Overview of Indonesian Law on Hiring Remote Worker and Contractor: Foreign Companies Perspective

As global remote work becomes increasingly mainstream, many foreign companies are turning to Indonesia’s skilled and affordable labor market to hire independent contractors or remote employees. However, engaging workers in Indonesia—especially from abroad—requires a clear understanding of the legal provisions, classification risks, and tax implications under Indonesian law.

This article outlines the most important terms and legal provisions that foreign companies must consider when hiring contractors or remote workers from Indonesia without establishing a legal entity in the country.

1. Distinction Between Contractor and Employee Under Indonesian Law

Under Indonesian labor law (Law No. 13 of 2003 as amended by the Omnibus Law and its implementing regulations), the distinction between an employee and an independent contractor is critical. Employees (whether permanent or fixed-term) are entitled to statutory rights such as minimum wage, paid leave, social security, and severance pay.

If a foreign company hires an Indonesian national as an independent contractor, they must ensure that:

• The individual controls their own work schedule and methods;

• There is no subordination typical of an employer-employee relationship;

• The contract is service-based, not time-based.

Misclassification can result in the contractor being deemed an employee, exposing the company to back pay claims, penalties, and mandatory benefits.

2. Contractual Agreement: Clarity and Local Compliance

To avoid misclassification, foreign companies must prepare a well-defined Independent Contractor Agreement that clearly states:

• Scope and deliverables of the work;

• Payment terms (project-based or milestone-based);

• Absence of employment benefits;

• Non-exclusive relationship.

Though Indonesian law does not require this contract to be written in Bahasa Indonesia for cross-border agreements, it is advisable to include a bilingual version to avoid enforceability issues under Law No. 24 of 2009 on Flag, Language, and State Symbols, especially if disputes arise in Indonesia.

3. Tax Obligations for Indonesian Contractors

Indonesian individuals earning income from foreign sources are still subject to Indonesian personal income tax, based on a self-reporting mechanism. However, foreign companies are not required to withhold or remit taxes if they do not have a permanent establishment (BUT – Bentuk Usaha Tetap) in Indonesia.

Nevertheless, the Indonesian worker may request documentation such as a certificate of income for their own tax reporting. To avoid confusion or compliance issues, companies should:

• Clarify that the contractor is responsible for filing and paying their own taxes;

• Avoid providing benefits that could indicate employer control, such as fixed monthly salaries or tools of trade.

4. Permanent Establishment Risk (BUT) for Foreign Companies

Under Indonesian tax law (Income Tax Law No. 36/2008 and its amendments), a foreign company may be considered to have a Permanent Establishment (BUT) in Indonesia if it:

• Has a dependent agent or representative;

• Controls or supervises a project for more than 183 days;

• Has operational or managerial control over local staff.

Hiring multiple Indonesian contractors who work full-time, report to foreign supervisors, and act as core business functions may trigger BUT status, leading to corporate tax liabilities in Indonesia. Legal counsel should assess the structure to mitigate this risk.

5. Use of Employer of Record (EOR) or Local Partner

To minimize legal exposure, many foreign companies use a local Employer of Record (EOR) or Professional Employment Organization (PEO). These services:

• Hire Indonesian workers on behalf of the foreign company;

• Manage payroll, tax withholding, and social security;

• Ensure full compliance with Indonesian labor law.

Using an EOR is advisable if the work relationship resembles full-time employment or if the contractor performs critical business operations.Conclusion

Conclusion

Hiring remote workers or contractors from Indonesia offers strategic and financial advantages, but it also carries legal and tax risks if not managed properly. Foreign companies must understand the difference between independent contractors and employees, draft clear service contracts, and be aware of permanent establishment triggers under Indonesian law.

For optimal compliance, foreign companies should consult with local legal and tax advisors or consider partnering with an EOR provider in Indonesia.