Can a Company reduce Employee Salary?. This question is very often asked by companies in Indonesia, especially if the company is facing problems, in the terms of financial problems, relocation, efficiency, or performance problems of the employees concerned. And then different opinions emerged, starting from those who thought they could not reduce the wages, can but were limited, and there were also those who thought that it was the company’s right to determine it. Then how about legal point of view in Indonesia, here we give a little review.
When discussing on the reduction of Employee salary, in order to make the discussion more structured, it must first be understood what is meant by “Salary ” based on the rule of law in Indonesia.
Based on Article 1 (30) of Law no. 13 of 2003 concerning Manpower as amended by Law no. 11 of 2020 concerning Job Creation (Manpower Law), then “Salary” are defined as:
Salary is the right of the worker/labourer that is received and expressed in the form of money as a reward from the entrepreneur or employer to the worker/labourer which is determined and paid according to a work agreement, agreement, or statutory regulations, including allowances for workers/laborers and their families for a job and/or service that has been or will be performed.
What needs to be understood from this definition is that the determination of salary is based on 3 things, ie.:
- Employment/work agreement,
- Agreement (can be in the form of Company Regulations or PKB), or
- Laws and regulations.
And in the provisions of the Manpower Law, it has been stipulated rules regarding the Minimum Salary limit for employees and companies are prohibited from paying Salary below the Minimum Salary (Article 88E (2) of the Manpower Law). The Minimum Salary is a safety net so that companies do not give Salary below what is determined by law. However, for Salary with a value above the Minimum Salary value, this is done based on an agreement between the Employee and the Company (Article 90A of the Manpower Law).
From the description above, it must be understood that the provisions regarding salary in Indonesia when viewed from the legal aspect contain: (1) compelling public law aspects (dwangenrechts) as regulated in the Law, and (2) private legal aspects (in accordance with the principles of freedom of contract, pacta sunt servanda, beginzel der contract vrijeheids as referred to Article 1338 in conjunction with Article 1320 of the Civil Code).
- Public legal aspects such as: Minimum Salary standards and salary payment obligations. For this matter, the company must follow it because it is coercive, and if it is violated the sanction can even be up to imprisonment;
- Aspects of private law such as: an agreement for a salary that is higher than the Minimum Salary. This is free to be agreed upon by the Company and Employees, and if it is violated the sanction is the payment of a fine or compensation.
After understanding the basic concept of Salary, then we will discuss “reducing employee salary”.
Regarding the issue of reducing employee salary, in accordance with the basic concept mentioned above, in general it can be seen from two sides:
- Reducing employee Salary to below the Minimum Salary. This is bound by a public law rule and this is clearly prohibited by the law (Article 88E (2) of the Manpower Law);
- Reducing employee Salary, but still above the “Minimum Salary” requirement. This is a private law domain, which means it will refer to the Employment Agreement or Agreement as the basis of salary discussed in the definition of “salary” above.
Regarding the reducing employee Salary, but still above the “Minimum Salary” provisions, there are two situations that can occur in this regard: (1) The first is a reducing employee Salary from the agreed in work agreement and (2) the second is a reducing employee Salary after get a promotion but not under the work agreement when signing the work agreement.
When there is a reducing employee Salary below the salary agreed in the Employment Agreement, then of course it must refer to the provisions of Article 55 of the Manpower Law which states “The work agreement cannot be withdrawn and/or changed, except with the consent of the parties“. Which means that the reducing employee Salary below the value stated in the Employment Agreement is mandatory to obtain the approval of the parties.
However, the situation is slightly different when there is a reducing employee Salary from salary after promotion. A simple example is, if it is agreed in the Employment Agreement for the employee’s salary to be IDR 10 million, then after one year of work a promotion is carried out and gets a salary of IDR 18 million, but in the third year the salary is reduced to IDR 12 million because it is considered the Employee not reach the target, in that situation, it is still requires the approval of the Parties?, because the fact has exceeded the initial Employment Agreement.
To get a clearer view, here are some examples of cases based on Court Decisions related to salary reductions which are generally carried out in conjunction with downgrades:
- In Supreme Court Decision No. 583 K/Pdt.Sus-PHI/2020, dated June 30, 2020, the judge have the opinion that “the reduction of position allowances is a customary that has been in effect so far in the company (the Defendant)”. Therefore, in this case indirectly, the judge does not view the salary reductions (in this case is allowances) as something that the company cannot do.
- Then, in the Supreme Court Decision No. 199 K/Pdt.Sus-PHI/2016, April 25, 2016, the judge have opinion that the demotion was rejected with the main reason that “the reason for doing the demotion is irrelevant”, Because if the employee’s performance is not as expected, what should be issued is a “Warning Letter”. In this case, it can be noted that the judge views that the application of the demotion must be in accordance with the existing and relevant regulations.
- There is also the Supreme Court Decision No. 665 K/Pdt.Sus-PHI/2020, dated June 10, 2020, in that case the Judge considered that because the employee performance appraisal process had been carried out in accordance with the Company Regulations and indeed the results showed that the employee’s performance was not in accordance with the targets, the Demotion was (demotion and salary reductions) legally justified.
From the description above, starting from the definition of “Salary” until the case examples based on the court’s decision, it is related to whether or not a company can reduce employee salary, it can be concluded that the points are:
- Reduction of salary to below the “Minimum Salary” is prohibited by legal provisions (Article 88E (2) of the Manpower Law);
- Reduction of salary below the salary based on the “Employment Agreement” but still above the “Minimum Salary” must be based on an agreement between the Company and the Employee (Article 55 of the Manpower Law);
- Reduction of salary below the last salary (salary after promotion) but still above the value of salary based on the “Work Agreement”, must referring to the provisions in the Employment Agreement or Agreement (which are generally contained in Company Regulations and/or PKB), if based on that agreement, if reduction of salary can be done, legally it can be done, because this is a private legal relationship (Article 90A of the Manpower Law).
- Law No. 13 of 2003 concerning Manpower as amended by Law No. 11 of 2020 concerning Job Creation;
- Supreme Court Decision No. 199 K/Pdt.Sus-PHI/2016, April 25, 2016;
- Supreme Court Decision No. 665 K/Pdt.Sus-PHI/2020, dated June 10, 2020;
- Supreme Court Decision No. 583 K/Pdt.Sus-PHI/2020, dated June 30, 2020.