Expanding your business into Indonesia comes with important hiring decisions. Should you use an Employer of Record (EoR) service or set up your own legal entity for traditional hiring? Both approaches have distinct advantages and challenges that can significantly impact your operations in this dynamic Southeast Asian market.
Indonesia’s complex labor regulations and unique business environment make this choice particularly important for foreign companies. Understanding the key differences between these hiring models can help you determine which option aligns best with your business goals and resources.
What is an Employer of Record (EoR)?
An Employer of Record is a third-party organization that takes on the legal responsibility of employing workers on behalf of another company. The EoR handles all aspects of employment including payroll processing, tax compliance, benefits administration, and ensuring adherence to local labor laws.
In this arrangement, the EoR becomes the official employer on paper, while your company maintains day-to-day management of the employees’ work activities. This separation of legal employment from operational management creates a unique structure that offers several advantages for companies entering the Indonesian market.
EoR services have gained popularity as businesses seek more flexible ways to expand globally without establishing legal entities in each country. For Indonesia specifically, where regulatory compliance can be complex, EoR solutions provide a streamlined entry path.
Traditional hiring in Indonesia explained
Traditional hiring involves establishing your own legal entity in Indonesia, typically through a PT PMA (foreign-owned limited liability company), and directly employing your workforce. Your company takes full responsibility for all employment-related obligations, compliance requirements, and human resource functions.
This approach requires significant investment in understanding and navigating Indonesia’s labor laws, tax regulations, and mandatory benefits systems. Companies must manage everything from employment contracts to social security contributions (BPJS), religious holiday allowances (THR), and termination procedures that align with Indonesian labor law.
With traditional hiring, your company has complete control over employment policies, compensation structures, and company culture. However, this control comes with greater administrative burdens and compliance responsibilities that require specialized knowledge of the local business environment.
Key differences in cost structure and timeline
One of the most significant differences between EoR and traditional hiring lies in the initial investment and ongoing costs. Traditional hiring requires establishing a legal entity, which can cost between $5,000-$10,000 in Indonesia, plus minimum capital requirements. This process typically takes 2-3 months before you can begin hiring employees.
In contrast, EoR services allow you to start hiring within days or weeks, with no upfront entity establishment costs. While many EoR providers charge a percentage of the employee’s salary, ISC offers a transparent flat-fee model—making budgeting simpler and more predictable.
For small to medium teams or short-term projects, Employer of Record (EoR) services are often the most cost-effective option. This approach eliminates the need for an internal HR team and all the associated costs and liabilities, such as managing payroll, benefits, and local compliance.
However, as your team grows beyond 15–20 employees or for very long-term operations, traditional hiring may become more economical, even with the higher initial investment.
Compliance considerations for both hiring methods
Indonesia’s employment regulations are comprehensive and continually evolving, making compliance a significant concern for foreign employers. The country’s Manpower Law (No. 13/2003) governs most employment relationships and includes specific requirements for contracts, working hours, leave entitlements, and termination procedures.
With an EoR arrangement, the provider assumes legal responsibility for employment compliance. This includes staying current with regulatory changes, managing mandatory benefits, and handling labor disputes. For companies unfamiliar with Indonesian employment law, this risk transfer represents a major advantage.
Traditional hiring places all compliance obligations directly on your company. This requires either building internal expertise or partnering with local legal advisors to ensure proper adherence to regulations. While this creates additional responsibility, it also allows for more customized employment policies within the legal framework.
Non-compliance penalties in Indonesia can be severe, including fines, business license revocation, and even criminal charges for serious violations. This makes the compliance aspect a critical factor when choosing between EoR and traditional hiring approaches.
Employee experience and management control
The employment experience differs significantly between EoR and traditional hiring models. In traditional hiring, employees are directly connected to your company from day one. This creates clearer identification with your organization, stronger cultural alignment, and more straightforward career progression pathways.
With an EoR arrangement, employees technically work for the EoR provider while taking direction from your company. This dual-employer situation can sometimes create confusion about company identity and belonging. However, good EoR providers work to minimize this disconnection through transparent communication and co-branding approaches.
Management control also varies between models. Traditional hiring gives you complete authority over all employment decisions, from compensation adjustments to disciplinary actions. EoR arrangements maintain your control over daily work activities but may require coordination with the EoR provider for formal employment changes.
For roles requiring deep integration into company culture or sensitive positions with access to proprietary information, traditional hiring often provides advantages in building stronger organizational loyalty and alignment.
Making the right choice for your business
Selecting between EoR and traditional hiring in Indonesia should align with your business strategy, timeline, and resources. EoR solutions excel for companies that:
- Need to hire quickly without waiting for entity establishment
- Want to test the market before making larger investments
- Have a small headcount (typically under 15 employees)
- Prefer to minimize administrative burdens and compliance risks
- Need flexibility to scale up or down quickly
Traditional hiring makes more sense for companies that:
- Plan a long-term, substantial presence in Indonesia
- Will employ a larger workforce
- Want maximum control over employment policies and practices
- Seek to build a distinct company identity and culture
- Have the resources to manage compliance and administration
Many companies actually implement a hybrid approach, using EoR services for initial market entry and transitioning to traditional hiring once they’ve established a stable presence and larger team in Indonesia.
The choice between EoR vs traditional hiring ultimately depends on balancing immediate needs against long-term objectives. By carefully evaluating factors like timeline, cost structure, compliance capabilities, and desired employee experience, you can determine which approach best supports your business goals in the Indonesian market.
