How does Indonesia distinguish employees from independent contractors?

The classification analysis should begin with the three statutory elements of an employment relationship:

• Work: the person performs activities for another party.

• Wages: the person receives remuneration for that work.

• Orders: the other party has authority to direct or control how the work is performed.

The first two elements may also appear in an independent commercial relationship. An independent contractor performs work and receives payment.

The element of orders or employer authority is therefore particularly important. The risk of employment classification increases when the Client controls the Vendor’s working process rather than merely defining the required service, quality standard, deadline or deliverable.

Indicators that may support employment classification include:

• continuing personal performance rather than separate Assignments;

• an obligation to remain available for work;

• fixed or Client-determined working hours;

• a Client-designated workplace;

• detailed instructions about the daily working process;

• regular reporting to a Client manager;

• inclusion in the Client’s organisational structure;

• the application of employee policies or disciplinary procedures;

• permission being required for leave or absence;

• regular wage-like remuneration unrelated to accepted results;

• Client provision of the essential tools and equipment;

• little or no commercial risk;

• restrictions on serving other customers;

• indefinite engagement in an ongoing business function; and

• the Client’s ability to impose sanctions for refusing work.

These indicators are most significant when they demonstrate the Client’s authority to issue orders and control performance.

Characteristics supporting genuine independent contracting include:

• clearly defined services, projects or deliverables;

• separate Assignments that the Vendor may accept or reject;

• Vendor control over the method and organisation of performance;

• freedom to determine working time and location, subject to genuine project requirements;

• payment linked to services, milestones or accepted deliverables;

• responsibility for correcting defective performance;

• use of the Vendor’s own equipment and business resources;

• responsibility for business expenses;

• exposure to profit, loss and commercial risk;

• freedom to serve multiple Clients;

• independent invoicing and recordkeeping;

• no position within the Client’s internal organisation; and

• no application of employee leave or disciplinary rules.

The words used by the parties are relevant but are not necessarily conclusive.

Evidence considered in a substance-focused assessment may include:

• the direct service agreement;

• individual Assignments;

• invoices and payment records;

• working schedules;

• internal communications;

• reporting arrangements;

• access to Client systems;

• equipment arrangements;

• performance-management records;

• exclusivity requirements; and

• the parties’ actual conduct.

Business registration, tax registration or the submission of invoices may support independent status, but these formalities do not eliminate employment risk where the Client exercises employer-like authority.

If a relationship presented as independent contracting is found to be employment, potential consequences may include:

• recognition of employment rights;

• wage and overtime claims;

• holiday and leave entitlements;

• termination compensation;

• social-security consequences;

• tax and withholding corrections;

• administrative sanctions; and

• proceedings before the competent employment institutions or Industrial Relations Court.

The precise consequences depend on the facts, the period concerned and the employment protections that should have applied.