A Complete Guide to Employment Laws and Payroll in Sri Lanka (2025)

Overview of Employment Law in Sri Lanka

The tropical island nation of Sri Lanka in South Asia has become a favored destination for those who are trying to expand their operations. With a skilled workforce and a strong English language,An increasing number of companies around the world are navigating Sri Lanka employment law to expand their workforce in this country. However, the labor and job market in the local area is complex because there are a lot of labor laws in Sri Lanka that make it difficult to navigate.

For a smooth and compliant recruitment process, you need to know the key employment laws in Sri Lanka. In this blog, we will explore some of the most fundamental elements of labor laws in Sri Lanka, which are important for any business looking to expand or establish operations in the country. We will also discuss how the Global Squirrels staffing platform can simplify your recruitment and compliance processes.

Sri Lanka’s Labor Market: Regulations & Cost Benefits

1. High literacy and education levels

As of 2023, Sri Lanka has a literacy rate of 93.3%, to be more elaborate, the literacy rate of men in the country is 94.3%, and for women, it is 92.2%. Given this, Sri Lanka has a strong education system that produces well-rounded graduates who are trained in many different fields of work.

2. English proficiency

Sri Lanka has English as its second language, so people can effectively communicate and collaborate with various colleagues and teams from your business with a diverse culture. This reduces language barriers and makes operations more efficient.

3. Cost-effectiveness

You can employ top talent in Sri Lanka at a fraction of the cost it can take to recruit the same in many other developed countries such as the USA. For instance, you can onboard a software engineer for $882.48 a month in Sri Lanka, while the same role costs $8,333.4 in the U.S. This gives you an advantage in optimizing your resources.

Looking to recruit employees in Sri Lanka? Check out our Sri Lanka for insights on employment laws, payroll, and hiring best practices.

Key Provisions in the Sri Lankan Employment Act

There are various labor laws in Sri Lanka that protect workers’ rights and ensure fair treatment in the workplace. Here is an overview of key employment laws in Sri Lanka concerning minimum wages, working hours, termination, maternity benefits, leaves, provident funds, and gratuity.

Working hours and overtime pay

In Sri Lanka, the working hours are limited to 8 hours a day and 45 hours a week excluding an hour for meals. Work hours of different classes of shops and offices may have different hours, but they are subject to certain restrictions. Overtime is any work in excess of these hours, and payment at a rate of at least 1.5 times the employee’s hourly wage is required, calculated as the employee’s monthly wage divided by 240.

Termination of Employment in Sri Lanka

In Sri Lanka, the Termination of Employment of Workmen (Special Provisions) Act No. 45 of 1971 governs the process of terminating employees.

Consent requirement:

No employer can terminate the scheduled employment of any workman without obtaining either the written consent of the workman or the prior written approval of the Commissioner of Labor.

Approval process:

The Commissioner, upon application by the employer, may grant or refuse approval for termination. The Commissioner has discretion and must notify both the employer and the workman of the decision. The Commissioner’s decision on termination, compensation, or gratuity is final and binding.

Understanding the TEWA Act Formula

In cases where employers wish to expedite the termination process or avoid the uncertainties of the formal approval process under TEWA, they may offer Voluntary Severance or Retirement Schemes (VSS/VRS). These packages can provide an alternative to the compensation determined by the TEWA, allowing employers to negotiate terms directly with employees for a quicker resolution.

The law includes a detailed formula for calculating compensation based on the number of years of service. For instance:

• 1-5 years: 2.5 months of salary
• 6-14 years: 2 months of salary
• 15-19 years: 1.5 months of salary
• 20-24 years: 1 month of salary
• 25-34 years: 0.5 months of salary

The maximum cumulative VSS/VRS compensation cannot exceed 48 months of salary.

Restrictions on termination:

• Employers with fewer than 15 employees are exempt from these regulations.
• Various grounds like disciplinary actions, closures of business, or industrial disputes may also affect the rights of termination.

