Expand your business into Sri Lanka - without an entity
New Horizons provides global employment solutions for businesses wanting to hire employees and distribute payroll in Sri Lanka. Through our Sri Lanka PEO and EOR, we manage your company’s payroll, benefits, and expenses in Sri Lanka. Additionally, we oversee HR duties, as well as employment and tax compliance.
New Horizons will act as your employees’ Employer of Record, which means you can begin doing business in Sri Lanka without a local entity. This not only allows your business to go-to-market faster, but also has the potential to save your business thousands in expansion costs.
As the only Sri Lanka PEO with an in-house recruitment team, New Horizons will source, hire, and onboard your Sri Lankan workforce. We hire employees in accordance with Sri Lankan labor regulations and coordinate all expense claims and benefits payments. Although we act as your employees’ Employer of Record, you still maintain full autonomy and control over all employees.
Our Sri Lanka PEO simplifies your expansion
New Horizons enables your business to expand its operations into Sri Lanka – without setting up a legal subsidiary.
New Horizons ensures day-to-day guidance to help your business navigate Sri Lankan labor laws and regulations. We also provide mandatory monthly payroll requirements, and absorb all local employment liabilities. Partnering with our Sri Lanka PEO is the quickest and most cost-effective way to enter the Sri Lankan market.
Employment & Labor Laws in Sri Lanka
✌ Employment regulations
Sri Lanka has three major employment laws that govern different classifications of employees: These laws are as follow:
- The Shop and Office Employees Act No. 19 of 1954 – This regulation governs employees in shops and offices. However, exclusions apply for bazar, charity, school, caretaker, and funeral-related work. Exclusions also apply to work periods that are less than one month.
- Factories Ordinance of 1950 – This law governs manufacturing and factory employees; and employees involved in manual labor activities, technical training, reformatory work, and vocational training.
- Wages Board Ordinance of 1941 – This law governs other trades that are not listed in the above Acts.
These laws provide a variety of rules and regulations. Some laws offer the same employee benefits (such as leave requirements), while others provide separate employee rights. There are also numerous labor laws that provide additional rights to employees.
📝 Employment contracts in Sri Lanka
While employment contracts in Sri Lanka can technically be verbal, best practice dictates that employers draft concise, strongly-worded written employment contracts. This will clearly establish the legal rights and responsibilities of both employers and employees. Employment contracts should contain terms around base salary, allowances, compensation, employee responsibilities, and termination protocols. All references to salary should be made in Sri Lankan rupees (LKR).
When your business partners with New Horizons’ Sri Lanka PEO, we ensure that all employment contracts maintain compliance with Sr Lankan labor regulations.
⏰ Work hours in Sri Lanka
Under the Shop and Office Employees Act No. 19 of 1954, normal working hours for shop and office employees cannot be more than nine hours per day, or 45 hours per week.
For shop and office employees who work more than eight day-time hours, a one-hour meal break between 11:00am and 2:00pm must be provided. For shop and office employees who work more than eight night-time hours, a one-hour meal break must be provided between 7:00pm and 10:00pm.
If employees work between 4:00pm and 6:00pm, they are entitled to an additional half-hour rest break. If employees commence work later than 10:00pm, an additional half-hour rest break must be provided for every four work hours.
For employees who work at least eight hours a day in tourism or entertainment industries, the eight-hour day can be spread over 11 hours and include a continuous three-hour rest period.
Businesses run by Muslims may be closed for an extended lunch break on Fridays for prayer.
Under the Wages Board Ordinance, a normal working week is up to 48 hours. Any hours exceeding this duration are considered overtime and up to 12 hour’s weekly overtime can worked. If there is no agreement regarding an overtime rate, it is paid at 1.25x an employee’s base rate.
🏖 Weekly holiday in Sri Lanka
Employees who work a minimum of 28 hours per week are eligible to receive a weekly holiday of 1.5 days, with full compensation. This typically includes a full day’s compensation for Sundays and a half day’s compensation for Saturdays. However, it’s also common for employers to offer a full day’s holiday on Saturdays. Employees in executive or managerial positions in a public institution are not entitled to the weekly holiday.
Weekly holiday pay is paid in the same week, or the week that immediately follows. For employees required to work on a weekly holiday, they are entitled to overtime, paid at 1.5x their normal hourly base.
