Shareholders Liability on Employees’ Compensation upon Termination and Company’s Dissolution

Under Indonesian laws, obligation to pay severance, reward for services, compensation payment, detachment money or any other similar payment with respect to the dismissals of the employees shall be borne by the company and not the shareholders of the company.

Pursuant to Law number 13 of 2003 on Manpower, employment relationship is created from the existence of employment contract between the employer and employee consisting of the element of work, wage and order. This contract may or may not be made in writing, so long as the three elements are satisfied and more, the employment contract must be produced based on agreement between parties, signed by capable person, agreed to perform certain work and the work performed is in accordance with laws and regulations and social norms. A service contract is not an employment contract and shall not constitute relationship other than relationship between service provider and principal, therefore any claim of severance payment, reward for services, compensation payment, detachment money or any other similar payment with respect to the dismissals of the service provider’s employees must be addressed to service provider as the employer, unless it can be proven otherwise that such order to work received by service provider’s employees is initiated and arranged by the principal.

In practice however, court is not always sided either with the company or the shareholders in terms of employment termination. In 2004, shareholders of PT Dirgantara Indonesia (“PTDI”) a state owned company was sued by its employees for wrongful termination. General Meeting of Shareholders (“GMS”) of PTDI decided in the meeting to lay off 6,600 employees. The decision of the class action lawsuit was ruled in favor of the employees and therefore canceled such termination decided by the GMS. Later in 2011, shareholders and management of PT Bakrie Life Insurance (“Bakrie Life”) was sued by its employees for failure in paying compensation including salaries and other benefits upon termination. The decision was ruled in favor of the employees and ordered Bakrie Life to fulfill its obligation to compensate the employees following the termination.[1]

In any event, dissolution or liquidation must properly follow the requirements of prevailing regulations in order to avoid any claim that may be arising from such liquidation. Under Indonesian law dissolution or liquidation either voluntary or ordered by the authority is a process to dissolve or liquidate an entity which involving fulfillment of obligations toward its creditors and distribution of the remaining assets to its shareholders. In case of liquidation, director of the company or the appointed liquidator is responsible to fulfill the company’s obligations prior to distributing the remaining assets to the shareholders of the company. According to the Manpower Law, employees are considered as preferred creditor. Manpower Law stipulates that in the event a company is under bankruptcy or liquidation, workers salary and benefits are preferred receivables which must be paid before paying off its other creditors.

Author:

Marini Sulaeman

Managing Partnerm.sulaeman@legiperitus.co.id

 


[1] Industrial Court (“Pengadilan Hubungan Industrial”) decision Number 94/PHI.G/2011/PN.Jkt.Pst, dated 18 Mei 2011

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