Offenses and penalties:

Employers who violate the terms of the law or fail to comply with the Commissioner’s orders may be subject to fines or imprisonment. The consequences of non-compliance may include huge fines or imprisonment of up to six months.

Maternity benefits

Maternity benefits in Sri Lanka are regulated by the Maternity Benefits Ordinance and the provisions of the Shop and Office Employees Act that offer vital protection and leave entitlement to women employees during and after pregnancy. Female employees are entitled to 84 days of maternity leave for their first two live births, including 14 days prior confinement (birth) and 70 days post confinement. The entitlement is reduced to 42 working days for the third and subsequent births to 14 days before childbirth and 28 days after childbirth. Importantly, maternity leave is included in all public holidays and weekly holidays that occur during this period. Maternity benefits extend to female workers regarding payment. For employees with no children or one child, maternity benefits are required for 12 weeks.

Leaves

Provident fund & trust fund

In Sri Lanka, two key social security schemes—the Employees’ Provident Fund (EPF) and the Employees’ Trust Fund (ETF)—ensure financial protection for employees, especially for retirement and other benefits. Here’s a breakdown of how each system works:

Employees’ Provident Fund (EPF)

• Established under Act No. 15 of 1958.

• Total monthly contribution: 20% of the employee’s earnings.

  • 8% contributed by the employee.

  • 12% contributed by the employer.

• Earnings included for EPF:

  • Wages.

  • Cost of living allowance.

  • Holiday pay.

  • Leave pay.

  • Meal allowances.

  • Payments for regular work on weekly holidays, Poya days, and public holidays.

• Earnings excluded: Overtime payments.

• Late remittance penalty:

  • Surcharges range from 5% to 50% if employer fails to pay on time.

Employees’ Trust Fund (ETF)

• Established under the Employees’ Trust Fund Act No. 46 of 1980.

• Employer contributes 3% of the employee’s total earnings each month.

• Benefits provided by ETF:

  • Life insurance coverage.

  • Certain medical benefits.

Additional Information

• EPF coverage:

  • Applies to most private sector employees.

  • Exemptions:

    • Government servants.

    • Domestic workers.

    • Employees in charitable or religious institutions with fewer than 10 employees.

• Voluntary contributions:

  • Employees can opt to contribute more to their EPF.

  • Once made, the decision is irrevocable.

• Combined goal:

  • EPF and ETF contributions provide a financial safety net for employees, especially for retirement.

Gratuity in Sri Lanka

• Governed by the Payment of Gratuity Act No. 12 of 1983.

• Gratuity is a lump sum payment made to employees upon termination of employment.

• Separate from EPF and ETF contributions.

• Applicable only if the employer had more than 15 employees in the 12 months preceding termination.

• Employee must have at least 5 years of continuous service to be eligible.

Gratuity Calculation

• Monthly-paid employees:

  • Gratuity = 1/2 month’s salary for each completed year of service.

• Weekly or daily-paid employees:

  • Gratuity = 14 days’ salary for each completed year of service.

Payment Conditions

• Gratuity is payable regardless of whether termination is by employer or employee.

• Deductions may apply if the termination was due to:

  • Fraud.

  • Misappropriation.

  • Willful damage to employer’s property.

• In case of employee’s death, gratuity is paid to their legal heirs.

Employment Contracts Under the Sri Lanka Employment Act

Contract employment laws in Sri Lanka are governed to a significant degree by Common Law, statutory provisions, and collective agreements. While the Legislature has put some restrictions on employment contracts, the foundation is based on Roman-Dutch Law, which is part of the Common Law in Sri Lanka. This Common Law governs areas where the Legislature has not acted on the existence of an employer-employee relationship and the rules for the vacation of post. Even though there have been many statutory interventions, Labor Tribunals and courts often rely on common law principles, especially with respect to disciplinary terminations and cases of job abandonment.

