Summary of New Regulatory Framework for Outsourcing Practices

Executive Summary

On April 30, 2026, the Ministry of Manpower officially enacted Permenaker Number 7 of 2026. This regulation follows the Constitutional Court Mandate (Decision No. 168/PUU-XXI/2023) and marks a significant shift from the broad outsourcing permissions allowed under the initial Job Creation Law. The primary objective is to enhance worker protection by strictly limiting the types of work that can be outsourced to third-party providers.

Key Regulatory Changes

The new regulation moves away from a “free market” approach to outsourcing, re-introducing a specific list of permitted job functions.

1. Restricted Scope of Work

Outsourcing is now legally restricted to only six specific fields:

Cleaning Services (Layanan Kebersihan)
Security Services (Tenaga Pengamanan)
Catering/Food Services (Jasa Penyediaan Makanan)
Employee Transportation (Angkutan Pekerja)
Technical Support Services (Jasa Pemeliharaan Teknis)
Support Sectors in Mining, Oil, and Gas (Penunjang Sektor Pertambangan dan Migas)

2. Contractual Requirements

Companies must now have written agreements that detail:

The specific type of work (must fall within the 6 categories).
Duration of the contract and work location.
Protection of worker rights, including wages, social security (BPJS), and severance entitlements.

3. Equal Protection Mandate

The regulation reinforces that outsourced workers must receive protection equal to that of permanent employees in terms of safety (K3), leave, and overtime pay.

Impact on the Labour Market

The implementation of Permenaker No. 7/2026 is expected to create several structural shifts in the employment landscape:

Market Factor	Anticipated Impact
Direct Hiring	Many industries (e.g., IT, Marketing, Customer Service) that previously relied on outsourcing must now transition to direct fixed-term (PKWT) or permanent (PKWTT) contracts.
Worker Bargaining Power	By limiting “precarious” contract types, the regulation aims to increase job security and bargaining power for workers in non-exempt fields.
Operational Costs	Companies may face higher administrative and HR costs as they move from “as-a-service” labor models to direct payroll management.
Compliance Risk	The regulation introduces strict sanctions for companies continuing to outsource “core” or non-listed functions, leading to a surge in internal HR audits.

Analysis: The “Core vs. Non-Core” Doctrine

The new regulation marks the return of the Functional Distinction Doctrine. Historically, labor law distinguished between “core business activities” (the heart of the company) and “non-core activities” (support services).

Legal Standing: The 2026 regulation effectively re-implements the spirit of Article 59 of the original Labor Law (13/2003). By limiting outsourcing to six sectors, the government is legally defining “core” activities as those that must be handled by direct employees to prevent “labor exploitation chains.”
Liability Shifting: Under the new rules, if a company outsources a “core” function (e.g., a bank outsourcing its tellers), the legal relationship automatically shifts. By operation of law, the outsourced worker can claim direct employment status with the user company, bypassing the agency.

II. Structural Impact on the Labour Market

The restriction creates a “friction” in the market that forces a reorganization of human capital.

1. The “Insourcing” Wave

Industries like Fintech, Manufacturing, and Retail are currently undergoing massive “insourcing.”

The Shift: Companies are moving from Variable Costs (paying a vendor invoice) to Fixed Costs (payroll, benefits, and long-term liabilities).
The Result: While this increases worker stability, it may lead to more rigorous hiring standards, as companies can no longer “easily replace” a worker provided by an agency.

2. Professionalization of Outsourcing Firms

The 2026 regulation creates a “survival of the fittest” environment for outsourcing agencies.

Agencies can no longer be “generalists.” They must become specialized firms in the six permitted niches (e.g., highly specialized security or industrial catering).
Market Consolidation: Smaller agencies that lack the capital to provide the mandated “Equal Protection” benefits are likely to be acquired or shut down.

III. The Economic Trade-off: Efficiency vs. Security

The labor market is currently balancing a “Dual-Track” system:

Aspect	Pre-2026 (Job Creation Law Focus)	Post-2026 (New Permenaker Focus)
Business Agility	High: Easy to scale up/down via agencies.	Moderate: Scaling requires direct hiring/termination.
Wage Compression	High: Vendors competed by lowering labor costs.	Low: Fixed minimum standards prevent “race to the bottom.”
Skill Development	Low: Agencies rarely invested in long-term training.	Higher: Direct employers invest more in their own staff.

IV. Potential Circumvention Risks

Legal experts are watching for two primary “workarounds” that companies might use to bypass these restrictions:

Wholesale Functional Outsourcing (Pemborongan Pekerjaan): Companies may try to disguise labor outsourcing as “Project-Based Work” or “Service Level Agreements” where they buy a result rather than hours.
Extended Probationary Loops: Using successive short-term direct contracts (PKWT) to mimic the flexibility of outsourcing without using a third party.

V. Compliance Checklist for Legal Counsel

[ ] Identify: List every worker currently under a third-party contract.
[ ] Classify: Does their job description fit the 6 categories? (Strict interpretation).
[ ] Transition: For non-compliant roles, draft transition plans to Direct PKWT (Fixed Term) or PKWTT (Permanent).
[ ] Vendor Audit: Ensure remaining vendors have updated licenses (NIB) specifically for the 6 permitted sectors.

Legal Note: Failure to comply doesn’t just result in fines; it can lead to a court declaring all your outsourced staff as permanent employees retroactive to their start date, creating massive back-pay liabilities.

Conclusion and Recommendations

The “wild west” era of outsourcing under the 2020-2023 framework has effectively ended. Employers should immediately audit their current vendor contracts. Any outsourced roles falling outside the six approved categories must be restructured into direct employment models to avoid legal liability and potential industrial disputes.