Multiplier Logo
Loading Animation Image
Sri Lanka

Essential Guide to Hiring Employees in Sri Lanka: Legal, Payroll, and Recruitment Tips

Sri Lanka is an emerging economy with affordable business costs. The country has free trade agreements (FTA) with key Asian markets such as Singapore, Iran, Israel, and Egypt. India-Sri Lanka Free Trade Agreement (ISLFTA) was signed in 1998 and became operational in 2000. Sri Lanka has a total of 10 FTAs signed with various countries. 

Their liberal economic policies create a suitable environment for businesses to thrive because of which more people are trying to set up a business here, which in turn requires recruitment. These factors make Sri Lanka an attractive place for international recruiters.

Sri Lanka is located at the crossroads of major shipping routes connecting South Asia, the Pacific, America, and Europe. This makes it an ideal location for conducting business. Besides, Sri Lankan workers are productive and hard-working. Hence, businesses planning to enter the Sri Lankan market to gauge how to hire people in Sri Lanka.

Read on to find out everything you need to know about the hiring process in Sri Lanka.

Things to Know Before Hiring in Sri Lanka

As discussed above, there are numerous benefits of hiring staff in Sri Lanka. The country has an adult literacy rate above 90%. Further, Sri Lanka’s labor force is highly skilled and capable of assimilating new technologies. But as a recruiter, here are a few things you need to know about how to hire people in Sri Lanka.

Employment Laws

Sri Lanka treats fixed-term contracts and permanent contracts differently. Misclassifying them can lead to fines. Thus, we recommend you draft a detailed agreement for each employee you hire in Sri Lanka. Make sure to mention the following parameters in the contract when you hire employees in Sri Lanka.

  • Position
  • Compensation Structure
  • Benefits
  • Working hours
  • Termination requirements
  • Bonus
  • Holiday and leave status

There is no maximum or minimum period of probation in Sri Lanka. But, the typical trial period is 6 months, which you can extend to 9 months. You can part ways with your employees within the period if you wish to do so.

The average salary for an employee in Sri Lanka is approximately 115,000 LKR per month. The average salary may include perks and benefits like transport, workforce skilling, educational opportunities, housing, paid leaves, etc. 

The Employment Termination of Sri Lanka also has some specific termination requirements. An employee’s termination cannot be without cause or notice. 

Employees are entitled to gratuity pay on completing five years of service. The gratuity rates are as below:

  • Half a month’s wages or salary for each completed year of service for monthly rated workers
  • Fourteen days salary for each year of completed service for other workers

This amount is payable in every circumstance, irrespective of the reason for termination.

Payroll and Taxes

All companies in Sri Lanka, resident or non-resident, are liable to pay corporate taxes for any business conducted in the country. The rates are as given below:

  • Corporate income tax rate – 28% (Tax rates of 14% and 40% also apply to profits from specific businesses)
  • Branch tax rate – 14% 
  • Capital gains tax rate – 10%

The compensation you pay to workers in Sri Lanka will depend on the nature of the job. If the gross remuneration of your employees exceeds INR 2,50,000 per month, you are required to deduct Advanced Personal Income Tax (APIT) from their payroll with their consent. 

The monthly APIT deductions should be made according to the table given below:

Monthly Regular Profits from Employment

Tax

Up to INR 2,50,000

Nil

INR 2,50,000 to INR 5,00,000

6% profits from employment less INR 15,000

INR 5,00,000 to INR 7,50,000

12% profits from employment less INR 45,000

Above INR 7,50,000

18% profits from employment less INR 90,000

You can also choose to make a lump sum or once-and-for-all payment of APIT instead of monthly deductions. 

Employers and employees in Sri Lanka must also contribute to social security programs. These include the Employee’s Provident Fund, established under the EPF Act No. 15 of 1958 (Act), and the Employee’s Trust Fund (ETF), established on 1 March 1981 under the Act No. 46 of 1980 by the Parliament of the Democratic Socialist Republic of Sri Lanka.

The EPF contribution rates for employers and employees are 12% and 8%, respectively. The ETF contribution rate is 3% for employers.

Wages and Working Hours

Different sectors in Sri Lanka have their working hour laws. Employers have to be mindful of the same during the process of recruitment and selection in Sri Lanka.

