In employment practices—especially in companies that operate with short-term contracts or project-based roles—the question of contract renewal often arises. One common concern is: Can employees be penalized if they choose not to renew their contract?
As a company specializing in executive search and HR solutions, HRnetRimbun frequently receives questions like this from our business partners. To provide a comprehensive answer, let’s take a closer look at the relevant regulations and best practices companies should follow.
1. Understanding the Context: Fixed-Term Contracts and Legal Provisions
Employees under a Fixed-Term Employment Agreement (PKWT) are entitled to termination compensation when their contract ends, according to Articles 15 to 17 of Government Regulation No. 35/2021. This applies to workers who have been employed continuously for at least one month.
2. What Happens If the Employee Declines to Renew the Contract?
- It is not considered a violation, and no penalties apply.
- The employee is still entitled to proportional termination compensation, calculated based on their length of service (talenta.co).
- This compensation must be paid within 30 days after the contract ends.
3. How Termination Compensation Is Calculated
- Compensation amount:
- For PKWT contracts <12 months → calculated proportionally.
- For contracts ≥12 months → equivalent to one month of full salary.
- Example: If the contract lasted 6 months → compensation equals half a month’s salary.
4. No Penalty, But…
While there’s no penalty for the employee, the employer must comply with legal obligations:
- Pay compensation on time (within 30 days).
- Failing to do so may result in administrative sanctions.
Read more: Why Is Job Grading Important in Determining Salary?
5. HRnetRimbun’s Practical Summary
| Situation | Compensation? | Notes |
|---|---|---|
| Contract ends, not renewed by employee | Yes | Not a violation, no penalty |
| Employer delays or denies compensation | Employer is still obligated | Must be paid within 30 days |
| Employee resigns before contract ends | May receive compensation & may owe restitution | As per Article 17 of PP 35/2021 |
6. HRnetRimbun’s Recommendations
- Ensure compensation policies are clearly written in your HR SOP.
- Communicate proactively before contract expiration (ideally one month in advance).
- Set up automated compensation calculations and utilize HRIS to avoid delays.
- Use this moment to explore options such as contract renewal, rehiring, or new recruitment based on business needs.
Conclusion
Employees who choose not to renew their contract are not subject to penalties—this is their legal right. However, employers are still required to provide compensation in accordance with the law to maintain compliance and a healthy employment relationship.
If your company needs support in developing compliant recruitment strategies, improving your employment contract SOPs, or finding the right talent for key roles, HRnetRimbun is here to help.
Contact us for trusted and professional human capital solutions.
