Contract Employees Resign? Read the Penalties and Compensation Here

It’s not uncommon for contract employees to resign before their contract ends. Such early departures can create a range of issues for both the employee and the employer.

In these circumstances, it’s crucial for both parties to have a clear understanding of their rights and responsibilities to navigate the transition smoothly and avoid potential disputes. Both the company and the departing employee need to be informed about the possible financial penalties, compensation entitlements, and any contractual obligations that might come into play.

By gaining a thorough understanding of these factors, you can ensure a more seamless resolution and uphold the terms of the contract while addressing any concerns that arise from an early resignation. Read on to understand the penalties and compensation involved when contract employee resign before the contract period expires!

Penalties for Resignation of Contract Employees

According to Article 62 of the Labor Law, if either party—whether the employee or the company—terminates the employment relationship before the agreed contract period ends, the terminating party is required to pay compensation to the other party. This compensation amounts to the wages until the end of the contract period.

However, there are exceptions to this obligation to pay a penalty. According to Article 61, paragraph (1) of the Labor Law, the following conditions allow for termination of the employment relationship without paying a penalty:

1. Employee’s Death:

If a contract employee dies before the contract ends, there is no obligation to pay a penalty.

2. Contract Expiration:

When the contract period ends as agreed, no penalty needs to be paid.

3. Court or Dispute Resolution Body Decision:

If there is a legal ruling from a court or an industrial dispute resolution body that terminates the employment, penalties do not apply.

4. Certain Circumstances:

Situations or events specified in the employment agreement, company regulations, or collective labor agreements that lead to the termination of employment without penalties.

Compensation for Contract Employees

In addition to penalties, contract employees who resign before the contract ends are also entitled to compensation. This is regulated by Government Regulation (PP) No. 35 of 2021 on Fixed-Term Employment Agreements (PKWT). The amount of compensation depends on the duration of the contract employee’s service.

1. PKWT for 12 Months or More

Employees who have worked for 12 continuous months are entitled to a compensation equivalent to one month’s wages. This serves as recognition for their contribution during that period.

2. PKWT for 1 Month or More but Less than 12 Months

For employees who have worked between 1 month and less than 12 months, the compensation is calculated proportionally. The calculation involves dividing the period of employment by 12 months and then multiplying by one month’s wages.

3. PKWT for More than 12 Months

For employees who have worked for more than 12 months, compensation is calculated similarly by dividing the employment period by 12 months and multiplying by one month’s wages. This ensures that the compensation is proportional to the length of service.

Resigning from a contract position before the end of the contract can have implications for both penalties and compensation. It is important for both employees and companies to understand their rights and obligations, so they can avoid disputes. Based on the Labor Law and PP No. 35 of 2021, penalties may be imposed on the party terminating the contract early, except in certain specified conditions. On the other hand, compensation must be provided to contract employees based on their length of service.

Understanding these regulations will help companies design fair and legally compliant policies, and assist employees in making informed decisions regarding resignation. By doing so, both parties can reach mutually beneficial agreements and minimize potential conflicts in the future.

If your company needs assistance managing employment agreements, RecruitFirst as an outsourcing company is here to help. We offer comprehensive solutions in human resource management, including handling employment contracts.

With our experience and expertise, we can ensure that the process runs smoothly and in accordance with legal requirements. Contact us today to collaborate, so you can focus on business development while ensuring compliance with applicable regulations.