When a buyer signs a share purchase agreement in Indonesia, the headline price is rarely the final number. Severance pay obligations in Indonesia apply to almost every employee whose role changes hands in a merger or acquisition, and these obligations persist even when the ownership on the share register changes. For finance executives involved in deal modelling, severance is not a minor detail to be settled after signing. It can significantly affect the true cost of acquisition if it emerges during due diligence rather than being factored in from the outset.
Why Employment Costs Follow the Deal, Not Just the Seller
Under Indonesia’s Company Law, management must provide employees with written notice of any planned mergers or acquisitions, including the anticipated impact on employment terms, before the transaction is approved at a general meeting of shareholders. Employees who do not agree to continue working under the new structure are entitled to reject the change. If they do so, this will result in their termination of employment, and they will receive the relevant severance package. This is in line with the guidance set out in the Legal 500’s Indonesia M&A country guide and analysis from ADCO Law on employee rights in M&A transactions. In practice, acquiring a company in Indonesia also means ensuring the rights of its workforce to resign with compensation.
Share Deal or Asset Deal: Two Different Severance Pictures
The structure chosen for a transaction directly affects who bears the exposure.
With regard to the share acquisition, the target’s legal entity and its existing employment contracts will remain as they are. The buyer simply becomes the new shareholder of a company that still owes any severance liabilities that were already on its books, as well as any new liabilities triggered by the change of control.
Asset acquisition: According to Baker McKenzie’s Global Private M&A Guide, Indonesian law does not automatically transfer employment from one party to another. Employees must consent to a transfer individually, and those who decline typically remain employed by the seller. In practice, this results in more frequent changes to the paperwork than to the cost, since sellers price expected severance into the deal or ask the buyer to indemnify it contractually.
How Severance Pay in Indonesia Is Actually Calculated
Under Government Regulation No. 35 of 2021, derived from the Job Creation Law, statutory compensation for regular staff consists of three distinct elements: standard severance, long-service awards, and rights compensation. Standard severance reaches its maximum cap at nine months’ base salary after eight years, whereas service awards incrementally reach ten months’ compensation for workers serving two decades or longer. Specific termination scenarios trigger mandatory multipliers, ranging from no payout for voluntary resignations to double the standard entitlement when employers decline continued employment after a merger. Because these legal classifications directly govern the financial exposure, thorough pre-deal verification remains crucial.
Where Acquirers Get the Number Wrong
● Undocumented or inconsistent tenure records, especially where a target has changed its legal entity, payroll provider, or ownership before, obscuring how many years of service actually count.
● Fixed-term staff kept on repeated contracts well beyond what the law allows, which converts them into permanent employees with full severance rights the target’s books never reflected.
● Change-of-control clauses inside senior executives’ individual contracts, which can trigger enhanced payouts the moment a transaction closes, separate from the standard statutory formula.
● Assuming the government’s Job Loss Guarantee program relieves the employer of cost. It supplements a terminated employee’s income but does not reduce the employer’s own statutory severance obligation.
Turning Severance Pay Indonesia Exposure Into a Negotiated Deal Term
The practical fix is to treat employment liability as its own due diligence workstream, reviewing headcount, tenure, contract types, and any collective labour arrangements before signing rather than after, a point echoed in employment-focused M&A commentary such as this overview of
Indonesian employment law as a strategic consideration in M&A. Findings can then be built directly into the transaction: a purchase price adjustment reflecting the target’s real severance exposure, an escrow or holdback against undisclosed liabilities, and clear representations and warranties on employment compliance. Deciding early whether staff will be retained, transferred, or terminated and rehired also settles, in writing, who is legally responsible for severance pay Indonesia entitlements once the deal closes, a decision far cheaper to make on paper than to litigate afterward.
Frequently Asked Questions
Pricing People Into the Deal, Not Around It
Severance is one of the few line items in an Indonesian acquisition that is both entirely foreseeable and routinely underpriced. Buyers who treat it as a legal question answered before signing, rather than an HR question answered after closing, tend to move into post-acquisition integration with far fewer surprises and far less friction with the workforce they now need to keep.
This is the same discipline we bring to clients beyond the employment side of a transaction. Our company is pleased to offer professional debt management services that have been specifically designed for finance executives who handle corporate accounts receivable with high volumes. We specialise in the development of receivables management systems, incorporating profiling, legal strategy, negotiation structure and recovery execution. We assist companies in maintaining stable cash flow without compromising strategic business relationships by integrating legal, commercial and financial governance perspectives.
To talk through severance exposure ahead of an upcoming transaction, reach our team on WhatsApp, or explore our full range of practice areas.
