Employment Law

Employment Regulations

Sri Lanka has three main employment laws governing different categories of employees: These laws are as follows:

• Shops and Office Employees Act No. 19 of 1954 - This regulation applies to employees in shops and offices. However, exceptions are made for work related to markets, charities, schools, caregiving and funerals. The exception also applies to working hours of less than one month.  
• Factories Ordinance 1950 - This law governs manufacturing and factory employees; employees engaged in manual labor activities, technical training, probation work and vocational training.
• Wage Boards Ordinance, 1941 – This law governs other industries not listed in the above Act.

These laws provide various rules and regulations. Some laws provide the same employee benefits (such as leave requirements), while other laws provide separate employee rights. There are also many labor laws that provide employees with additional rights.

Employment Contract in Sri Lanka

While employment contracts in Sri Lanka can technically be oral, best practice requires employers to draft concise, strongly worded written employment contracts. This will clarify the legal rights and responsibilities of both employers and employees. The employment contract should contain provisions regarding basic salary, allowances, compensation, employee responsibilities and termination agreements. All references to wages shall be expressed in Sri Lankan Rupees (LKR).

When you do business with Remoly’s Sri Lanka PEO, we ensure that all employment contracts comply with Sri Lankan labor regulations.

Fixed Term

Indefinite

Working Hours in Sri Lanka

According to the Shop and Office Employees Act No. 19 of 1954, the normal working hours of shop and office employees shall not exceed 9 hours per day, or 45 hours per week.

For store and office employees who work more than 8 hours during the day, a one-hour meal break must be provided between 11:00 am and 2:00 pm. For store and office employees who work more than 8 hours at night, a one-hour meal break must be provided between 7:00 pm and 10:00 pm.

Employees are entitled to an additional half-hour break if they work between 4:00 and 6:00 p.m. If an employee starts work later than 10:00 p.m., an additional half-hour break must be provided for every four working hours.

For employees in the tourism or entertainment industry who work at least 8 hours per day, the 8-hour working day can be extended to 11 hours and includes a 3-hour continuous rest period.

Muslim-run businesses may extend their lunch breaks on Fridays for prayers.

According to the Wage Board Regulations, the normal working time per week is a maximum of 48 hours. Any time exceeding this duration is considered overtime, which can be up to a maximum of 12 hours per week. If there is no agreement on overtime rates, payment will be made at 1.25 times the employee's base rate.

Sri Lanka Statutory Holidays

Employees covered by the Shops and Office Employees Act No. 19 of 1954 are entitled to paid leave on all statutory holidays.

Under the Shop and Office Employees Act No. 19 of 1954, the Labor Commissioner is required to approve shop or office employees to work on holidays. In this case, the employee is usually given alternative leave on a different date, or is paid an extra day's pay.

Employees working in industries with wage boards are entitled to paid leave on all statutory holidays.

All employees are entitled to one day of paid leave on the full moon Poya day. These dates will vary from year to year. If employees are required to work on this day, they must be paid at least 1.5 times their regular wage.

Income Tax

Total earnings will vary depending on how much the employee earns in Sri Lanka. This is divided into different tiers called "Tax Blocks". An employee is required to pay income tax if their monthly income exceeds Sri Lankan Rupees 250,000, or over Sri Lankan Rupees 3,000,000 per year.

The following sources of income are considered components of taxable income:

• employment income
• operating income
• investment income
• other income

Health Insurance

Sri Lanka has a universal healthcare system that provides free medical services to all citizens. Public hospitals in major towns have OPD facilities, with laboratory and radiology facilities common in most hospitals.

Despite lower levels of health expenditure, Sri Lanka's health indicators are comparable to those of more developed countries in the region. The public healthcare system also has long waiting lists for specialized care and advanced procedures. As a result, reliance on private care increases.

A major portion of the private healthcare market (as high as 75% according to some estimates) is concentrated in four to five healthcare companies operating in Colombo.

Holiday Policy

Annual Leave

Employees in Sri Lanka are entitled to 14 days of paid annual leave for every year of service. They can take leave starting in their second year of service. Annual leave is accrued based on the start of the employment relationship. Details are as follows:

• Employment period starts on January 1st and ends on March 31st of the previous year – 14 days
• Employment started April 1 to June 30 of the previous year – 10 days
• Working hours start from July 1st to September 30th or previous year – 7 days
• The working period is from October 1st to December 31st of the previous year - 4 days of leave must be taken for at least 7 consecutive days. However, employees can only accrue a maximum of 14 days, regardless of how many years of service they have provided. Employers can carry over unused annual leave to the next year. This information should always be included in the employment agreement. In the year of termination, annual leave is calculated as follows:
• Employees who have worked for less than 10 months in the current year can enjoy 1 day of paid annual leave for each month of work.
• If the employee has worked for ten months or more, the employee is entitled to a full 14 days of annual leave. The employee is entitled to all unused annual leave earned in the year before termination of the contract.

