Under the Manpower Law, employers and employees must make every effort to avoid the termination of their employment relationship. A unilateral termination by the employer is prohibited and any termination must have valid and limited grounds under the law. In theory, if an employee objects to their termination, the employer must pay their salary until the Industrial Relations Court, which handles employment disputes, approves the termination. This is sometimes seen as a loophole that allows employees to prolong the termination process. This is another reason why employers usually seek an alternative arrangement for using employees' services and avoid entering into employment relationships.
One of the most common ways in which a company can use a person's services is by entering into a partnership agreement and thereby treating them as a partner instead of an employee. In such cases, the expectation is that the relationship between the parties is based on an agreement, rather than an employment relationship governed by the Manpower Law. One of the best-known examples of a partnership agreement is that between an online app-based transportation company and its drivers.
However, partnership agreements often give rise to disputes, especially if they are terminated. Thus, to mitigate any adverse effect, partnership agreements must be drafted diligently so that they are not deemed to create an employment relationship between the principal and the partner. There have been many cases in which the Manpower Office or the Industrial Relations Court have deemed poorly drafted partnership agreements to be employment agreements.
Legal basis of partnership agreements
Strictly speaking, partnership agreements do not fall within the scope of the Manpower Law. The main difference between a 'partner' and an 'employee' is therefore the existence of an employment relationship between the principal (or, in the case of employment, the employer) and its partner (or, in the case of employment, the employee). While employment relationships are subject to the Manpower Law, partnership agreements may, in principle, be considered private agreements between the parties. Therefore, they are subject to the Civil Code.
Under the Civil Code, an agreement which has been constituted legally is deemed to be the law for the parties thereto. An agreement must satisfy the following legal requirements:
- the parties must have consented to the agreement;
- the parties must have had the capacity to enter into the agreement;
- the agreement must have a certain subject; and
- the agreement must have a lawful purpose.
Agreements which fail to satisfy the first or second requirements may be revoked by the parties (by way of filing a lawsuit with the courts and obtaining a final and binding court ruling). Agreements which fail to satisfy the third or fourth requirements will be deemed invalid by law.
There are no specific rules on how to draw up a partnership agreement, except in industries which have specific technical requirements for the appointment of a partner (especially if the partnership agreement concerns a distributorship, agency or franchise arrangement). The parties can agree on the content of a partnership agreement, but they must always consider the above legal requirements.
Partnership agreements generally relate to a mutual relationship between the parties. Therefore, in most cases, the parties' bargaining position is equal. This is not the same in an employment relationship, as employers generally have a better bargaining position than employees when negotiating the terms of an employment agreement.
In addition, it is more common for partnership agreements to be entered into by two companies (eg, to establish a joint venture or distributorship) instead of by a company and an individual. This article examines only the latter.
Risks of partnership agreements
A number of factors must be considered (especially by the principal) when preparing a partnership agreement with an individual.
Each party's obligations An 'employment relationship' is defined as a relationship between an employer and an employee under an employment agreement which details the following elements:
- the nature of the employee's work;
- the employee's salary; and
- their orders and instructions.
These elements are the first indicators that a partnership agreement could be considered an employment agreement.
If, for example, under a partnership agreement, Party A (the partner) must perform certain work on the instructions of Party B (the principal) and will, in return, receive a monthly payment from Party B, it can be assumed that the partnership agreement is actually an employment agreement. Whether the agreement is entitled a 'partnership agreement' is irrelevant.
To mitigate the above possibility, partnership agreements should clearly state what each party will contribute to the partnership. They should not merely state that "payment from the principal to the partner according to the work he/she performs upon the principal's instructions". One example is the partnership between an online app-based transportation company (the principal) and a driver (the partner), in which the partnership agreement stipulates that the principal will provide the service of managing orders from customers and forwarding them to the partner, who will then use its own property (ie, vehicle) to transport the customers. The partner has the freedom to choose whether to accept the order. The fee that the customer pays is shared between the principal and the partner according to the agreement (or, alternatively, the partner pays a certain fee for using the application). In this scenario, the driver enters into a partnership agreement with the principal because they wish to use the principal's application services and not the other way around (the principal hires the partner to perform tasks on its behalf – namely, to provide a transportation service to the principal's customers).
Partnership agreements should also be drafted to avoid creating an employer-employee relationship. Some common mistakes that principals can make in the distribution of obligations under a partnership agreement include the following:
- The principal determines the partner's annual leave and its approval.
- The principal enrols the partner in the Manpower Social Security Programme, despite arguing that they are not an employee.
- The principal issues a payslip to the partner.
- The partner's scope of work includes performing duties which are considered to be the principal's core business (eg, a shoe manufacturing company hires a shoemaker under a partnership agreement).
