Sri Lanka PEO & Employer of Record

WeHG provides an International PEO and global Employer of Record service in Sri Lanka to companies willing to enter the Sri Lankan market or hire local/expat employees in this country.

Traditional approach requires establishing a subsidiary in Sri Lanka.  However our solution allows you to start the operations in Sri Lanka within days hence save time and money.  WeHG would hire candidates on your behalf while you maintain full operational control of their work. So legally they would be our employees, on our local payroll, 100% compliant but will work on your behalf. .

Sri Lanka fast facts

Population, million: 21.8
Land area: 65,210 km² 
Capital: Sri Jayawardenepura Kotte, Colombo
Local currency: Sri Lankan rupee (Rs) (LKR)

Hiring, Negotiating and Doing Business in Sri Lanka

Necessity of written employment contract

The contract of employment does not have to be in writing to be legally binding. It may be created in writing or by word of mouth, or can be inferred through the conduct of the parties. However, for employees who fall under the scope of the Shop and Office Employees (Regulation of Employment & Remuneration) Act No 19 of 1954 (that is, employees who work in shops or offices) the employer must provide the following, in writing, to the employee:

• Name of employee, designation and nature of employment.
• The grade to which the person is appointed (if any).
• Basic remuneration and scale of remuneration (if any).
• Whether remuneration is paid weekly, fortnightly or monthly.
• Cost of living allowance or any other allowance (if any).
• The period of probation or trial (if any), and the conditions governing that period of probation or trial.
• Conditions governing employment and dismissal.
• Normal hours of employment.
• Number of weekly holidays, annual holidays and casual and privilege leave (if any).
• Overtime rate payable.
• Provision of medical aid (if any).
• Conditions governing any provident, pension scheme or gratuity scheme applicable to the employment.
• Prospects of promotion.

Different forms of engagement: employment, contracting, work with private entrepreneur

Sri Lankan employment law does not distinguish between categories of employment for the purposes of the application of employment law. The definitions of “workman” and “employee” as contained in the statutes apply equally to all categories of employees. However, in practice, the following categories of employment have been identified:

• Probationary employment: persons who are serving a probation period under a contract of employment.
• Regular employment: persons employed under general contracts of employment.
• Casual employment: persons employed on a short-term needs basis, which generally does not relate to the employer’s core business.
• Seasonal employment: persons employed in industries that have seasonal demands, to meet the additional manpower requirements of those seasonal demands.
• Fixed-term employment: persons employed for a fixed-term period.

Sri Lanka Employment Contract

Employment agreements

In Sri Lanka, employment contracts can be oral or written, but it best practice to put a strong, written contract in place, in Sinhala or Tamil, which spells out the terms of the employee’s compensation, benefits, and termination requirements. An offer letter and employment contract in Sri Lanka should always state the salary and any compensation amounts in Sri Lankan rupees rather than a foreign currency.

Sri Lanka working hours

Under the Shop and Office Employees (Regulation of Employment & Remuneration) Act No 19 of 1954 (SOEA) the normal working day for all shop and office employees cannot exceed nine hours on any day (inclusive of a one-hour meal break) and 45 hours in any week.

Rest breaks

A rest break must be given to employees on the days that they work eight hours or more. Employees are not entitled to a rest break on a shorter working day. Under the SOEA a one-hour rest break must be given between the hours 11.00am and 2.00pm where employees work during the daytime. 

Vacation leave in Sri Lanka

An employee falling under the SOEA is entitled to 14 days’ annual leave with full pay for every completed year of service. The SOEA requires that not less than seven days must be taken on a consecutive basis. In respect of the first year of employment, an employee is entitled to proportionate in the succeeding year leave calculated on the following basis:

• 14 days’ leave if employment commenced on or after 1 January but before 1 April.
• Ten days’ leave if employment commenced on or after 1 April but before 1 July.
• Seven days’ leave if employment commenced on or after 1 July but before 1 October.
• Four days’ leave if employment commenced on or after 1 October but before 31 December.

Sri Lanka Maternity Leave

The Shop and Office Employees (Regulation of Employment & Remuneration) Act No 19 of 1954 (SOEA) provides for paid maternity leave and benefits for female employees. Accordingly, 84 days’ paid maternity leave is granted to female employees where the confinement results in the delivery of a live child, and 42 days’ paid maternity leave where the confinement does not result in the delivery of a live child. An employee who has given notice to her employer that she is pregnant cannot be employed, or caused or permitted to be employed, in any work that may be injurious to her or her child during that notice period (this notice period must not exceed three months). In addition to the employee’s right to full wages during maternity leave, the employee cannot be dismissed solely on the basis of her pregnancy or confinement or of any illness consequent to her pregnancy or confinement.

Under the Maternity Benefits Ordinance No 32 of 1939 (MBO), female employees are entitled to take 14 days’ or two weeks’ maternity leave prior to the confinement and 70 days or ten weeks after the birth. Where the confinement does not result in the delivery of a live child, the maternity leave is 28 days or 4 weeks following the confinement. If the maternity leave prior to the birth has not been taken, then that period of maternity leave must be added to the period of maternity leave taken after the confinement.

