Indonesian employment law as a strategic consideration in mergers and acquisitions

by Aurel Azzahra Akbar

In many mergers and acquisitions (M&A) transactions, primary attention is directed toward valuation, financing, and corporate structuring. Employment matters are often regarded as operational details to be addressed after signing. In practice, however, employment law frequently influences valuation assumptions, deal structure, and post-closing integration risk.

This is particularly true in jurisdictions such as Indonesia, where statutory employee protections are closely linked to corporate change events.

Under Indonesian law, the fundamental principle is continuity of employment. As reflected in the Job Creation Law and the amended Manpower Law, a merger or acquisition does not automatically terminate employment relationships. Employment relationships generally continue despite changes in ownership, unless either party elects otherwise. Where termination occurs as a consequence of corporate restructuring, employers are obligated to fulfil statutory entitlements, including severance pay, service pay, and compensation for rights.

These obligations may be substantial and can materially affect transaction economics. From a deal perspective, employment-related liabilities influence valuation assumptions, purchase price negotiations, indemnity arrangements, and overall risk allocation between parties.

The employment implications of a transaction depend significantly on the chosen structure. Under a carry-over approach, employment relationships continue with the post-transaction entity, supporting operational stability while requiring the acquirer to assume existing employment obligations. By contrast, a zero basis structure allows greater flexibility for workforce restructuring, but carries elevated legal risk if termination procedures and statutory entitlements are not handled in full compliance with applicable regulations.

In cross-border transactions, international investors may assume greater flexibility in workforce adjustments than Indonesian law permits. Misalignment of expectations at this stage can result in post-closing disputes or unexpected financial exposure. Employment-related risks are often latent, not immediately visible in financial statements, yet capable of crystallising after closing through industrial relations disputes or regulatory scrutiny, potentially disrupting operations and management focus.

Accordingly, employment due diligence should extend beyond headcount verification. It should assess compliance history, statutory payment obligations, employment agreements, collective labour arrangements, internal policies, and ongoing or potential disputes. Employment law should therefore be treated not as an administrative afterthought, but as an integral component of transaction strategy to preserve value and execution certainty.

Aurel Azzahra Akbar is a part of the corporate legal team at Protemus Capital, where she contributes her expertise in legal matters to support the company's operations and compliance efforts.

M&A M&A Employment Law Indonesia Protemus Capital Business Services