Final Settlement in Sri Lanka: What to Pay a Leaver

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The settlement checklist, in order
Salary and allowances to the last working day
Leave: what must be paid out
Gratuity: eligibility and the 30-day deadline
Loans, advances and what may lawfully be recovered
Tax on terminal benefits
Documents to issue
Do this automatically in Humanised
Frequently asked questions
Do I have to pay gratuity if the employee resigned rather than was dismissed?
What if the employee has less than 5 years of service?
Is a bonus included in the final settlement?
Can I withhold the final payslip until company property is returned?
Does probation change any of this?

Salary is due to the last day worked, within two working days of termination. Untaken leave from the previous year, plus a share of the current year, must be settled before the leaver’s last day. Give it as time off, or pay it out. Gratuity, if the employee qualifies, is due within 30 days. Final EPF and ETF contributions follow the normal monthly deadline. None of these can be skipped because someone resigned rather than was dismissed.

The settlement checklist, in order

Confirm the last working day, and whether notice was given, worked, or paid in lieu.
Work out final salary and allowances to that day.
Settle outstanding leave: last year’s balance plus this year’s built-up share.
Check gratuity eligibility (5+ completed years, employer with 15+ staff) and calculate it.
Deduct only lawful amounts against loans or advances, within the deduction cap.
Include the final month in the normal EPF and ETF remittance.
Issue the final payslip, and any documents needed for an EPF or ETF claim.

Salary and allowances to the last working day

Under the Shop and Office Employees Act, normal remuneration must reach the employee within a set number of days of the wage period ending. That is 3 days for a weekly wage, 5 for fortnightly, and 10 for monthly. Termination pay has its own, tighter rule. Full remuneration due on termination must be paid before the end of the second working day after the termination (Shop and Office Employees Act s.19(1)(c)). This covers basic salary and any allowance that counts as “remuneration”, up to the last day worked. Where the employee had to work a notice period, it runs to the end of that period. It does not cover leave, gratuity, or EPF and ETF. Those have their own rules below.

Leave: what must be paid out

The Act requires you to let a leaver take, before termination, last year’s leave balance plus a share of this year. That share is one day per completed month, if the current year of employment is under 10 months. It is the full 14 days if the current year is 10 months or more (Shop and Office Employees Act s.6(6)). Where notice is too short to fit that leave in, or the job ends with no notice, the employer pays instead. Pay full remuneration for each day of leave that could not be taken (s.6(6) proviso). Casual leave is not covered by this rule. By common practice it lapses. Check your own policy, since many employers pay it out anyway.

Gratuity: eligibility and the 30-day deadline

An employee qualifies for gratuity after 5 years of continuous service. The employer must also have employed 15 or more workmen on any day in the 12 months before termination (Payment of Gratuity Act No. 12 of 1983, s.5(1)). For a monthly-rated employee, the amount is half a month’s wage or salary, at the rate last drawn, per completed year of service (s.6(2)(a)). Pay it within 30 days of termination. Miss that date and a surcharge applies, starting at 10% and rising to 30% the longer it stays unpaid. See Gratuity Not Paid on Time: Surcharge and Recovery for the full scale. Getting the years-of-service count right matters just as much. See Length of Service: Counting Years for Gratuity, or check the gratuity calculator.

Loans, advances and what may lawfully be recovered

You can only deduct from a leaver’s final pay what the Shop and Office Employees Act allows: authorised deductions the employee has consented to. An example is recovery of an advance or loan, or a deduction the employee has asked for. The total deducted at any one time cannot exceed 60% of the remuneration then due (s.19(1)(a)). Do not recover a whole outstanding loan in one go if that breaks the 60% cap. Spread the recovery, or agree a separate repayment plan for the balance. The cap applies to salary and leave pay. It is not a reason to withhold gratuity, which has its own payment and forfeiture rules. Gratuity is forfeited only where the termination was for fraud, misappropriation, wilful damage or causing loss to the employer. This is under the Payment of Gratuity Act s.13.

Tax on terminal benefits

Since 1 April 2023, an Inland Revenue Department circular (SEC/2023/E/01) applies. It requires employers and the ETF to withhold tax at source on certain terminal payments before release. Add up the retiring gratuity, a commuted pension, an approved compensation-for-loss-of-office payment, and the ETF sum. Where that combined total is over LKR 5,000,000, the employer and the ETF must each hold back 12% on the amount above it. A higher rate of 36% applies to the whole of any other payment. That covers compensation under a scheme the Commissioner General of Inland Revenue has not approved, an ex-gratia payment, or anything not listed above. The employee can apply to the IRD’s Clearance & Direction Unit for a direction on the amount held back, within 90 days of the retention. They need NIC copies, the employer’s letter on the payment, ETF contribution details, and recent T10 certificates. Most SME settlements never reach LKR 5,000,000 combined, so this mainly affects senior or long-serving staff. Still, check settlements above roughly LKR 3–4 million.

Documents to issue

Final payslip, showing salary, leave pay, gratuity, and any deduction, each as a separate line.
EPF and ETF confirmation of the final contribution made. A claim to withdraw an EPF balance or an ETF benefit needs the employer’s certification of the last contribution.
A service or experience letter confirming dates of employment and position. Not a statutory form, but most new employers and the EPF/ETF claim process will ask for it. Issue it promptly.

Do this automatically in Humanised

A final pay run in payroll software pulls salary and leave balances into one settlement statement. It works out EPF, ETF and APIT together, and prepares the C-form, R4, T10 and bank files for the final month. So a leaver’s settlement uses the same numbers as their payslip history.

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

Frequently asked questions

Do I have to pay gratuity if the employee resigned rather than was dismissed?

Yes. The Payment of Gratuity Act applies “whether by the employer or workman, or on retirement or by the death of the workman, or by operation of law, or otherwise”. How the employment ended does not matter. Once the 5-year and 15-employee thresholds are met, gratuity is due.

What if the employee has less than 5 years of service?

There is no statutory gratuity. Salary to the last day, leave due, and final EPF and ETF still apply in full. Only gratuity is skipped.

Is a bonus included in the final settlement?

Only if earned and due under the employment contract, or a scheme the employer already operates. The Shop and Office Employees Act does not create a statutory bonus entitlement. This is a contractual question, not a statutory one.

Can I withhold the final payslip until company property is returned?

No. Withholding salary that is legally due, such as pay to the last working day, is not one of the authorised deductions under section 19(1)(a). Pursue the value of unreturned property separately, rather than by delaying wages that are due within two working days.

Does probation change any of this?

No. Leave, gratuity eligibility (once 5 years is reached), and the 30-day and two-working-day deadlines all apply the same way. It does not matter if the employee was confirmed or on probation.

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