Introduction
When a company must part ways with an employee, the process can be emotionally and financially delicate—especially for foreign employers navigating Indonesian labor law. Severance pay, known locally as pesangon, is a core component of fair termination and compliance. Understanding its calculation helps prevent disputes and ensures lawful separation.

Key Concepts: Severance, Long Service Pay, and Compensation
Under Indonesian labor law, employee entitlements upon termination generally include:

1. Severance Pay (Pesangon): Compensation based on years of service.
   
2. Long Service Pay (Uang Penghargaan Masa Kerja): Additional payment for longer tenure.
   
3. Compensation of Rights (Uang Penggantian Hak): Payment for unused leave, relocation, or housing allowance.
   

These components differ depending on the cause of termination—resignation, redundancy, or dismissal for misconduct.

Legal Framework in Indonesia
The calculation is governed by Law No. 13 of 2003 on Manpower (as amended by Job Creation Law No. 6 of 2023) and Government Regulation No. 35 of 2021.
For normal termination (PHK tanpa kesalahan), the formula is:

• Severance Pay: 1 month’s wage × years of service (up to 9 months’ salary).
  
• Long Service Pay: 2 months’ wage for 3 years of service, up to 10 months’ wage for 24 years or more.
  
• Compensation of Rights: Includes annual leave, transport allowance, or other benefits due.
  

For dismissals due to misconduct, severance may not be owed, depending on the severity and court decision.

Real Case in Indonesia
In a 2022 case, an Indonesian manufacturing firm miscalculated severance for 80 terminated employees by excluding long service pay. The Industrial Relations Court (PHI) ruled the employer must pay the difference plus penalties. The case reaffirmed that pesangon is not merely a goodwill gesture—it’s a legal obligation.

Best Practices for Foreign Employers

1. Verify Employment Tenure: Include all continuous service periods.
   
2. Apply Correct Formula: Use PP No. 35/2021 as reference.
   
3. Consult Legal Experts: Seek local counsel for accuracy.
   
4. Communicate Transparently: Explain calculations to employees.
   
5. Keep Documentation: Maintain payroll and employment records.
   

Conclusion
Calculating severance correctly demonstrates respect, fairness, and compliance with Indonesian labor standards. It protects both the company’s integrity and the employee’s rights—ensuring a lawful and dignified termination process.

References:

• Law No. 13 of 2003 on Manpower (as amended by Law No. 6 of 2023)
  
• Government Regulation No. 35 of 2021 on Employment Relations