The Minister of Labor and Transmigration recently issued a Decision excluding the requirement of legal entity for companies accepting outsourced work. Under the Decision, companies without legal entity character can accept outsourced work under several circumstances. The Decision may subjected to a challenge before the Administrative Court as it is issued not under the proper legal basis.

The Law  Number 13 Year 2003 (“Labor Law”) permit outsourcing under Article 64. However, the Labor Law also set several requirements for work that can be outsourced under Article 65 (2). It, among others, requires that: (1) the outsourcing agreement between companies shall be made in written, (2) the work that is to be outsourced shall be carried out separately from the core activities of the company, the work is conducted with either direct or indirect order from the superior, constitute an activity that support the company’s core production and shall not in any way hinders the production process of the company should the outsourced work is not properly performed. Article 65 (3) requires that companies accepting the outsourced work shall have legal entity character (an incorporated company).  Article 65 (5) of the Labor Law allows the Minister to amend or add the existing requirements laid under Article 65 (3).

Decision KEP220/MEN/X/2004 on the Conditions for the Outsourcing of Work to Other Companies (the “Decision”) was drafted to facilitate the implementation of Article 65(5) of Law No. 13 of 2003 on Labor (the “Labor Law”) with regards to the prerequisites for outsourcing.  The Decision provides certain exceptions; namely, that the receiving company can be an unincorporated company if the work involves procurement of goods or consultation services, the company operates in maintenance and reparation and consultation service which employ less than 10 people. The decision also allows outsourcing to unincorporated companies if within the region there are no qualified incorporated company eligible to perform the work.

It is interesting to note that the Decision also regulates sub-contracting. The decision allows a company receiving outsourced work to sub-contract it to other company which is not incorporated. However, the Decision clarifies that should the non-incorporated sub contractor company fail to fulfil its obligation with respect to the rights of its employees, the initial company who received the outsourcing must bear the responsibility.

The Decision displays several peculiarities and inconsistencies. First, it was intentionally drafted to facilitate Article 65(5). Article 65(5) allows minister to amend Article 65 (2) which contains the terms and conditions for outsourcing. However, the provision of the Labor Law requiring outsourcing to be accepted by an incorporated company is Article 65 (3). Article 65(5), an Article used by the minister to amend the Law only allows amendment toward Article 65 (2) and not Article 65 (3). Under the existing Administrative Law, the decision may be deemed as ultra vires or act of government official which falls outside the scope of authority granted to it and is therefore subjects to a review by Administrative Court. The second peculiarity is with respect to permission to refer to unincorporated company should within a particular region the outsourcing company fails to find a qualified incorporated company  eligible to perform the work. The Decision allows the company to outsource it to an unincorporated company. It, however fails to explain the definition of (i) region – whether it covers a city or regent or provincial level and (ii) it fails to elaborate ‘qualified companies’. (mma)