📅 Statutory holidays in Sri Lanka
Employees who are governed by the Shop and Office Employees Act No. 19 of 1954 are entitled to paid leave for all statutory holidays.
Under the Shop and Office Employees Act No. 19 of 1954, the Commissioner of Labour is required to approve a shop or office employee working on a holiday. In this situation, employees are generally granted an alternative holiday on different day, or paid an extra day’s wage.
Employees who work in industries that have established wage boards are entitled to paid time off for all statutory holidays.
All employees are entitled to one day’s paid leave on a Full Moon Poya Day. These dates vary each year. If an employee is required to work on this day, they must be paid at least 1.5x their normal rate of pay.
Duruthu Full Moon Poya Day
Tamil Thai Pongal Day
Navam Full Moon Poya Day
Madin Full Moon Poya Day
Coronavirus Public Holiday
Bak Full Moon Poya
Sinhala and Tamil New Year Eve
Sinhala and Tamil New Year
Vesak Full Moon Poya
Vesak Full Moon Poya Holiday
Poson Full Moon Poya Holiday
Poson Full Moon Poya
Esala Full Moon Poya
Nikini Full Moon Poya
Binara Full Moon Poya
Adhi-Vap Full Moon Poya
Milad-Un-Nabi, Vap Full Moon Poya
Deepavali Festival Day
Ill Full Moon Poya
Unduvap Full Moon Poya
🏦 Income tax
Depending on how much an employee earns in Sri Lanka, total income will vary. This is categorized under different tiers, known as ‘Tax Slabs’. If an employee’s monthly earnings surpass 250,000 LKR, or 3,000,000 LKR annually, they are required to pay income tax.
The following sources of income are considered a component of taxable income:
- Employment Income
- Business Income
- Investment Income
- Other Income
🏥 Health insurance
Sri Lanka has a universal health care system that extends free healthcare to all citizens. OPD facilities are readily available in public hospitals situated in major towns and cities, with laboratory and radiology facilities common in most.
Despite low levels of health expenditures, Sri Lanka’s health indicators are comparable to more developed countries in the region. The public healthcare system also has long waiting lists for specialized care and advanced procedures. As a result, reliance on private care is increased.
A major proportion of the private healthcare market, as much as 75% according to some estimates, is concentrated among four or five healthcare firms operating out of Colombo.
👍 Annual leave
Employees in Sri Lanka are granted 14 day’s paid annual leave for each year of service they have completed. They can begin taking this leave during their second year of service. Annual leave is accrued based on when the employment relationship commenced. The details are as follows:
- Employment beginning January 1 to March 31 of the previous year – 14 days
- Employment beginning April 1 to June 30 of the previous year – 10 days
- Employment beginning July 1 to September 30 or the previous year – 7 days
- Employment beginning October 1 to December 31 of the previous year – 4 days
Leave must be taken as a block of at least seven consecutive days. However, employees can only accrue up to 14 days, regardless of how many years of service they have provided. Employers can allow unused annual leave to carry forward to the next year. This information should always be included in the employment agreement.
During the year of termination, annual leave is calculated as such:
- If the employee has worked for less than 10 months during the year, one day of paid annual leave for each month worked is accrued
- If the employee has worked for ten months or more, they are provided with the full 14 days of annual leave
The employee is entitled to all unused annual leave that he or she earned in the year before termination.
😷 Casual leave and sick leave
From the second year and moving forward, employees governed by the Shop and Office Employees Act are eligible for seven days of casual leave. During the first year of work, employees are entitled to one day’s worth of paid leave for every two months that they have worked. Casual leave can be used by the employee due to illness or for their own private business.
There is no statutory right to unpaid leave in Sri Lanka.
👶 Maternity and paternity leave
Expectant mothers are entitled to 84 day’s paid maternity leave for their first and second child. This includes 14 days before the birth and 70 days during hospitalization or after the birth. Leave for the third and subsequent children is 42 days, with 14 days available before childbirth and 28 days available post childbirth.
The payment of maternity leave is made without accounting for weekly, public, or Full Moon Poya holidays.
There are no statutory rights to paternity leave in Sri Lanka.
💰 Termination and severance
Sri Lanka has a number of important regulations that govern how an employee can be terminated and what type of notice he or she is entitled to receive. Generally, notice periods are specified in employment agreements.
