Sri Lanka Employment Law: A Practical Guide for SME Employers

Sri Lanka’s employment landscape is shaped by half a dozen distinct statutes, each with its own enforcement body. For a small business owner, the practical risk isn’t malice — it’s missing one obligation across that surface area. This page is a working SME’s reference: what applies, what the current rates are, and where the compliance traps tend to be.

Which laws actually apply to your SME

If you employ Sri Lankan workers, you are bound by some combination of the following, depending on your industry, the seniority of the employee, and the size of your payroll:

• Shop and Office Employees Act (No. 19 of 1954) — covers most office, retail, and white-collar workers. Sets working hours, overtime, leave, and holiday entitlements.
• Wages Boards Ordinance (No. 27 of 1941) — covers workers in trades regulated by a Wages Board (manufacturing, hotels, garments, construction, etc.) with sector-specific minimum wages.
• Employees’ Provident Fund Act (EPF, No. 15 of 1958) — mandatory retirement contribution: 8% from the employee, 12% from the employer, remitted monthly.
• Employees’ Trust Fund Act (ETF, No. 46 of 1980) — additional 3% employer contribution remitted monthly, separate from EPF.
• Termination of Employment of Workmen (Special Provisions) Act (TEWA, No. 45 of 1971) — applies once you employ 15 or more workers; restricts non-disciplinary terminations and prescribes compensation.
• Payment of Gratuity Act (No. 12 of 1983) — applies at 15+ employees; entitles workers with 5+ years of service to half a month’s wages per year on separation.
• Maternity Benefits Ordinance (No. 32 of 1939) — 84 working days of paid maternity leave for the first two children, 42 for subsequent.
• Inland Revenue Act — governs APIT (Advance Personal Income Tax) withholding from monthly salaries above the threshold.

Statutory contributions you cannot skip

Three deductions are non-negotiable on every monthly payroll and are the most common source of audit findings:

• EPF — 20% of gross monthly earnings. 8% deducted from the employee, 12% contributed by the employer. Remit to the Central Bank’s EPF division by the last working day of the following month.
• ETF — 3% of gross monthly earnings. Borne entirely by the employer; remit to the ETF Board on the same monthly cadence.
• APIT — withhold per the current Inland Revenue tax tables. The slabs and thresholds change at least annually; verify the current rates before each tax year begins on 1 April.

Late or missed remittances attract a 5%–50% surcharge depending on how overdue they are. Surcharges compound — small misses become expensive quickly.

Working hours, overtime, and leave

For employees covered by the Shop and Office Act, the standard working week is 45 hours over 5.5 days (or 8 hours per day, 5 days for a 40-hour week). Anything beyond that is overtime, payable at 1.5× the normal rate. Total overtime is capped at 12 hours per week.

Statutory paid leave entitlements after the first year of service:

• Annual leave: 14 working days.
• Casual leave: 7 working days.
• Sick leave: typically 7 days (commonly bundled into the casual leave entitlement by employers, though many provide it separately).
• Public holidays: all gazetted Sri Lankan public and bank holidays, with substitute leave or double-time pay if worked.

Termination: what changes at 15 employees

Below 15 workers, you may terminate with reasonable notice (typically what your employment contract specifies — usually one month) and pay outstanding dues. Once you cross 15 workers, TEWA applies and changes the calculus significantly:

• Non-disciplinary termination requires either the employee’s written consent or prior written approval from the Commissioner of Labour.
• Approved terminations attract compensation on a schedule that scales with years of service — up to 2.5 months’ wages per year for long-tenured staff.
• Disciplinary termination remains possible without Commissioner approval, but requires a documented domestic inquiry that meets natural-justice standards. Skipping the inquiry is the single most common reason termination orders are overturned.

Contracts: what every employment letter should cover

Sri Lankan law does not mandate a written contract for every hire, but the absence of one shifts every dispute onto the employer’s word. At minimum, a written employment letter should specify:

• Job title, reporting line, and primary duties
• Start date, probation period (typically 6 months), and confirmation criteria
• Gross salary, breakdown of allowances, and pay frequency
• Working hours, overtime treatment, and shift patterns where relevant
• Leave entitlements (annual, casual, sick, special)
• Notice period required from either side
• Confidentiality and IP-assignment clauses

If you do not have a templated set, we publish free Sri Lanka–compliant contract templates — letter of appointment, fixed-term contract, change of terms, warning letters, and termination confirmations.

Where Humanised fits in

Humanised is HR and payroll software built for Sri Lankan SMEs. It calculates EPF, ETF, and APIT automatically against the current rates, generates payslips and bank transfer files in the formats your bank expects, tracks leave entitlements against the Shop and Office Act defaults, and stores signed contracts against each employee record. If you want to see how that works on your actual payroll, book a 30-minute walkthrough and we’ll run a demo against your numbers.

This page is a general overview, not legal advice. Statutory rates and thresholds change — verify the current figures with the Department of Labour, the Inland Revenue Department, or your qualified labour-law counsel before acting on anything specific.