DIFFERENCE BETWEEN EMPLOYEE/ INDEPENDENT

CONTRACTOR

BASIS FOR INDEPENDENT

EMPLOYEE
COMPARISON CONTRACTOR

Meaning The employee is a An independent contractor is

person hired by the a self-employed person who
employer, to work on a provides services to other
regular basis, in organization for a fixed
exchange for a fixed compensation.
remuneration.

Source of Salary Proceeds from each project

income

Works for One employer Multiple clients

Inputs Provided by employer Contractor uses his own

inputs

Time and place Decided by Employer Decided by Contractor

of work

Payment for Made by employer Made by contractor himself

expenses

Independence Works under the control Works independently.

and direction of
employer.

Delegation He is required to He can delegate tasks.

personally perform the
task.
 BASIS FOR INDEPENDENT
EMPLOYEE
COMPARISON CONTRACTOR

Training Employee receives Contractor does not receive

training for performing any training from contractee.
services in a particular
manner.

Relationship Continuing relationship Temporary relationship with

with employer. client.

WHY IS IT IMPORTANT TO DIFFERENTIATE BETWEEN

THE TWO?
In Sri Lanka one could find several enactments which govern the
employer employee relationship. Trade Unions Ordinance No 14 of
1935, Industrial Disputes Act No 43 of 1950, and Termination of
employment of workmen (Special Provisions) Act No 45 of 1971 are
among them. Since these legislations provide provisions regarding
wages, minimum hours of work and other social benefits, one might
come to a decision that it is not necessary to have a contract of service
between the parties and it is frequently seen that parties enter into
contractual relationships without a written contract of service, but it
should be mentioned that these legislations apply only where there is a
contract of service and not for an independent contractor under the
contract for service. Therefore to identify whether a person who
provides service is a workman or an independent contractor in the
absence of a written contract of service, court has developed several
tests.
TESTS
Only the Shop and Office Employees' (Regulation of Employment and
Remuneration) Act No 19 of 1954 specifies the need of a written
contract of service and it could be argued that this Act has recognized
the need of a written contract of service mainly to curb the injustice
faced by the employees and also the difficulty to prove the existence of a
contract of service by oral evidence. Also though the letter of
employment helps to prove the existence of an employer employee
relationship it is not a written contract of service. In this scenario court
has developed 'control test', 'integration test', 'economic reality test', and
'multiple test' and adopt them according to the circumstances. The initial
test used by the courts was the 'control test'. In the case of Yewens v
Noakes (1880) 6 QBD 530 the court emphasized "A servant is a person
subject to the command of his master as to the manner in which he shall
do his work". This suggests the employer's capacity to control. The more
he can control, more likely the existence of an employer employee
relationship. Court identified certain aspects with regard to the control
test such as the employer's power to select the employee, whether the
employer paid wages, the employer's right to control the method of
doing the work and the employer's right to dismiss from work. The case
Jamis Appuhamy v. Shanmugam (1978) 80 NLR 298 also demonstrates
that Sri Lankan courts also have recognized the control test to
differentiate a workman from an independent contractor. However soon
the courts recognized the .inadequacy of the control test as it was
difficult to apply where skilled workers are employed. For an instance
hospital authority is unaware of what a surgeon does at the theatre, but it
is unreasonable to say there is no employer employee relationship for the
very reason that hospital authority doesn't have any control over the
surgeon. The same happens with regard to pilots, engine drivers and
scientists, but it would best suit for an owner and housemaid
relationship. Nevertheless courts later recognized many other tests to
fulfill the inadequacies arose out of the control test. In the case of
Stevenson Jordan and Harrison Ltd v McDonald and Evans (1952) 1
Times. L. R Lord Denning introduced the 'integration test' and said " ...
under a contract of service, a man is employed as part of the business,
and his work is done as an integral part of the business; whereas under a
contract for services, his work, although done for the business, is not
integrated into it but is only accessory to it" In the Sri Lankan case Y.G
de Silva v Associated News Papers Ltd (1978-1979) 2 Sri LR 173 a
person entered into an agreement with a newspaper company as a
District Correspondent for six months and it was renewable by mutual
consent of the parties. He had to attend daily and take instructions from
the company. He used the office equipment, stationary and office
telephone. Although it was not stated in the agreement his traveling
expenses were paid by the company. Also he was granted leave with the
consent of the company. The court held that he did not run a business of
his own and considered him as an integral part of the business, but the
application of this test was limited to where the service is rendered to the
main business of the organization.

