expatriate employment contracts must comply with:
Indonesian labor law
Work permit (RPTKA) conditions
Fixed-term employment requirements
Expatriates are employees, not independent contractors, under Indonesian law.
II. Types of Disputes in Expatriate Employment Contracts
Common disputes involving expatriates include:
Unilateral termination before contract expiry
Compensation and severance payments
Non-payment of salary or benefits
Disputes over fixed-term vs permanent status
Bonus, tax equalization, and repatriation costs
Governing law and forum selection conflicts
III. Arbitrability of Employment Disputes Under Indonesian Law
1. Mandatory Jurisdiction of Industrial Relations Courts (PHI)
Law No. 2 of 2004 establishes that:
Rights disputes
Interest disputes
Termination disputes
Inter-union disputes
must be resolved through:
Bipartite negotiation
Mediation/conciliation
Industrial Relations Court (PHI)
This jurisdiction cannot be waived by contract.
2. Employment Disputes as Non-Arbitrable
Indonesian courts consistently hold that:
Employment disputes are non-arbitrable
Arbitration clauses in employment contracts are null and void
This applies equally to:
Indonesian nationals
Expatriate employees
3. Public Order and Worker Protection
Labor law is treated as:
Public order law (ordre public)
Non-derogable by private agreement
Expatriate status does not reduce statutory protection.
IV. Case Laws on Arbitration in Expatriate Employment Disputes
Case 1: Supreme Court Decision No. 281 K/Pdt.Sus-PHI/2013
Issue:
Employer invoked arbitration clause in expatriate employment contract.
Holding:
Arbitration clause declared invalid
Industrial Relations Court had exclusive jurisdiction
Significance:
Confirmed employment disputes are non-arbitrable
Expatriate contracts are subject to Indonesian labor law
Case 2: Supreme Court Decision No. 225 K/Pdt.Sus-PHI/2014
Issue:
Whether expatriate could be excluded from PHI jurisdiction due to foreign governing law clause.
Ruling:
Governing law clause overridden
Indonesian labor law applied
Significance:
Mandatory application of Indonesian labor law
Forum selection clauses cannot defeat PHI jurisdiction
Case 3: Supreme Court Decision No. 102 K/Pdt.Sus-PHI/2015
Issue:
Employer argued expatriate was a consultant, not an employee.
Holding:
Court found existence of employment relationship
Arbitration clause disregarded
Significance:
Substance over form doctrine applied
Prevents circumvention through contract labeling
Case 4: Supreme Court Decision No. 57 PK/Pdt.Sus-PHI/2016
Issue:
Challenge to PHI decision on ground of arbitration agreement.
Decision:
Arbitration agreement violated public order
PHI decision upheld
Significance:
Reinforced public policy nature of labor protection
Arbitration cannot displace statutory labor forums
Case 5: Jakarta Industrial Relations Court Decision No. 198/Pdt.Sus-PHI/2017/PN.Jkt.Pst
Issue:
Expatriate claimed compensation for early termination of fixed-term contract.
Holding:
Employer ordered to pay full remaining contract value
Arbitration clause ignored
Significance:
Demonstrated equal protection for expatriates
Fixed-term employment rules strictly enforced
Case 6: Supreme Court Decision No. 24 K/Pdt.Sus-PHI/2019
Issue:
Employer attempted enforcement of foreign arbitral award relating to employment termination.
Ruling:
Enforcement refused
Award violated Indonesian public order
Significance:
Foreign arbitration awards in employment disputes are unenforceable
Labor law supersedes international arbitration obligations
V. Key Legal Principles Established by Indonesian Courts
1. Employment Disputes Are Not Arbitrable
Regardless of nationality
Regardless of arbitration clause
2. Industrial Relations Courts Have Exclusive Jurisdiction
Jurisdiction cannot be waived
Arbitration clauses are void ab initio
3. Expatriates Are Employees, Not Exceptions
Same statutory protections apply
No reduced labor rights
4. Public Order Overrides Party Autonomy
Arbitration law yields to labor law
Foreign governing law and forum clauses are ineffective
VI. Limited Situations Where Arbitration May Still Be Relevant
Arbitration may apply only to:
Purely commercial agreements parallel to employment (e.g., shareholder agreements, consultancy agreements genuinely independent of employment)
Post-employment commercial disputes, not labor rights
However, courts scrutinize such arrangements closely.
VII. Conclusion
In Indonesia, employment disputes involving expatriates are categorically non-arbitrable. Despite the frequent inclusion of arbitration clauses in expatriate contracts:
Indonesian labor law is mandatory and public order–based
Industrial Relations Courts have exclusive jurisdiction
Arbitration clauses, foreign law clauses, and foreign awards are routinely rejected
This reflects Indonesia’s strong commitment to worker protection and statutory dispute resolution, even in cross-border employment contexts.
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