Sri Lankan Severance Laws

Notice periods

Notice periods, or payments in lieu of notice, for dismissal are typically stipulated in the contract of employment. However, where the provisions concerning notice periods, or payments in lieu of notice, are exercised by the employer during the course of an unjust dismissal, the employee can challenge that termination on the basis of unjust dismissal.

In the case of a dismissal on disciplinary grounds, the Termination of Employment of Workmen (Special Provisions) Act No 45 of 1971 (TEWA) makes it mandatory for the employer to inform the employee, in writing, of the reasons for the dismissal before the expiry of the second working day after the dismissal has taken place.

Severance payments

Employees can challenge a dismissal as an unjust dismissal and apply for a severance payment by filing an application, within six months of the dismissal, to the Termination Unit of the Labour Department under the TEWA (where the employees come within the purview of that Act) or to a Labour Tribunal under the Industrial Disputes Act No 43 of 1950 (IDA). TEWA will apply on the termination of services where the employer has employed 15 or more employees on average at any time during the six months preceding the termination of services of an employee. Further, TEWA does not apply to employees with less than one year’s service, employees in the governmental authorities, employees specifically covered under collective agreements, employees retired with the attainment of the retirement age as stipulated in the contract of employment or where termination is on disciplinary grounds.

The quantum of compensation that may be awarded by the Commissioner of Labour (Commissioner) as a result of a successful application for unjust dismissal under the TEWA is regulated as follows, depending on the employee’s length of service:

• Employee with one to five years’ service: 2.5 months’ salary paid as compensation for each year of service competed (capped at 12.5 months’ salary).
• Employee with six to 14 years’ service: 2 months’ salary paid as compensation for each year of service competed (capped at 30.5 months’ salary).
• Employee with 15 to 19 years’ service: 1.5 months’ salary paid as compensation for each year of service competed (capped at 38 months’ salary).
• Employee with 20 to 24 years’ service: 1 months’ salary paid as compensation for each year of service competed (capped at 43 months’ salary).
• Employee with 25 to 34 years’ service: 0.5 months’ salary paid as compensation for each year of service competed (capped at 48 months’ salary).

The maximum severance payment that can be made under the above formula is LKR1.25 million.

Sri Lanka Tax

The rate of tax on employment income

For the period commencing from 1 January 2020 to 31 March 2020, income tax is levied on employment income and income received from Sri-Lankan sources at the following progressive rates, depending on the aggregate of income earned subject to a tax-free allowance of LKR750,000 for this period (foreign national employees working in Sri Lanka are not entitled to this tax-free allowance):

• Cumulative employment income of up to LKR750,000: exempt.
• Cumulative employment income of between LKR750,001 and up to LKR1,500,000: taxed at a rate of 6%.
• Cumulative employment income of between LKR1,500,001 and up to LKR2,250,000: taxed at a rate of 12%.
• Cumulative employment income of LKR2,250,001 and above: taxed at a rate of 18%.

Social security contributions 

Under the Employees Provident Fund Act No 15 of 1958 (EPF), the employer is required to contribute 12% of the employee’s monthly earnings and the employer is required to deduct and contribute 8% of each employee’s salary to the EPF Fund. Under and in terms of the Employees Trust Fund Act No 46 of 1980 (ETF) the employer is also required to contribute a further 3% of the employee’s monthly earnings to the ETF Fund on account of that employee.

The EPF and ETF provide that such calculations should be based on the “total earnings” of the employee. This is supplemented by the Court of Appeal judgment in Saifudeen Adamaly v Lawson Pest Control Limited (C.A. Writ Application No 770/1995, decided on 28 March 1996) which held that all fixed allowances paid in cash should be included in the calculation of such superannuation benefits.

Health Insurance Benefits in Sri Lanka

Entitlement to paid time off

Under the Shop and Office Employees (Regulation of Employment & Remuneration) Act No 19 of 1954, employees are entitled to seven days’ paid casual leave in any year, except during the first calendar year of employment. During the first calendar year of employment, the employee is entitled to one day’s paid casual leave for every two months worked. Casual leave can only be taken by the employee for their own private business purposes or because of their own illness.

Entitlement to unpaid time off

There is no automatic entitlement to unpaid time off, and this is at the absolute discretion of the employer.

Recovery of sick pay from the state

There is no provision to recover sick pay paid from the state.

Additional Benefits in Sri Lanka

There is no provision regaring additional benefits from the state.

Sri Lanka Holidays

• Tamil Thai-Pongal Day.
• National Day.
• Milad-Un-Nabi (Holy Prophet’s Birthday).
• Day Prior to Sinhala and Tamil New Year Day.
• Sinhala and Tamil New Year Day.
• May Day.
• Day Following Vesak Full Moon Poya Day.
• Christmas Day.

Why Choose WeHireGlobally

WeHG takes care of all the onboarding hurdles, payroll, compensation and benefits, tax filing, and termination of employment. Our Employer of Record solution allows you to manage your overseas teams efficiently while minimizing cost and risk.