In Market Investigations Ltd v. Minister of Social Security (1968) 3

ALL ER citing the case of US v. Silk (1946) 331 U.S. 704 court held
that the test to be applied is not whether power of control is exercised or
not but depending on the economic reality. This is known as the
'economic reality test". Here it is considered whether the person is in
business on his own account or works for someone else who gains the
profit or loss. In the Sri Lankan case Jamis Appuhamy v. Shanmugam
(1978) 80 NLR 298 a person was engaged as a taxi driver. He was not
paid regularly and was paid one-third of the daily profit. Court applied
the economic reality test and said that he did not bear the risk or loss of
the business and therefore he is a workman. This acts as one of the most
effective tests in differentiating the contract of service and contract for
service.

Courts have developed another test covering multiple aspects of the

relationship. In Montreal v. Montreal Locomotive Works Ltd
(1947) D.LR 161 court introduced a fourfold test which includes 1.
control, 2.ownership of the tools, 3. chance of profit, 4.risk or loss. In
the modern world of work the control test is not adequate to apply in
complex Lases therefore courts apply not only the control test, but also
the integration test, economic reality test and the multiple test. In
Ceylinco Insurance Co. Ltd v. Commissioner of Labour CA No. 398/95
the respondents were insurance agents and they were engaged as
independent contractors, but for them it was prohibited to work in any
other organization or run their own business. Court decided respondents
were an integral part of the com pany and company had control over the
performance of service and therefore considered them as employees of
the company.

Employees’ Provident Fund Act No 15 of 1958

It devolves as a legal requirement consequent to enactment of several acts of

parliament, for an employer, to make deposit of contributions to the Employees’
Provident Fund to enable the retired employees to obtain provident fund benefits
easily and without delay, to keep the employees informed and to take other
necessary action in this regard.

An individual account is being maintained at the Central Bank on behalf of each

employee with contributions both from the employee and the employer. The
compound interest received on the investment of funds of individual members,
systematically build over time, are credited to individual member’s account. It is
the duty and responsibility of an employer to deposit provident fund contributions
on behalf of employees, to register employees in the fund, distribute annual
statement of individual accounts, fill in accurately and certify refund of benefit
applications and pay regularly housing loan installments. The employer is legally
bound to do them. He is also bound to provide information and documents sought
by the Commissioner General of Labour or any of his authorized officers.

A member has a right to obtain a loan from a house and property loan granting
authority offering as security his provided fund balance. It is also possible to obtain
a second loan if he has regularly and unfailingly paid the loan installments and has
won the confidence of the lending institution.

It has to be specially mentioned that in case of default of payments of the loan

installment, recovery of the default amount would be made good from the
members provident fund balance with the attendant risk of losing his old age
retirement security cover.

Employer will be liable for the payment of surcharge ranging from 5% to 50%
for late payments of EPF:

Delay from day 01 to day 10 5%

Delay from day 10 to 01 month 15%

Delay from 01 month to 03 months 20%

Delay from 03 months to 06 months 30%

Delay from 06 months to 12 months 40%

Delay over 12 months 50%

What type of job should you do to obtain EPF membership?

In this instance, the nature of the job whatever it may be, is not important.

1. Employees who are permanent, non-permanent, apprentice, temporary, casual

working few hours with intermittent breaks, working short of a full day

2. Employees who work on piece rate, on contract basis, on commission basis or

payment on unit basis.

