Global investors are watching closely to see that the bill is not watered down in parliamentary debates, as Southeast Asia's largest economy tries to compete for manufacturing investment relocating from China against the pandemic backdrop.
Lawmakers held weekend meetings to wrap up debate so the bill could be passed before a parliament recess on Oct. 9.
Trade unions were preparing for rallies this week and a national strike by 5 million workers from Oct. 6 to 8, to press their demand for the proposed labour changes to be dropped, a union leader said.
"During the national strike, we will stop all production processes," Said Iqbal, president of the Confederation of Indonesia Trade Unions, said in a statement.
Unions and green groups have held several rallies to protest the bill, although last week's rallies were comparatively small.
On Sunday, the legislation committee agreed to a cut in mandatory severance benefits paid by employers to 23 times monthly wages, versus a maximum of 32 times now, said Firman Soebagyo, a lawmaker of the Golkar party.
Workers would still be eligible for the existing level and the government would fund the difference, he added.
The government had sought to cut the maximum to 19 times the monthly wage, saying the rules were too generous and deterred hiring.
The committee also rejected proposals to tie the minimum wage only to economic growth and let labour-intensive industries set their own wages, but backed proposals to cut mandatory paid leave and allow longer work hours.
Nomura economist Euben Paracuelles called the committee's decision a "significant watering down" of reforms, saying that scrapping high severance pay and setting minimum wages in line with productivity were the two most crucial changes needed.
Although it would have been ideal for parliament to pass all the proposals, a compromise was better than nothing at a time of extraordinary economic challenge, said Wellian Wiranto, an economist with OCBC.
"The passage does not look like a sure thing just yet, given the opposition from the labour movement," he warned, however, adding that failure to pass a meaningful reform would hurt Indonesia's economic recovery from the coronavirus pandemic.
The proposed labour reforms are part of a so-called "omnibus" bill of changes in more than 70 laws, to allow parliament to vote in a single swoop and speed reforms.
The legislation committee must now ask ministers to agree on its decision, before taking the measure to a vote.
Panel chairman Supratman Andi Atgas told Reuters such a meeting had yet to be set, as lawmakers put the finishing touches on a final draft.
(Additional reporting and writing by Gayatri Suroyo; Editing by Ed Davies and Clarence Fernandez)
By Tabita Diela and Maikel Jefriando