Shifting the Employment Paradigm to Reduce Operating Costs

Illustration: Gemini AI

Business in Indonesia is at a very challenging point. Increasingly fierce competition in both domestic and global markets requires businesses to be more alert to opportunities while remaining efficient. Yet efforts to stay competitive are often weighed down by rising operating costs. Higher office rents and electricity tariffs, as well as the procurement and depreciation of work assets such as operational vehicles, computers and furniture, all place a considerable burden on companies. Beyond these, however, human resources (HR) turns out to be the largest operating cost. This is because, under Indonesian employment law, employing a worker brings mandatory and ongoing obligations. Paying wages in line with annual increases in the minimum wage (UMP/UMK), providing the religious holiday allowance (THR), paying health insurance contributions (such as BPJS) and setting aside funds for severance pay and compensation for entitlements all create a relatively high operating cost structure.

In uncertain economic conditions, this high cost structure may hold back growth. Taking on more workers can boost revenue, but it also increases spending obligations that could cripple the company if revenue targets are not met. This forces businesses to think creatively and look for more adaptive strategies for managing their sales and marketing teams. One strategic solution now attracting attention is to shift the paradigm of the legal relationship. A relationship originally based on employment between worker and employer can be converted into a purely commercial relationship through an agency or affiliate arrangement. It is important to stress, however, that this shift differs from the “partnership” model commonly found in ride-hailing services. Here, the relationship is a business relationship between independent legal subjects. For example, in an agency relationship, the company works with agents, such as property or insurance agents, who work independently, bear their own operating costs and are rewarded on a profit-sharing basis. In an affiliate relationship, the company uses a network of digital marketing partners who work on a commission basis.

Through this shift, businesses can transform fixed costs into variable costs that arise only when a transaction or sale takes place. As a result, companies not only reduce their operating costs significantly but are also freed from employment regulations that are often out of step with fluctuations in business margins. On this basis, the author has written an article entitled “Shifting the Employment Paradigm to Reduce Operating Costs”. It uses a normative legal research method, focusing on the rules and norms of positive law, legal doctrine and legal principles relevant to the subject. The main focus is to analyse the alignment between employment legislation and the other laws governing agency and affiliate relationships.

The approach used is conceptual, chosen because the author seeks to examine the legal concepts underlying employment relationships and agency and affiliate relationships, in particular the concepts of independence and freedom of contract. The data come from secondary sources, comprising primary legal materials such as the Manpower Law and its amendments and the Civil Code; secondary legal materials such as literature, expert opinion and legal journals; and tertiary legal materials. All materials are analysed qualitatively using Progressive Law and the principle of freedom of contract as analytical tools. The article therefore addresses two questions: to what extent can agency or affiliate relationships significantly reduce a company’s operating costs, and what does an ideal agency or affiliate contract look like if it is to avoid creating an employment relationship under employment regulations?

Agency or Affiliate Relationships as a Way to Reduce Operating Costs

In the discourse of Progressive Law developed by Prof. Satjipto Rahardjo, law is seen as an institution intended to lead people to a better life: the law exists for people, not the other way round. In a dynamic business world, this paradigm gives employers room to change a legal relationship from employment to agency or affiliation, which can help reduce operating costs. Here are some of the reasons:

1. Minimum wage: Employment relationships are governed by Law Number 13 of 2003 on Manpower, as last amended by Law Number 6 of 2023 on the Enactment of Government Regulation in Lieu of Law on Job Creation into Law (the “Manpower Law”). Under Article 88(3)(a) of the Manpower Law, employers must comply with the minimum wage (UMP/UMK), which tends to rise every year regardless of whether the company’s sales are growing or it is making a loss.

2. Social security contributions: Under Law Number 24 of 2011 on the Social Security Administering Bodies (BPJS), every employer must register all its workers and pay BPJS Health and BPJS Employment contributions. In an employment relationship, these contributions are non-negotiable and must be paid every month. By converting employment into an agency or affiliate relationship, the company’s obligation to pay contributions falls away, as agents and affiliates act as independent legal subjects responsible for their own social security cover.

3. Severance: Article 156(1) of the Manpower Law requires employers to pay severance pay, long-service pay and compensation for entitlements when employment is terminated. These amounts must be provisioned from the outset in the company’s financial plans, directly reducing working capital. By contrast, in an agency or affiliate arrangement governed by Article 1338 of the Civil Code, the relationship ends in accordance with the contract, with no obligation to pay severance.

4. Overheads: In terms of day-to-day overheads, an employment relationship requires the employer to provide adequate work facilities in line with occupational health and safety standards, allocating capital for desks, chairs, computers and even operational vehicles. In an agency or affiliate relationship, however, the principle of independence applies in full. Agents and affiliates use their own tools to carry out their work, so the company can eliminate asset depreciation and maintenance costs that would otherwise weigh on its operating costs.

From a progressive law perspective, if a company bears excessive costs but its revenue falls short of target, employment law fails in its aim of promoting human welfare. The consequences are serious: the company may face claims, demands for compensation and, in certain circumstances, even criminal sanctions. Agency and affiliate arrangements therefore offer a way to convert fixed costs into variable costs. The company pays only commission or a profit share when a sale is made, automatically aligning its expenditure with its revenue. This transformation also cuts administrative and managerial costs that often go unnoticed. In an employment relationship, the company needs a large HR department to manage attendance, performance appraisals and complex industrial relations matters. With an agency or affiliate arrangement, the relationship is transactional. The company does not need to control in detail how its partners work, so its organisational structure becomes leaner and can focus on developing its core products rather than getting caught up in employment bureaucracy.