3. Employees who receive monthly salaries, weekly paid or daily paid.

4. Those employees from labour grade to managerial grade and in any of the
above categories.

Employee Trust Fund

An employee is entitled to ETF from the first day of his/her employment

irrespective of whether he/she is permanent, temporary, apprentice, casual or a
shift worker. Similarly, employees working on piece rate, contract basis, and work
performed basis of any manner are also eligible for membership. Employer has to
contribute an amount equal to 3% of the employee’s total earnings.

Steps to obtain Employee Trust Fund registration

The ETF does not have a separate registration procedure for making contributions.
ETF contributions should also be made through the EPF registration number. For
the purpose of ETF payments, Employers having over 15 employees should
complete Remittance Advice R1 and employers having less than 15 employees
should complete Remittance Advice R4 and make the payments accordingly. If
payment is to be made by cheques/ Bank Drafts, ensure that they are crossed and
made payable to ETF Board. Payments by Money Order should be made favoring
“Employees’ Trust Fund”. The monthly contributions must reach the ETF Board
on or before the last working day of the following month. Otherwise, the
employers will be liable to pay surcharge.
Director’s liability upon non-payment of EPF/ETF

As per the director’s duties set out in the Companies Act no. 07 of 2007, Directors
should be aware that they can be prosecuted for offences or held personally liable
under these statutes even if the company is wound up and the claims against the
company are extinguished.

- A director may avoid liability if he/she can prove that such offences were
committed without his/her consent or concurrence and that he/she had
exercised all due diligence to prevent the commission of such offence.
(Harjaspal Singh Juneja vs Recovery Officer, EPF (CWP no. 22717 of 2010)
 decided on 23 August, 2016 in the High Court of Punjab and Haryana at
Chandigarh).

VICTIMIZATION- WHEN AN EMPLOYEE IS CHANGED FROM ONE

PLACE TO ANOTHER
The managerial prerogative to transfer personnel must be exercised without grave
abuse of discretion, bearing in mind the basic elements of justice and fair play. Having
the right should not be confused with the manner in which that right is exercised.

Thus, it cannot be used as a subterfuge by the employer to rid himself of an undesirable

worker. In particular, the employer must be able to show that the transfer is not
unreasonable. Inconvenient or prejudicial to the employee: nor does it involve a
demotion in rank or a diminution of his salaries, privileges and other benefits.

Should the employer fail to overcome this burden of proof, the employee's transfer shall
be tantamount to constructive dismissal, which has been defined as a quitting because
continued employment is rendered impossible, unreasonable or unlikely; as an offer
involving a demotion in rank and diminution in pay.

Likewise, constructive dismissal exists when an act of clear discrimination, insensibility

or disdain by an employer has become so unbearable to the employee leaving him with
no option but to forego with his continued employment.

However, in the case of Suldao vs. Cimech System Construction, Inc. 506 SCRA
256 decided on 30th Oct 2006 (Supreme Court of Manila, Phillipines), it was held that
while the employee's transfer was valid, the manner by which the employer unjustifiably
prevented him from returning to work on several occasions runs counter to the claim of
good faith on the part of the corporation. By reporting for work, the employee
manifested his willingness to comply with the regulations of the corporation and his
desire to continue working for the latter. However, he was barred from entering the
premises without any explanation. This is a clear manifestation of disdain and
insensibility on the part of an employer towards a particular employee and a veritable
hallmark of constructive dismissal.

Thus, the Court held that while the decision to transfer employees to other areas of its
operations forms part of the well-recognized prerogatives of management, it must be
stressed, however, that the managerial prerogative to transfer personnel must not be
exercised with grave abuse of discretion, bearing in mind the basic elements of justice
and fair play. Having the right should not be confused with the manner in which that
right is exercised. Thus it cannot be used as a subterfuge by the employer to rid himself
of an undesirable worker.