- The principal imposes employment penalties (eg, warning letters or demotions), conducts a performance review of the partner or determines whether they will be promoted.
The Manpower Office often finds that the above scenarios indicate that a partnership agreement is actually an employment agreement.
Terms used in partnership agreements Another clear indicator is the terms used in a partnership agreement. Specifically, the Manpower Law's terms should not be used in partnership agreements to avoid the assumption that they are actually employment agreements.
Examples of terms that should not be used in partnership agreements are:
- 'employer';
- 'employee';
- 'employed';
- 'salary';
- 'working hours'; and
- 'work performance bonus'.
Partner's confirmation Partnership agreements should include a clause in which the partner confirms that the agreement may in no way be considered to establish a employment relationship between the parties. However, the Manpower Office and the Industrial Relations Court may set aside such clauses if they decide that a partnership agreement should be deemed an employment agreement.
Despite the above, the Manpower Office and the Industrial Relations Court may have different views on partnership agreements and will therefore issue decisions on a case-by-case basis. Under the Procedural Law, a judging panel is not obliged to follow a previous court's ruling (precedent) even if the cases are similar. The following rulings illustrate this differing case law.
Sigit Suyadi v Sulaksono (as the owner of CV RAPI) In Sigit Suyadi v Sulaksono (as the owner of CV RAPI), the plaintiff argued that he had been working as a delivery driver for the defendant.(1) The plaintiff had signed a partnership agreement with the defendant, which stated that the plaintiff was merely a partner of the defendant and not an employee. The plaintiff argued that his employment had been terminated by the defendant and that he was therefore entitled to severance. The defendant argued that the plaintiff was not entitled to any severance as he had been a partner and not an employee.
In its ruling, the Industrial Relations Court considered whether the three elements of an employment agreement (ie, work, salary and orders or instructions) had been present in the relationship between the plaintiff and the defendant.
Work The court held that this element had existed in the relationship, as the plaintiff had been required to perform specific work (ie, delivering certain goods using a truck from one location to another).
Salary The court noted that the payment for the plaintiff's services had been determined by the parties and was a 'lump-sum amount', which included all of the expenses that the plaintiff might have incurred (eg, fuel and meals). Therefore, the plaintiff's income was a lump-sum amount minus the costs incurred to transport the goods. The amount that the plaintiff had received was therefore not fixed, but a fluctuating income. Therefore, the court ruled that the payment that the defendant had made should not be considered a salary.
Orders or instructions The court noted that the plaintiff had been required to sign in every time he went to the defendant's office and to appear in the office every day. However, there was no penalty for failing to do so. The only consequence had been the fact that the defendant would not give him the job of delivering goods if it received an order that day. Therefore, the court decided that the element of orders or instructions did not exist.
The court therefore dismissed the plaintiff's suit.
Hendrawan v PT Puninar Jaya Similar to the above case, the plaintiff in Hendrawan v PT Puninar Jaya argued that he had been working for the defendant as a driver.(2) However, the defendant argued that he had not been an employee, but rather a partner under the partnership agreement which the parties had signed. When the defendant terminated the agreement, the plaintiff filed a lawsuit in the Industrial Relations Court.
As the driver of a delivery vehicle, the plaintiff had worked on a commission basis and signed a partnership agreement. Therefore, the defendant argued that he had been a partner and not an employee. However, the court decided that an employment relationship had been established between the parties, as all of the required elements had existed. This included the work element, as the defendant had "procured the goods which the Plaintiff had to transport". The court therefore ordered the defendant to pay the plaintiff a severance package. The Supreme Court upheld the Industrial Relations Court's ruling.(3)
In theory, a pure partnership agreement should not establish an employment relationship between the principal and the partner. However, as there are no specific regulations on this issue and, in practice, the use of partnership agreements can give rise to disputes.
There is no such thing as a bulletproof partnership agreement. However, the above considerations can serve as guidelines on how to draw up a proper partnership agreement and decide whether such an agreement is appropriate. However, companies should bear in mind that each partnership agreement is unique and should be viewed and reviewed on a case-by-case basis.
For further information on this topic please contact Lia Alizia or Harris Toengkagie at Makarim & Taira S by telephone (+62 21 252 1272) or email ([email protected] or [email protected]). The Makarim & Taira S website can be accessed at www.makarim.com.
Endnotes
(1) Case 79/G/2013/PHI-Sby, 12 February 2014.
(2) Case 147/PHI.G/2012/PN.JKT.PST, 7 November 2012.
(3) Supreme Court Ruling 276K/PDT.Sus-PHI/2013, 18 July 2013.
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