What are some important employment laws 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 hiring talent from this country. However, the labour 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 hiring 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 hiring and compliance processes.

Why should you consider hiring in Sri Lanka?

Hiring talent from Sri Lanka presents numerous advantages for businesses looking to enhance their workforce.

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

Let us look at some important labor laws in Sri Lanka

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, 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 Labour.

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.

The formula for compensation:

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

In Sri Lanka, annual leave entitlements are determined based on the employee’s joining date and are provided in the year following their first year of employment. Employees who start work between 1st January and 31st March will have 14 days of annual leave in the following year. Employees can claim up to 10 days if they start between 1st April and 30th June. If the employees start between 1st July and 30th September, they can claim 7 days. Employees who joined on or after 1st October are entitled to 4 days of leave in the next year.

In addition, when an employee’s employment ends, he or she is entitled to any leave earned in the previous year and the current year. If, however, the employee took their leave before cessation, they cannot be compensated for unavailed leave. If the employee has worked less than 10 months and 14 days, compensation is calculated off one day of leave for every complete month of service; if they have worked more than 10 months, compensation is based on 14 days of leave.

Employees in Sri Lanka are given 7 days a year of casual leave to take personal leave (like illness or other justifiable reasons). Casual leave is also available to new employees on a pro-rata basis, this being one day of leave per two months of service completed. This leave allows employees to use their leave entitlements without interfering with their overall leave entitlements.

Provident fund & trust fund

In Sri Lanka, the Employees’ Provident Fund (EPF), established by Act No. 15 of 1958, mandates contributions from both employees and employers to secure employee retirement savings. They have to remit a total of 20% of the earnings of the employee’s EPF each month, that is, 8% by the employee and 12% by the employer. Wages, cost of living allowances, holiday pay, leave pay, and meal allowances are included in ‘earnings’ for EPF purposes but not overtime payments. Payments for work made during regular hours on weekly holidays, Poya days, and public holidays are included in earnings. If an employer fails to remit EPF contributions on time, surcharges will range from 5% to 50%.

The Employees’ Trust Fund (ETF), established under the Employees’ Trust Fund Act No. 46 of 1980, requires employers to contribute 3% of an employee’s total earnings each month to the Trust Fund. This provides benefits, including life insurance coverage and certain medical benefits. EPF covers most private sector employees, with exceptions made for government servants, domestic workers, and employees in charitable or religious institutions with fewer than 10 employees. Employees in covered sectors can voluntarily choose to contribute higher amounts to their EPF, though this decision is irrevocable once made. Together, contributions in EPF and ETF provide an essential safety net for employees in Sri Lanka going forward.

Gratuity

In Sri Lanka, gratuity is governed by the Payment of Gratuity Act No. 12 of 1983 and is a lump sum payment given to employees in consideration for their service at termination of employment. EPF and ETF contributions are separate from gratuity and will not apply if the employer has more than 15 workers in the previous 12 months before the termination of the employee. In order to receive gratuity, the employee must be in continuous service for five years.

Gratuity for monthly paid employees is calculated at the rate of 1/2 of a month’s salary for each completed year of service. For employees paid on a weekly or daily time basis, the gratuity is based on 14 days’ salary for each completed year of service. Gratuity is payable regardless of whether the termination was initiated by the employer or the employee. Deductions, however, may be made where the termination was based on fraud, misappropriation, or willful damage to the employer’s property. If the employee passes away while employed, any gratuity due will be paid to the employee’s legal heirs.

Contract employment laws in Sri Lanka

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, Labour 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 hiring talent in Sri Lanka

• Legal complexities

Hiring from Sri Lanka 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 does Global Squirrels help your business stay compliant?

Global Squirrels is a staffing and payrolling platform that allows you to hire 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.

Our platform solves your challenges of hiring from Sri Lanka by:

• 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, as an Employer of Record (EOR) solution provider, 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 hire 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’ hiring plans based on your job requirements: the Orange and Purple Plans. Let us look at how these plans work.

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.

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 hiring 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 hire in Sri Lanka through our staffing and payrolling platform? Get a demo today!