The maximum working hours for factory workers are 48 hours a week. On the other hand, the office and shop workers have a standard 45-hour workweek. Though overtime is permissible, it cannot exceed 12 hours per week. Also, individuals working overtime have to be suitably compensated as per the labor laws, which are governed by the National Minimum Wage of Workers Act No 3 of 2016. The rates are as mentioned below:

  • Factory Workers: At least 125% of the regular hourly wage
  • Shop and Office Workers: At least 150% of the regular hourly wage

Leaves and Time Off

Every shop and office employee in Sri Lanka is entitled to 14 days of annual leave and 7 days of casual leave for every completed year of service. The employment law in the country also provides for a paid maternity leave of 84 days for female employees. However, no legislation in Sri Lanka obligates private sector companies to grant paternity leave.

Apart from the above, an employee in Sri Lanka is also entitled to the following statutory holidays:

  • Tamil Thai-Pongal Day
  • National Day
  • Milad-Un-Nabi (Holy Prophet’s Birthday)
  • The day before Sinhala and Tamil New Year’s Day
  • Sinhala and Tamil New Year’s Day
  • May Day
  • Poya Day
  • Christmas Day

Anti-Discrimination Law

The Sri Lankan constitution protects its people from any form of discrimination. Thus, discrimination is severely frowned upon based upon race, religion, nationality, age, sex, sexual orientation, disability, political opinion, and labor union membership. The recruitment and selection process in Sri Lanka should be without bias to adhere to the law.

Retirement and Termination Policy in Sri Lanka

Sri Lanka’s ministry of public services has extended the retirement age of public servants in Sri Lanka to 65 but workers are free to retire willfully at the age of 55. This is effective as of January 01, 2022.

Under section 31 of the Industrial Dispute Act, 1950, the employer must serve a termination notice before terminating the services of an employee. This law focuses more on collective dismissals after giving a notice period of 1 month (this is eligible if the employee has worked for a year or more). A worker who has worked for 5 years is eligible for gratuity. 

The Cost of Hiring Employees in Sri Lanka

The cost of the recruitment process in Sri Lankan companies depends on many factors, such as the position you’re hiring for, recruitment strategies, and your policies towards employee benefits.

Here are a few direct and indirect costs related to the hiring process in Sri Lanka.

  • Expenses from recruitment fairs and job advertisements
  • Legal services
  • Staffing agencies
  • Hiring committee
  • Travel cost
  • Verification and background checks

The recruitment process in Sri Lankan companies does not stop at hiring. You will need a strategic onboarding system that helps you hire competent employees smoothly.

You will also have to provide training programs to help new employees understand the organization and their role. These costs are also a part of the recruitment fees in Sri Lanka.

What Does a Company Need to Hire Employees in Sri Lanka?

There are two ways how to recruit employees in Sri Lanka. Either partner with an Employer on Record (EOR) in Sri Lanka or establish a business presence there. If you choose the latter, you will need a local office in Sri Lanka, an address registered as a subsidiary, and a local bank account, all of which take time, effort and in-depth knowledge of local laws.

Sri Lanka allows foreigners to incorporate as a limited liability company (LLC), public limited company, branch office, and representative office. You can choose one of the above entities depending upon the nature of your business. Here are the steps you need to take to incorporate an entity in Sri Lanka:

Step 1

Register your company online with the Registrar of Companies in Sri Lanka

Step 2

Select promoters and directors for the company

Step 3

Draft a memorandum of association detailing your business objectives

Step 4

Submit all required documents to the registrar, including the Articles of Association

Step 5

Obtain a Tax Identification Number from the Taxpayer Services Unit

Step 6

Obtain an Employee Provident Fund Number from the Department of Labor in Sri Lanka

Step 7

Set up a local bank account in the city your company is registered

You can start the recruitment process in Sri Lanka after completing the above steps. Once your company is registered, you can employ workers and employees according to the laws. Here are some options you can use for hiring employees in Sri Lanka:

Various Options for Hiring Employees in Sri Lanka

When you hire staff in Sri Lanka, you must look at the types of employment available in the country. The kind you choose holds significant importance as it will determine your obligation towards your employees.

Here are the various options on how to hire employees in Sri Lanka.