Contract employment laws in Sri Lanka today comprise various elements, including:

1. The common law – foundational principles from Roman Dutch Law.
2. Contractual terms – terms agreed upon by the parties that are not covered by legislation, such as the probation period.
3. Statutory provisions – mandatory laws that apply to employment relationships.
4. Collective agreements – agreements between employers and employees, negotiated collectively.
5. Awards of labor courts – rulings by Labor Tribunals, Industrial Courts, and Arbitration Awards that may override individual contract terms.
6. Custom or usage – workplace practices that have become established over time.

Parties have the freedom to agree upon some terms and conditions, but many aspects of employment, where applicable, are subject to statutory provisions, collective agreements, and awards of the labor courts. This legal structure ensures a balanced approach to employment rights, with the Common Law serving as the basis, supplemented by legislative and judicial regulations.

Two most common challenges of labor law compliance in Sri Lanka

• Legal complexities

Sri Lanka employment law can be beneficial to your company, but there is one important step that sometimes gets overlooked or is difficult to complete: making sure they fill out the W-8BEN form. For tax purposes, this form validates their status as a non-U.S. resident, yet improper handling of it can result in serious consequences. Both you and the professional may be subject to needless withholding taxes and possible non-compliance penalties if the W-8BEN form is missing or completed incorrectly. You also risk losing out on tax treaty benefits that could lower tax rates if you do not have the right documentation.

• High entity set-up cost

Establishing a legal entity in Sri Lanka is a complex and resource-intensive process that includes local registration, permits, and ongoing administrative responsibilities. If you have a physical presence, the setup process can take a long time and require a significant investment of capital, making it a difficult hurdle for those looking to expand.

How we Simplifies Hiring & Payroll in Sri Lanka

Global Squirrels is a staffing and payrolling platform that allows you to recruit top talent from Sri Lanka who meet all your business requirements. This is done by providing you with pre-screened profiles within 2 to 5 business days. Our platform also manages all your HR functions, such as payroll, timesheets and tasks, performance, and compliance with local labor laws in Sri Lanka.

• Helping you comply with local labor laws in Sri Lanka, including tax regulations, and handling crucial documents, such as the W-8BEN. This is done by prioritizing and staying up to date with the most recent laws, ensuring your business does not face any legal risks.
• Global Squirrels acts as a trusted staffing and payroll partner in Sri Lanka., will act as your legal entity in Sri Lanka, eliminating the hassle and huge costs associated with setting up an entity in the country and handling all administrative responsibilities.

Moreover, if you recruit talent through a BPO or outsourcing agency, they charge huge markups, which will eventually increase your bill rate. You may not be able to pay industry-standard compensation to your preferred talent. To overcome this challenge, our SaaS platform eliminates the concept of hidden charges or markups, helping you save up to 20% on hiring. With our transparent pricing model, you know what you are paying for. You just need to pay the payroll costs and a flat platform fee.

You can choose Global Squirrels’ plans based on your job requirements: the Orange and Purple Plans. Let us look at how these plans work.

Purple plan

The Purple plan is what you need if you have a freelancer you want to convert or an already-sourced candidate you want to onboard as a full-time employee. Our platform will handle all administrative functions payroll & benefits management, task and timesheet management, performance management, compliance with local labor laws in Sri Lanka.

Orange plan

The Orange plan is more elaborate as our platform will help you find and onboard top talent who meet all your business requirements. This is done by giving you complete control over the recruitment process. All you need to do is sign up and choose the Orange plan. Once done, you will be asked to fill in details such as the job role, job description, and date when you expect the professional from Sri Lanka to start working for your business. Then, you will be asked to fill in the required and desired certifications and skills of the candidate. In 2-5 business days, our platform will share curated profiles of top talent on the platform, and from here, you can choose the candidate you want to interview and finally select the one(s) you want to onboard based on their performance in the interview.

Are you ready to recruit through our staffing and payrolling platform? Get a demo today!