Employing Staff in Sri Lanka: What a Foreign Employer Must Know

Foreign employers setting up in Sri Lanka usually plan the incorporation carefully and the employment arrangements casually. It is the wrong way round. Incorporation is administrative. Employment law here contains one rule that has no equivalent in most common law systems, and it cannot be contracted out of.

You cannot dismiss an employee at will. Not on notice, not by paying in lieu, and not because the contract says you may.

Section 2: consent, or the Commissioner's approval

Section 2(1) of the Termination of Employment of Workmen (Special Provisions) Act, No. 45 of 1971 provides that no employer shall terminate the scheduled employment of any workman without the prior consent in writing of the workman, or the prior written approval of the Commissioner.

There is no third route. A contractual notice clause does not create one, and nor does a payment in lieu.

Section 2(4) then defines what counts as a termination, and the definition is deliberately wide. The scheduled employment of a workman is deemed to be terminated by his employer if, for any reason whatsoever otherwise than by reason of a punishment imposed by way of disciplinary action, his services are terminated. That includes non-employment of the workman, whether temporarily or permanently, and non-employment in consequence of the closure by the employer of any trade, industry or business.

Closing the business is therefore not an escape. Nor is a temporary lay-off.

The disciplinary exception, and its two-day deadline

Termination by reason of a punishment imposed by way of disciplinary action falls outside section 2(1). That is the exception on which most lawful dismissals proceed, and it carries its own obligation.

Section 2(5) requires an employer who terminates by way of disciplinary punishment to notify the workman in writing of the reasons for the termination before the expiry of the second working day after the date of termination.

Two working days is a short period, and the reasons given in that letter will frame everything that follows. It should be drafted before the dismissal, not after it.

Who the Act does not apply to

Section 3(1) takes a number of cases outside the Act altogether. The two that matter most to a new employer are the first two.

• An employer by whom less than fifteen workmen on an average have been employed during the six months preceding the month in which the employer seeks to terminate the employment
• A workman employed for less than 180 days in the continuous period of twelve months from the date of employment, where the termination takes place within that period. The 180 days include days of approved absence, absence from a workplace accident or a scheduled occupational disease, days the employer failed to provide work, up to thirty days lost to a lockout or lawful strike, and statutory holidays
• Termination on the workman attaining the minimum retirement age specified in the Minimum Retirement Age of Workers Act, No. 28 of 2021, or the age stipulated in a collective agreement or in the contract of employment
• The Government as an employer, the Local Government Service, local authorities, co-operative societies and public corporations
• A workman employed in contravention of any law for the time being in force

The fifteen-workman threshold is measured as an average over six months, not on the day of the dismissal, so a business crossing that line should assume the Act applies from then on. The 180-day threshold is the reason probationary arrangements in Sri Lanka are usually structured around the first year.

The procedure before the Commissioner

Where approval is needed, section 2(2) sets out how the application runs.

The employer applies, and a copy of the application must be served on the workman concerned, who must be afforded an opportunity of being heard. Section 2(2A) puts the Commissioner on a timetable at the front end: on receiving the application he must call upon the workman within three days to respond, and the workman has seven days to do so, extendable by a further seven where the failure was due to circumstances beyond his control.

The Commissioner may grant or refuse approval in his absolute discretion, and must do so within three months from the date of receipt of the application. He must give written notice of the decision to both the employer and the workman. He may decide the terms and conditions on which approval is granted, including terms as to the payment of a gratuity or compensation for the termination.

Then section 2(2)(f), which is the provision that most surprises foreign counsel. Any decision made by the Commissioner under those provisions shall be final and conclusive, and shall not be called in question, whether by way of writ or otherwise, in any court, or in any court, tribunal or other institution established under the Industrial Disputes Act.

That is an ouster in about as strong a form as Sri Lankan drafting produces. The practical consequence is that the application to the Commissioner is not a preliminary step before the real argument. It is the argument. The evidence, the commercial rationale and the proposed compensation all have to be put properly the first time.

Section 2(3) makes failure to comply with a decision of the Commissioner an offence.

The contributions: 8, 12 and 3

Two funds take mandatory contributions, and the split is often misread as a single deduction from salary.

Under section 10(1) of the Employees Provident Fund Act, No. 15 of 1958, the employee is liable to contribute an amount equal to eight per cent of his total earnings for the month. Under section 10(2) the employer is separately liable to contribute twelve per cent of the same earnings, payable on or before the last day of the succeeding month.

Under section 16(1) of the Employees Trust Fund Act, No. 46 of 1980, the employer must pay a further three per cent of total earnings, again on or before the last day of the succeeding month. The Trust Fund contribution is entirely the employer's; nothing is deducted from the employee for it.

So the employer's own cost is fifteen per cent above gross salary, and the employee sees eight per cent deducted. A budget built on the eight per cent alone is short by the larger amount.

What late payment costs

Section 16 of the Employees Provident Fund Act imposes a surcharge where contributions for a month have not been paid before the last day of the succeeding month, and the employer cannot explain the failure to the Commissioner's satisfaction as being due to circumstances beyond his control. The surcharge is calculated on the amount of the contributions due.

The bands escalate quickly, and the first one bites after ten days. Payroll for a Sri Lankan subsidiary run from a foreign parent's monthly cycle is the usual reason contributions slip past the deadline.

What to do before the first hire

1. Assume the Termination of Employment of Workmen Act will apply once headcount averages fifteen, and structure roles and probation accordingly.
2. Draft a disciplinary procedure that can produce a written statement of reasons inside two working days, because section 2(5) allows no longer.
3. Budget fifteen per cent above gross salary for the employer's Provident Fund and Trust Fund contributions, separately from the eight per cent deducted from the employee.
4. Put the contribution payments on a local cycle that clears before the last day of the following month.
5. Where a termination genuinely cannot be agreed, prepare the application to the Commissioner as the substantive case, since the decision cannot afterwards be challenged by writ or otherwise.

None of this makes Sri Lanka a difficult place to employ people. It makes it a place where the exit has to be thought about at the point of hiring, which is good discipline anywhere.