Permanent Workers

Hiring a full-time permanent employee is the most common method of recruiting in Sri Lanka. Full-time employees are entitled to all rights and benefits, including social security, leaves, protection against dismissal, etc. Generally, employers prefer to keep employees on probation for some time before hiring them permanently.

Temporary or Casual Workers

You can hire temporary employees in Sri Lanka for a particular project. Sri Lankan employment laws consider temporary workers as “employees.” Hence, they are eligible for all benefits available to employees.

Further, if a temporary worker is employed under a fixed-term contract that is continually renewed without a break in service, they will be presumed to be a regular employee.

Apprentices

An apprentice is a worker who agrees to work under you at low wages for a fixed period of time. The primary purpose of apprenticeship is to learn the trade from a skilled employer.

An apprentice is neither classified as a workman nor an employee. However, some statutes like the EPF Act bring them under the definition of a workman, extending the benefits of Provident Funds to them. They are also protected under the Termination of Employment of Workmen Act, 1971.

Seasonal Workers

Seasonal workers are employed in a particular season. They are not regulated by any law in Sri Lanka. Therefore, you are not obliged to hire them again. 

Once you have figured out the type of employment for your organization, the next task is to find a suitable candidate. You can start by advertising in job portals, social media channels, or asking existing employees for referrals.

Another way is to get help from professional agencies like Multiplier. They can help you understand the laws and rules regarding hiring, employment, and the benefits and compensation you are liable to pay your employees.

The Steps to Hiring in Sri Lanka

The hiring process in Sri Lanka is similar to the hiring process in most countries. Here’s a step-by-step guide on how to hire employees in Sri Lanka.

1. Advertise the Position

The recruitment process in Sri Lankan companies begins with advertising job openings. Include a clear description of your company and the position you’re hiring for. You can leverage the top job sites mentioned above to quickly hire Sri Lankan workers.

2. Shortlist the Applicants

This step can be challenging, especially if there is a massive response to your advertisement. You may require the help of a hiring agency and a hiring committee here.

One way to quickly identify suitable candidates is to have a skill test or questionnaire built into the application. However, make sure that the screening process is fair and non-discriminatory.

3. Interview Shortlisted Candidates

Once you identify potential candidates, you need to schedule interviews to find the best fit. Virtual interviews have become the norm nowadays. However, if you already have a presence in Sri Lanka, you can also go for physical interviews.

The questions you ask during the recruitment and selection in Sri Lanka are fundamentally the same as you would ask a candidate in your country. You can further ask whether the applicant is familiar with your customs and languages since this can be an additional advantage.

4. Make a Job Offer

The final step of the recruitment and selection process in Sri Lanka is offering the job to the best candidate. If the candidate accepts your offer, it’s time to draft a formal employment contract. The job offer must contain vital details like:

  • Terms of employment
  • Terms of perquisites and allowances
  • Compensation and remuneration
  • Employee undertakings, commitments, and covenants
  • Basic salary structure
  • Authorized signatory (name & designation)

Make the contract as detailed as possible to avoid future disputes. Also, ensure that you comply with all employment laws in Sri Lanka, or else your contract may be rendered invalid.

Let Multiplier Be Your EOR Platform in Sri Lanka

Establishing a presence in foreign countries comes with many complexities. It not only requires significant investment but there are also many compliance issues to deal with. If you’re not sure how to hire someone in Sri Lanka, let Multiplier handle your global teams.

By trusting Multiplier as your Employer of Record (EOR), you can enter into new markets without the hassle of incorporating a new entity. We take care of your global teams’ payroll, benefits, taxes, social contributions, and local insurance policies, enabling you to thrive in international markets.

Let us take the burden of meeting your international compliance requirements while you focus on the most crucial aspect of your business — growth!

Frequently Asked Questions

The minimum wage in Sri Lanka for workers in industry or service is 10,000 LKR per month.

The maximum working hours for factory workers are 48 hours a week. The office and shop workers have a standard 45-hour workweek. Overtime of 12 hours per week is allowed but must be suitably compensated.

You can hire in Sri Lanka either by partnering with an Employer on Record (EOR) or by establishing a business presence there. If you choose the latter, you will require a local office in Sri Lanka, an address registered as a subsidiary, and a local bank account.

Need help hiring in Sri Lanka ?

Table of Contents

World’s Preferred EOR/PEO Platform for a Global Workforce