Novia D. Rulistia, Jakarta – The rigidity of the 2003 Labor Act, particularly its severance provisions, has forced entrepreneurs to use outsourcing, a panelist told a seminar on Tuesday.

Chairman of the Indonesian Employers Association (Apindo) Sofjan Wanandi said the hefty severance payments stipulated by the law burdened employers, making them turn to outsourcing. "In fact, outsourcing isn't good for either employer or employee – but employers have no alternative."

A three-part severance package applies when a permanent employee is terminated, giving the former employee a right to a service payment and so-called rights replacement payment, in addition to the severance payment itself.

The minimum severance payment for an employee who has been working eight years, for example, is the equivalent of nine months of salary.

"In practice", however, according to Apindo head of industrial relations and advocacy Hasanuddin Rachman, that minimum is usually multiplied by a factor of at least two; and this is just one of the three severance payments the law requires. "This is considered too much by employers," Hasanuddin told The Jakarta Post.

Unlike the other two payout components, the rights replacement payment is calculated primarily on the basis of transportation costs and holidays.

Sofjan said many businesses faced with this burden have to turn to outsourcing, even though this brings "side effects". With the outsourcing system, for instance, companies have to train new employees when an outsourced employee's contract expires, which has time and productivity costs, he said.

Meanwhile, outsourced employees don't enjoy the same rights and benefits as permanent ones. To help strike a balance, Sofyan said more and more companies were using outsourced workers only in areas not involving production.

Under the law, outsourcing is an agreement where one company provides services to another for business functions that usually are or could be provided in-house.

Also speaking at the seminar, the president of the Indonesia Welfare Labor Association, Rekson Silaban, said outsourcing decisions shouldn't be based on the core versus non-core distinction, but instead on vulnerability associated with the job.

For example, outsourcing wasn't appropriate in the case of minimum wage employees whose positions were still non-permanent or contract-based, he said. He also said that wages for outsourced employees should be higher – by at least five percent – than for permanent employees – to compensate for the lack of severance protection.