It should be stressed that agency and affiliate relationships are purely commercial relationships recognised in Indonesian commercial law. Unlike the partnership model often debated in ride-hailing services, agency and affiliation in this context emphasise each party’s full autonomy. Because there is no element of subordinate instruction, the employer is freed from other statutory employment entitlements, such as overtime pay, paid leave and other allowances, which cumulatively can amount to 30% to 40% on top of a worker’s wages. Reducing operating costs in this way gives companies breathing space to expand without major financial risk. By reducing HR and office costs, profit margins can be reinvested in innovation and better product quality. Through the lens of progressive law, this is a form of proportionate justice: the employer can run its business sustainably, while agents and affiliates have the opportunity to earn an unlimited income based on their own performance. The shift from employment to agency or affiliation has thus been shown to reduce operating costs significantly. With a more efficient cost structure, a company not only becomes more price-competitive but is also more resilient to future economic uncertainty, both national and global.

The Ideal Agency or Affiliate Contract

In drafting an ideal agency or affiliate contract, the guiding principle must be freedom of contract as set out in Article 1338 of the Civil Code, which provides that all lawfully made agreements bind the parties as if they were law. The business and its partner have full sovereignty to determine the content, form and terms of their cooperation, provided they do not contravene the law. This is important to make clear that the legal relationship is a purely civil, business-to-business relationship, not one of subordination between employer and worker.

The greatest challenge in drafting such a contract is avoiding its classification as an employment relationship. Under Article 1 point 15 of the Manpower Law, an employment relationship exists where there are the elements of work, wages and instruction. If all three are present in practice, the partnership status automatically falls away by operation of law and becomes an employment relationship. An ideal contract must therefore eliminate these elements, particularly the element of “instruction” or subordination, which is what distinguishes an employee from an agent or affiliate. The author summarises several proposals below:

1. Identity of the parties and title of the agreement: Avoid the terms “Employer” and “Worker”. Use “Principal” and “Agent” or “Affiliate” instead. The recitals should state that the Agent or Affiliate is an independent legal subject with their own expertise, facilities and infrastructure for providing marketing services. Confirming their independent status at the outset is essential to show that the parties stand on an equal and mutually beneficial footing.

2. Limiting the Principal’s intervention in working methods: In an employment relationship, the employer may give detailed instructions on how work is done. In an ideal agency contract, however, the Principal may only set targets for results. The contract must state expressly that the Agent or Affiliate has full freedom to decide their working hours, place of work and strategy, without having to follow the company’s internal managerial SOPs. The absence of attendance records and daily administrative reports is strong evidence that there is no subordination.

3. Work facilities: Provisions on work facilities must be drafted very carefully. A safe contract should state that the Agent must provide all the tools they need, from communication devices and computers to operational vehicles. The Principal should not provide permanent office facilities or company equipment to the Agent. Requiring the Agent to bear their own operating costs reinforces the principle that the Agent or Affiliate acts independently.

4. Compensation: The contract must not use the terms “Wages” or “Allowances”. The right terms are Commission/Success Fee or Profit Sharing/Revenue Sharing. Payment must be based entirely on performance, not on units of time such as a monthly payment. The contract should also make clear that there is no minimum wage or fixed compensation if no transaction occurs. This reflects the principle that the reward is determined by agreement on the economic value of an achievement, not by time served.

5. Non-exclusivity: An ideal agency or affiliate contract should be non-exclusive, meaning the Agent or Affiliate is free to work with or partner with other companies provided there is no real conflict of interest. If an Agent or Affiliate may serve several Principals, it is legally difficult to classify them as an employee.

6. Dispute resolution: The contract must provide for disputes to be resolved through civil proceedings, not as industrial relations disputes. The dispute resolution clause should expressly choose the District Court or arbitration as the forum. It is also advisable to include a waiver clause in which both parties agree to exclude the application of the Manpower Law to their legal relationship, to the extent permitted by law. This makes clear that any dispute is a breach of contract, not a dispute over workers’ rights or interests.

7. Termination: The agency contract should refer to Articles 1266 and 1267 of the Civil Code. Unlike an employment relationship, which requires a complex termination procedure and severance under Article 156 of the Manpower Law, an agency or affiliate relationship can be ended by agreement or upon a breach of its terms, with no obligation to pay severance. Stating expressly that there is no long-service pay or compensation for entitlements will reduce the risk of claims when the relationship ends.

In short, the ideal contract is one that keeps a safe distance from the characteristics of an employment relationship. By making full use of the principle of freedom of contract, businesses can set clear boundaries on purely commercial rights and obligations. Such a contract is not only a tool for cost efficiency but also a legal safeguard that protects the company’s operating costs from potential employment disputes in the future.

Agency and affiliate relationships can reduce a company’s operating costs very significantly because they convert the fixed costs of employment into variable costs that are entirely performance-based. The savings include not only eliminating ongoing obligations such as annual minimum wage increases and BPJS contributions, but also the reserves set aside for severance that can erode working capital. The costs of procuring, depreciating and maintaining assets used as work facilities can also be reduced. From a progressive standpoint, this arrangement gives companies room to stay competitive and adapt to market fluctuations without being caught up in employment law risk.

An ideal agency or affiliate contract must be founded on freedom of contract while excluding the elements of an employment relationship. At a minimum, it should include: the terms Principal and Agent/Affiliate, with a statement of independent status in the recitals; limits on intervention in working methods, focusing on results without administrative or managerial control or company SOPs; an obligation on the agent/affiliate to provide their own tools without company facilities; commission- or profit-sharing-based compensation with no fixed wage or time-based component; a non-exclusive relationship to avoid economic dependence; dispute resolution through civil proceedings or arbitration, excluding the application of the Manpower Law; and termination provisions referring to Articles 1266 and 1267 of the Civil Code. Drafted this way, the contract not only serves to make operating costs more efficient but also protects the company from the risk of an employment relationship arising in the future.