Common Mistakes of Foreign Companies in Using Employer of Record in Indonesia

Employer of Record (EOR) is increasingly being chosen by foreign companies as a shortcut to recruiting workers in Indonesia without having to immediately establish a local business entity. With a large labor market and a relatively fast recruitment process, EOR offers a seemingly simple solution amidst the complexity of Indonesia’s labor regulations. However, behind this convenience, many companies are trapped in wrong assumptions. Misunderstanding the role of the EOR and its legal limitations can result in significant compliance risks.

Indonesia has a relatively formal and structured employment framework, especially after various regulatory updates post-Job Creation Law. In this context, EOR is not just an administrative service, but rather a part of the employment law system that has clear boundaries. When these limitations are ignored, the potential for disputes and unexpected liabilities arises.

One of the most common misconceptions is the notion that EOR completely shifts legal risk to the service provider. Formally, EOR does act as the employer of record. However, in law enforcement practice in Indonesia, work relationships are valued substantially. Companies that control day-to-day work, set targets and manage employee performance can still be viewed as functional employers.

In cases of employment disputes, authorities often assess who actually has control over the employment relationship. This means that EOR can reduce risk, but does not remove client responsibility completely.

Another mistake arises when companies try to use EOR for positions that cannot legally be outsourced. Indonesian labor regulations differentiate between core and non-core functions. Positions directly related to a company’s core activities—such as core sales, key product development, or strategic operational functions—often cannot be placed under an EOR scheme.

When companies impose an EOR model for these types of roles, the risk of administrative correction and demands for conversion to internal employee status becomes real. In some cases, this may trigger additional compensation obligations.

Many global companies come with high expectations of flexibility, including short-term contracts or easy layoffs. Indonesia does not operate with that logic. The majority of EOR workers are employed through a Specific Time Work Agreement (PKWT) which is subject to detailed rules, including the duration of the contract, reporting to the Ministry of Manpower, as well as compensation obligations if the contract is terminated early.

When companies ignore the PKWT structure and treat EORs like freelance workers, the financial consequences are often only realized at the end of the contract.

Another aspect that is often underestimated is employment costs outside of salaries. In Indonesia, employers are required to cover BPJS Health and BPJS Employment contributions in certain proportions. These contributions can add costs up to a double-digit percentage of gross salary.

Foreign companies that only compare net salaries are often surprised when they receive the final cost structure of the EOR. When these calculations are not done from the start, recruiting budgets become unrealistic.

Not all EOR providers in Indonesia have adequate structures and licensing. Some operate through informal partners or entities that do not have proper business classification. In conditions like this, the validity of the employment contract may be questioned, especially if an audit or dispute occurs.

For foreign companies, failure to conduct due diligence on an EOR provider is a costly mistake. The legality of the provider, BPJS and tax reporting capabilities, as well as understanding local regulations are crucial factors.

EOR is often most effective as a short to medium term market entry solution. However, a strategic error occurs when EOR is treated as a permanent replacement for the establishment of local entities. If a company begins to build a large team, generate income and run sustainable operations in Indonesia, the tax authorities may assess the existence of a Permanent Establishment (BUT).

At this point, the company may be required to form a local entity and comply with the Indonesian corporate tax regime. In other words, EOR is a transition tool, not an end goal.

These mistakes demonstrate that EOR should be understood as part of a compliance strategy, not simply a shortcut. Companies that successfully leverage EOR are typically those that understand legal constraints, adapt global expectations to local realities, and prepare clear transition plans.

In practice, many foreign companies prefer to consult local counsel before determining whether an EOR or entity creation is the most appropriate course of action. Firms such as CPT Corporate are often referred to as those who help companies assess appropriate market entry structures, both through Employer of Record in Indonesia and through company establishment (PT PMA) when the scale of the business begins to grow.

Employer of Record remains an effective tool for foreign companies looking to move quickly in Indonesia. However, such effectiveness relies heavily on a proper understanding of employment laws, outsourcing limitations, and long-term obligations. Mistakes in using EOR rarely occur due to bad intentions, but rather because of the assumption that Indonesia’s system is similar to other jurisdictions.

For companies that are able to read EOR as a measurable strategy—not an instant solution—Indonesia still offers great opportunities. The key is not speed alone, but rather the conformity of the structure with applicable laws.

About Company CPT

CPT Corporate, as a strategic partner in the Indonesian market, consists of an experienced team consisting of legal experts, accountants and business analysts who specialize in corporate affairs in Indonesia. CPT Corporate is determined to be a strategic partner that bridges the gap between business and government regulations. CPT Corporate’s expertise includes regulatory advice, tax compliance, business restructuring, foreign investment and complex mergers and acquisitions. CPT Corporate is committed to helping businesses navigate Indonesia’s dynamic market, ensuring smooth operations and sustainable growth. Not just an ordinary “Corporate Secretarial Provider”. CPT Corporate exists to reduce barriers and connect companies with the government. With experience in helping hundreds of companies, both local and foreign, in various sectors with various cases, CPT Corporate has enriched its experience and knowledge, so that it can provide the best service to clients.

This press release has also appeared on VRITIMES