Constitutional Court Ruling on Job Creation Law Labor Cluster: Mandatory Contract and Outsourcing Overhaul

### Executive Summary In Decision No. 168/PUU-XXI/2023, the Indonesian Constitutional Court (Mahkamah Konstitusi / MK) addressed fundamental labor rights under Law No. 6 of 2023 on the Enactment of Perppu No. 2 of 2022 into Law (Job Creation Law). The Court ordered the legislature and the executive branch to draft a new, independent labor statute within two years, while simultaneously issuing self-executing interpretations that alter current operational parameters under Government Regulation No. 35 of 2021 (PP 35/2021). ### Key Statutory and Regulatory Revisions 1. **Fixed-Term Employment Contracts (PKWT):** - The Court mandated that the maximum duration for a PKWT contract—inclusive of extensions—must not exceed five (5) years, re-establishing strict statutory ceilings previously loosened under the regulatory framework. - Article 59 of Law No. 13 of 2003, as amended, must explicitly protect the rights of fixed-term employees to regular statutory transitions where work of a permanent nature is concerned. 2. **Outsourcing Parameters (Alih Daya):** - The Court restricted unregulated outsourcing practices. Contracting enterprises (user companies) may only outsource ancillary or auxiliary functions; core business operations cannot be arbitrarily transferred to outsourcing entities. - The Minister of Manpower is instructed to explicitly define permissible business sectors and classifications for outsourcing arrangements. 3. **Severance Pay (Uang Pesangon) and Termination (PHK):** - The Court restored substantive checks on unilateral termination of employment by corporate employers. Reductions in standard severance multipliers introduced by PP 35/2021 are curtailed where they deviate from the fundamental protective intent of the original Manpower Law. - Prior negotiation via bipartite mechanisms remains mandatory before termination notices can produce legal effect. 4. **Minimum Wage Indexation:** - Formula components for Provincial and Regency/City Minimum Wages (UMP/UMK) must integrate broader decent living standards (KHL) rather than relying strictly on inflexible mathematical caps tied solely to regional economic growth and inflation indices. ### Practical Corporate Legal Counsel Recommendations - **Contract Audits:** Conduct an immediate compliance audit of all existing PKWT agreements to ensure accumulated contract durations do not exceed the five-year ceiling. - **Vendor & Service Level Agreement (SLA) Review:** Re-examine third-party staffing and outsourcing agreements. Assess whether outsourced personnel are performing core activities versus support services to prevent risks of joint-liability claims or court-mandated transition of outsourced staff into direct employees. - **Company Regulations and Collective Labor Agreements:** Revise internal employment policies (Peraturan Perusahaan) and Collective Labor Agreements (PKB) to incorporate the revised minimum standards established by the Court.