Contractor or Employee? EPF, ETF and Gratuity

On this page

Why the label on the contract is not enough
What tests does a tribunal use?
Six signs your contractor is really an employee
What do you owe if a contractor is reclassified?
Genuine contractors: what to pay and what to withhold
Wording that helps, wording that hurts
What records should you keep for each contractor?
Do this automatically in Humanised
Frequently asked questions
Is a contract employee eligible for gratuity in Sri Lanka?
Are contract workers eligible for EPF and ETF?
Does a fixed-term or "contract basis" employee get gratuity?
What about a retainer paid to a part-time consultant?
Are gig and delivery staff employees?
Can we just call everyone a contractor to avoid EPF and ETF?

The label on the agreement does not decide this. What matters is how the work is actually done. Look at the whole picture together. You set the hours and the method, you supply the equipment, and the person depends on you for their income. Where all of that is true, a Labour Tribunal or the Labour Department can treat them as an employee. Then EPF, ETF and, after five years, gratuity are all due.

Why the label on the contract is not enough

Sri Lankan employers write “consultant”, “contract basis” or “freelance” on an agreement. They assume that settles the EPF and ETF question. It does not. Our EPF employer guide covers which earnings attract contributions once someone is a member. This page answers the question that comes first: is the person a member at all.

The law does not test this by what the agreement is called. It looks at how the work is actually done. Getting the call wrong is expensive. Unpaid EPF and ETF do not go away when a contractor later wins a claim. They are back-dated. And a genuinely independent contractor should not have 20% deducted from their invoices in the first place.

What tests does a tribunal use?

No Act sets out a single checklist. Sri Lankan Labour Tribunals apply the Industrial Disputes Act’s broad definition of “workman” (an employee, as that Act defines the word). They have moved away from asking only “who controls the work” (the control test). It fits factory-floor supervision better than modern professional and gig work. In practice, tribunals weigh several things together:

Control: who decides what is done, and how, when and where.
Integration: whether the work is part of the normal running of the business, or a service bought in from outside.
Economic reality: whether the person carries their own business risk and profits from running it well, or is just paid for their time.
Mutuality of obligation: whether the business must keep offering work, and the person must keep accepting it.

No single factor decides it. A written agreement calling the relationship a “contract for services” carries weight. But a tribunal will look past it if the day-to-day reality is employment.

This is how tribunals have approached the question in practice. It is not written into any Act as a fixed formula.

Six signs your contractor is really an employee

Sign	Contractor (genuine)	Employee (in substance)
Hours	Sets their own hours to deliver the result	Works fixed hours you set
Tools and workspace	Uses their own equipment and workspace	Uses your equipment, sits at your premises
Exclusivity	Free to work for other clients	Works only, or almost only, for you
How the work is done	You specify the result, they choose the method	You specify the method and supervise it
Payment	Invoices for a defined piece of work or milestone	Paid a regular amount for time worked
Integration	Delivers a discrete project	Attends team meetings, is on the org chart, has a company email

One or two signs pointing to “employee” do not settle it on their own. Several signs together, especially long duration and exclusivity, are what tribunals and the Labour Department tend to notice.

What do you owe if a contractor is reclassified?

If a contractor is found to have been an employee all along:

EPF and ETF become due from the date the relationship in substance began, not from the date of any finding. Our EPF employer guide sets the rates. EPF: 8% deducted from the employee plus 12% from the employer, on total monthly earnings. ETF: 3%, employer-only, on the same earnings.
A surcharge applies to the late contributions, on the same 5%-to-50% scale set out in that guide. The surcharge does not care why the payment was late.
Gratuity can also be owed once five years of continuous service is reached. Continuous service means unbroken service with the same employer. For a monthly-rated employee, the rate is half a month’s wage or salary, at the rate last drawn, for each completed year of service (s.6(2)(a)). This applies if the employer had 15 or more workmen on any day in the 12 months before the employee left (Payment of Gratuity Act No. 12 of 1983). Use the gratuity calculator once service length is settled.
The Labour Tribunal can also order reinstatement or compensation for termination. This is separate from the EPF, ETF and gratuity exposure, because ending a “contract” that was really employment is a dismissal.

Genuine contractors: what to pay and what to withhold

For a contractor who is genuinely self-employed:

No EPF or ETF. These apply to employer-employee relationships, not to a business buying in a service.
No payroll tax withholding under APIT (the income tax an employer takes from an employee’s pay). The contractor accounts for their own income tax.
Pay against an invoice, not a payslip, and keep the invoice as the record.
If the same person moves from occasional invoicing to daily, exclusive, supervised work, revisit the classification. The facts have changed even if the contract has not.

Wording that helps, wording that hurts

A contract cannot override the facts. But it can avoid creating facts that argue against you.

Helps: the contractor names the deliverable and the price, not hours. The contractor may subcontract or refuse a particular job. The contractor is free to work for others. The contract has a fixed term tied to a project, not an indefinite one.
Hurts: the contract sets fixed daily hours or a rota. It forbids other clients. It is renewed indefinitely on the same terms as staff. It requires the contractor to attend appraisals, wear a uniform, or use your leave-approval process.

What records should you keep for each contractor?

The signed agreement, dated, describing the deliverable and the price.
Invoices received, matched to payments made, not a recurring “salary” transfer.
Evidence the contractor works elsewhere too, where that is true (their own letterhead, other client references).
A note of why the relationship is structured as a contract, reviewed if it runs past a year.

Do this automatically in Humanised

Keep signed contractor agreements and employment contracts in the same place, so the distinction is provable. Use HR software with contracts for managing employee contracts digitally and tracking each person’s probation length. Then a contractor renewed five times on staff terms is easy to spot.

This is general payroll guidance. Every case is different. For your own case, speak to a payroll practitioner or a lawyer.

Frequently asked questions

Is a contract employee eligible for gratuity in Sri Lanka?

Only if the relationship is, in substance, employment, and continuous service reaches five years with an employer of 15 or more workmen. A genuine contractor who invoices for discrete work is not an employee and is not eligible.

Are contract workers eligible for EPF and ETF?

Genuine independent contractors are not. EPF and ETF apply to employees. Someone labelled a “contractor” but working under your control, exclusively and on your equipment, can be found to be an employee. Then EPF and ETF apply from when the relationship in substance began.

Does a fixed-term or “contract basis” employee get gratuity?

A fixed-term employee is still an employee, not a contractor in the sense used on this page. Gratuity eligibility depends on years of continuous service and employer size, not on the word “contract” in the job title.

What about a retainer paid to a part-time consultant?

A modest retainer for defined advisory work, with no fixed hours and freedom to take other clients, points to a genuine contractor relationship. A retainer that is really disguised full-time, exclusive work points the other way.

Are gig and delivery staff employees?

It depends on the same tests: control over how and when the work is done, exclusivity and economic dependence. This is an unsettled, fast-moving area in many countries. Get a specific opinion before assuming either answer for a delivery or ride-hailing workforce.

Can we just call everyone a contractor to avoid EPF and ETF?

No. If the underlying relationship is employment, calling it something else does not remove the EPF, ETF or gratuity liability. It only adds a surcharge and a tribunal claim on top of the liability you were trying to avoid.

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