A lot of companies look at Indonesia and think, “We’ll just hire someone there.” Then they discover it’s not quite that simple.
In most cases, employing someone locally means setting up a PT PMA — a foreign-owned company. That brings capital requirements, government filings, licensing, and ongoing reporting. If you’re only hiring one person or exploring the market, that level of commitment can feel excessive.
Hiring without forming your own entity is possible. You just need to approach it the right way.
Why a Local Entity Is Usually Required
Indonesia’s labor laws are structured around formal employment relationships. Businesses that hire full-time staff are generally expected to operate through a registered local company. A PT PMA isn’t just paperwork — it’s the legal foundation for putting someone on payroll.
Once established, employers must process payroll locally, withhold income tax, and register employees with BPJS Ketenagakerjaan and BPJS Kesehatan. Employment contracts must reflect rules on leave, overtime, probation periods, working hours, and termination protections.
Trying to manage all of this from another country — without knowing the local rules inside and out — is where things usually get complicated. That’s why many international companies explore employer of record services in Indonesia as an alternative to setting up their own entity while staying compliant with local employment regulations.
What Happens If You Skip Entity Formation
Some companies attempt offshore contracts. Others classify workers as independent contractors. On the surface, that can seem easier.
But the classification has to match reality.
When someone works set hours, follows your instructions, and becomes part of your daily operations, it starts to look and feel like employment — no matter what the contract says. Indonesian authorities look at the substance of the relationship, not just the label attached to it.
If misclassification is determined, the company could be responsible for unpaid tax, missed social security contributions, and administrative penalties. For businesses building a team in Indonesia, that risk isn’t theoretical.
The Employer of Record Approach
An Employer of Record (EOR) offers another option.
Rather than building your own PT PMA from scratch, you work with a company that’s already set up and operating locally. The EOR becomes the legal employer on paper.
Legally, the EOR is the employer. Practically, the person works with you — you assign tasks, set expectations, and integrate them into your team like any other hire.
Behind the scenes, the EOR handles employment contracts, payroll in Indonesian rupiah, income tax withholding, required BPJS contributions, and coordination with local payroll banking systems — not unlike how senior bank accounts are structured to ensure compliance, proper documentation, and regulated oversight. They also stay current on labor law updates, which is not something most foreign companies want to manage remotely.
The result is straightforward: you gain access to Indonesian talent without establishing your own legal entity first.
Payroll and Termination Realities
Payroll isn’t just cutting a paycheck. Indonesian income tax is calculated on a progressive scale, and required social security contributions must be handled properly. The numbers need to be calculated, deducted, and submitted on time.
There are also structured termination rules. Severance obligations and procedural steps are defined in law. If those steps are not followed correctly, disputes can arise quickly.
An EOR doesn’t remove these rules — it manages them on your behalf.
Why Companies Choose This Model
Businesses usually turn to an EOR for practical reasons.
It allows faster onboarding. It removes much of the administrative weight tied to payroll and compliance. It lowers exposure to avoidable errors while a company evaluates whether Indonesia will become a long-term market.
You can hire one person or a small team without committing to full incorporation. If growth continues, you can later establish a PT PMA and transition employees accordingly.
That flexibility matters, especially in early stages of international expansion.
When Forming Your Own Entity Makes Sense
There are situations where forming a PT PMA is the right strategic move. Large operations, physical offices, and long-term expansion plans often justify building a local entity.
But for organizations that want to move carefully and compliantly, partnering with an Employer of Record offers a way to employ talent in Indonesia without immediately taking on the responsibilities of incorporation.
