Can Companies Extend Employee Contract After 5 Years?

In the realm of employment, many companies rely on contract employees or those with a Fixed-Term Employment Agreement (Perjanjian Kerja Waktu Tertentu/PKWT) to run their operations. However, Indonesian labor regulations stipulate that an employment contract cannot exceed five years. This is outlined in Government Regulation No. 35 of 2021 regarding Fixed-Term Employment Agreements, Outsourcing, Working Hours and Rest Periods, and Termination of Employment (PP 35/2021).

So, can a company extend a contract for an employee who has reached this limit?

How to Extend an Employee’s Contract

In practice, companies can extend an employee’s contract in line with company policies. Extensions can be made if both the employer and the employee agree. So, how can a company extend a contract after five years?

1. Contract Addendum

One method for continuing employment is to issue a contract addendum. An addendum is an additional agreement designed to extend an existing employment contract. This option works well when the company still requires the employee’s services and the employee agrees to continue their role.

Here’s how a contract addendum operates:

• Mutual Agreement: Both the company and the employee agree to extend the employment contract after the initial five-year period ends.
• Official Documentation: The addendum is drafted in writing and signed by both parties, specifying that the contract extension is due to the company’s needs and the employee’s consent.
• Ongoing Employment: The employee can continue working without interruption, with their rights and obligations from the previous contract remaining in effect, adjusted according to the addendum.

An addendum ensures that the employee’s welfare is protected, providing legal assurance that the contract extension is legitimate.

2. Severance Pay and Rehiring

Another solution for extending a contract involves terminating the existing contract, providing severance pay, and then rehiring the employee.

Severance pay is compensation given to employees when their employment ends after the contract period. After receiving severance pay, the employee can be rehired by the company through a new hiring process.

Here’s how severance pay and rehiring work:

• Contract Termination: After five years, the employment relationship is formally ended, and the employee receives severance pay as compensation.
• Grace Period: Some companies provide a grace period, such as one month, before rehiring the employee. This helps comply with regulations prohibiting contracts from exceeding five years without a break.
• Rehiring: After the grace period, the company can rehire the employee with a new contract.

Offering severance pay and rehiring ensures compliance with regulations that prevent contracts from exceeding five years without a break. Additionally, it gives the company an opportunity to reassess the employee’s performance and suitability for the position.

Why Do Companies Extend Employee Contracts?

In practice, companies may offer contract extensions because they still need the employee’s services. If the employee also wishes to continue working, a contract extension can be arranged.

Regardless of the method a company uses to extend an employee’s contract, it must provide a solution that is lawful and complies with regulations. This way, the company’s needs can be met without disadvantaging the employee. The choice of method depends on the specific situation and the agreement between the company and the employee.

This concludes the explanation on how to extend an employee’s contract after five years. Deciding whether or not to extend an employee’s contract can be confusing if you don’t take other considerations into account.

If you’re uncertain, you can use the outsourcing services of RecruitFirst to make the decision. With us, recruiting new employees or extending existing contracts will be much easier. As an outsourcing company, not only assist in extending employee contracts efficiently and systematically, we also provide comprehensive solutions in recruiting new talent that will take your business to the next level.

With our services, you can focus on business development while we handle all the details related to human resources. Contact RecruitFirst today to get a free consultation and discuss how we can help enhance your team’s efficiency and profitability!