Personal and Sick Leave

From the second year onwards, employees covered by the Shop and Office Employees Act are eligible for 7 days of casual leave. During the first year of employment, employees are entitled to one day of paid vacation for every two months of employment. Employees may use personal leave due to illness or personal business.

There is no statutory right to unpaid leave in Sri Lanka.

Maternity and Paternity Leave

Pregnant mothers are entitled to 84 days of paid maternity leave for their first and second children. This includes the 14 days before birth and the hospital stay or 70 days after birth. The leave for the third child and subsequent children is 42 days, including 14 days before delivery and 28 days after delivery.

Maternity leave is paid without regard to weekly holidays, public holidays or full moon holidays.

There is no statutory paternity leave entitlement in Sri Lanka.

Termination and Severance

Sri Lanka has a number of important regulations governing how an employee can be dismissed and what type of notice he or she is entitled to receive. Generally, the notice period will be specified in the employment agreement.

If an employer terminates employment for disciplinary reasons, they must notify the employee in writing. This should describe the reasons for dismissal within two working days of the date of termination.

Under Sri Lanka's main employment laws, most employees can only be dismissed for one of the following reasons:

• Employees agree
• The Labor Commissioner has given prior approval
• Justification exists

To terminate an employee for just cause, an employer needs to provide sufficient evidence to support their decision. This is to prevent employees from challenging unfair dismissal before the Labor Commissioner or the Labor Court.

The law does not define good cause, but it is interpreted to include the following:

• Misconduct
• breach of contract terms
• Unsatisfactory performance
• low efficiency
• Disobedience
• Incompetent, abusive or unruly behavior
• Gross negligence in the performance of duties
• Drunk at work
• dishonest
• theft
• Convicted of a crime involving imprisonment or moral turpitude

A core consideration in determining good cause is whether the employer acted in good faith.

Under Sri Lanka’s labor laws, disputes regarding dismissal may be submitted to alternative dispute resolution, including mediation, conciliation or arbitration. These cases can also be brought to the Employment Tribunal, which can order reinstatement and back pay, or provide severance pay that the court deems fair.

Employees can challenge unfair dismissal and apply for severance pay within six months of dismissal. Potential compensation for unfair dismissal includes:

• Employees with 1 to 5 years of service – 2.5 months’ salary for each year of service completed, capped at 12.5 months’ salary
• Employees with 6 to 14 years of service – receive 2 months’ salary for each year of service completed, but not to exceed 30.5 months’ salary
• Employees with 15 to 19 years of service – receive 1.5 months’ salary for each year of service completed, but not to exceed 38 months’ salary
• Employees with 20 to 24 years of service – one month’s salary for each year of service completed, not to exceed 43 months’ salary
• Employees with 25 to 34 years of service – 0.5 months’ salary for each year of service completed, but not to exceed 48 months’ salary

In no event shall the maximum amount of severance payment exceed Sri Lankan Rupees 1.25 million. Furthermore, employment tribunals have wide discretion to determine what they consider just and equitable, having regard to the circumstances of the claim.

For companies expanding overseas for the first time, dealing with employee layoffs and dealing with severance packages can be complicated. Remoly's Sri Lanka PEOs can reduce risk for foreign companies and provide guidance during the process.  

Salary and Benefits

Sri Lanka Compensation Act

The minimum wage in Sri Lanka is 10,000 Sri Lankan rupees per month. In addition to the national minimum wage standards, employees in different industries may also have minimum wage standards, including daily wages, monthly wages or contract wages.

Welfare Protection in Sri Lanka

In order to maintain a successful benefits administration strategy, employers in Sri Lanka should pay attention to benefits security. Sri Lanka celebrates 26 national holidays every year. Different industries will decide which days are celebrated. In some industries, only eight holidays provide employees with paid time off.

Other statutory benefits include:

• 14 days of paid annual leave after the first year of employment
• 7 days of sick leave in the first year of employment
• New mothers giving birth to their first or second child can receive 84 days of paid leave - in most cases 14 days before and 70 days after the due date.

Sri Lanka Welfare Administration

For employers who are evaluating their benefits administration plans, it is recommended that they consider supplemental benefits as well as statutory minimum benefits. These benefits can attract high-level talent and encourage employees to stay with the company longer. For example, although paid paternity leave is not mandatory in Sri Lanka, it can be used as a means of attracting employees to your company.

In Sri Lanka, other supplementary benefits include performance-based bonuses, additional paid leave and private healthcare.

Benefits and Compensation Limitations

One of the major limitations to benefits and compensation for expanding your business is setting up a local entity. Employers are generally prohibited from hiring and paying employees without first establishing a subsidiary in Sri Lanka. This process can take months to complete, causing significant business delays.

With Remoly's Sri Lanka PEO, businesses can start operating in Sri Lanka in as little as 48 hours. Remoly is the employer of record for your employees, which means you do not need to set up a subsidiary in Sri Lanka. As the only global PEO with an in-house recruiting team, we can help you find, hire and develop top local and international talent.