If an employer is terminating the employment relationship on disciplinary grounds, they must inform the employee in writing. This should describe the reasons for dismissal within two working days of the date of termination.
Under major employment laws in Sri Lanka, most employees can only be dismissed for one of the following reasons:
- The employee consents
- The Commissioner of Labour has provided prior approval
- A justifiable cause exists
To terminate an employee for a justifiable cause, employers need to provide sufficient evidence that supports their decision. This is in case the employee challenges it as an unjust dismissal to the Commissioner of Labour or a labor tribunal.
Justifiable cause is not defined by law, but it has been interpreted to include the following:
- Breach of contract terms
- Unsatisfactory performance
- Incompetence, abusive or unruly behavior
- Gross negligence in the discharge of duties
- Intoxication during work
- Conviction of a crime involving imprisonment or moral turpitude
A central consideration of determining justifiable cause is whether the employer acted in good faith.
Under Sri Lanka’s labor laws, disputes regarding dismissals can be referred to alternative dispute resolution, including mediation, conciliation or arbitration. These cases can also be sent to a labor tribunal that can order reinstatement and back payment of wages, or provide severance pay in an amount the tribunal deems equitable.
Employees can challenge termination for unjust dismissal and apply for severance payments by filing an application within six months of the dismissal. Potential compensation for unjust dismissal includes:
- Employee with 1 to 5 years of service – 2.5 month’s salary for each year of service the employee completed, subject to a cap of 12.5 month’s salary
- Employee with 6 to 14 years of service – 2 month’s salary for each year of service the employee completed, subject to 30.5 month’s salary
- Employee with 15 to 19 years of service – 1.5 month’s salary for each year of service the employee completed, subject to 38 month’s salary
- Employee with 20 to 24 years of service – one month’s salary for each year of service the employee completed, subject to 43 month’s salary
- Employee with 25 to 34 years of service – 0.5 month’s salary for each year of service the employee completed, subject to 48 month’s salary
In any situation, the maximum value of a severance payment cannot be greater than LKR 1.25 million. Additionally, labor tribunals are given wide discretion to determine what they believe to be just and equitable, given the particular circumstances surrounding the claim.
Navigating employee terminations and handling severance packages can be complicated for companies expanding overseas for the first time. New Horizons’ Sri Lanka PEO can mitigate risk for foreign companies and provide guidance through this process.
💳 Sri Lanka compensation and benefits
Sr Lanka compensation laws
The minimum wage in Sri Lanka is LKR 10,000 per month. In addition to the national minimum wage, employees from different industries may have set minimum wages that include daily pay, monthly pay, or contract rates.
Minimum Wage Country Comparison Chart
(Per month in USD)
Guaranteed benefits in Sri Lanka
To maintain a successful benefit management strategy, employers in Sri Lanka should be mindful of guaranteed benefits. Sri Lanka celebrates 26 national holidays each year. Different industries will determine which days are celebrated. In some sectors, only eight of those holidays are provided with paid time off for employees.
Other statutory benefits include:
- 14 day’s paid annual vacation after the first full year of employment
- Seven sick leave days during the first year of employment
- 84 day’s paid leave for new mothers having their first or second child — in most cases taken as 14 days before the due date and 70 days after
Sri Lanka benefit management
For employers that are assessing their benefit management plan, it’s advised they consider supplemental benefits, as well as statutory minimums. These benefits can attract high-level talent and encourage employees to stay with a business for longer. As an example, whilst Sri Lanka does not mandate paid paternity leave, this could be provided as a means of attracting staff members to your company.
In Sri Lanka, other supplemental benefits can include performance-based bonuses, additional paid time off, and private health care.
Benefits and compensation restrictions
For expanding businesses, one of the major restrictions to benefits and compensation involves setting up a local entity. Employers are generally prohibited from hiring and paying employees without first establishing a subsidiary in Sri Lanka. This process can take months to complete, which causes significant business delays.
With New Horizons’ Sri Lanka PEO, businesses can begin operating in Sri Lanka in as little as 48 hours. New Horizons acts as your employees’ Employer of Record, which means there’s no need to establish a subsidiary in Sri Lanka. And as the only global PEO with an in-house recruitment team, we can help you source, hire, and onboard top local and international talent.