In cases of constructive dismissal, the burden of proof is on the employer to show that
the employee was dismissed for a valid and a just cause.
Protection against dismissal
The mere transfer of the business will not automatically bring about a
termination of employment of the employees. However, where the business of
the employing entity is transferred to a different entity, the original employer
must take one of the following measures:

 Enter into an arrangement with the new buyer of the business and the
employees, for the buyer to take on the employment of the employees,
generally with a requirement that the buyer will recognise the previous
tenure of service under the selling employer as a continuous and
uninterrupted service for statutory purposes.
 Enter into a negotiated severance arrangement with the employees.
 Make an application to the Commissioner of Labour seeking approval
for the dismissal of the employees under the Termination of
Employment of Workmen (Special Provisions) Act No 45 of 1971
(TEWA) and, where such approval is granted, compensation will be
payable to the employees dismissed according to the provisions set out
in the TEWA (see Question 20).

Harmonisation of employment terms

Harmonisation of employment terms is possible, but where that harmonisation
creates less favourable terms of employment for the employees than they
were previously employed under, the employees' consent will be required.

Employer and parent company liability

27. Are there any circumstances in which:

 An employer can be liable for the acts of its employees?

 A parent company can be liable for the acts of a subsidiary
company's employees?

Employer liability
An employer is legally responsible for the actions of its employees. However,
this rule only applies if the employee is acting within the course and scope of
employment, where the employer can be held vicariously liable for the actions
or omissions of the employee.
Parent company liability
Sri Lankan company law is based on English law and recognises the limited
liability of an incorporated entity. Therefore, the general rule is that a company
has a separate and distinct legal personality from that of its parent company.
However, in limited circumstances (most notably in situations of demonstrable
fraud) an aggrieved party can request a court of law to pierce the corporate
veil and hold the parent company and/or its officers, shareholders and/or
directors liable.

Employer insolvency
28. What rights do employees have on the insolvency of their
employer? Is there a state fund which guarantees repayment of
certain employment debts?

Employee rights on insolvency

Under the Termination of Employment of Workmen (Special Provisions) Act
No 45 of 1971 (TEWA), if a business has been closed down and the requisite
notice has not been given to either the employees or the Commissioner of
Labour (Commissioner), the Commissioner has the power to investigate and
inquire into that closure and to order the ex-employer to pay compensation to
the employees concerned. This will be in addition to the rights of aggrieved
employees to file an application to a Labour Tribunal under the Industrial
Disputes Act No 43 of 1950.

If the business closure has taken place in contravention of the TEWA, the
Commissioner can order the employer to pay the employees compensation as
an alternative to reinstatement, any gratuity payments owed or any other
benefit payable to employees.

Further, where the employer company is placed in liquidation, the

superannuation benefits payable on account of the employees (that is, under
the Employees Provident Fund Act No 15 of 1958 (EPF), the Employees Trust
Fund Act No 46 of 1980 (ETF) and the Payment of Gratuity Act No 12 of
1983) will be the first charge on the assets of the company in liquidation, and
where such assets are insufficient to settle those liabilities, the directors of the
company can be held jointly and severally personally liable to meet any
shortfall due.

State guarantee fund

Under the EPF and ETF, the funds to which employers must make
contributions are maintained by the state. However, there is no separate state
guarantee fund to protect the interests of employees in the event of the
insolvency of the employer.

Health and safety obligations

29. What are an employer's obligations regarding the health and
safety of its employees?
The Shop and Office Employees (Regulation of Employment & Remuneration)
Act No 19 of 1954 makes provision for sufficient and suitable lighting and
ventilation at every part of the premises of a shop or office. Similar provision is
made for sanitary conveniences and washing facilities, seats for female shop
assistants and facilities for meals and resting. An employer cannot compel an
employee to reside on the premises of a shop or office unless a permit in the
prescribed form has been obtained from the Commissioner of Labour or the
premises are a residential hotel. The Factories Ordinance No 45 of 1942 (FO)
also makes provision for matters such as cleanliness, overcrowding,
temperature control, ventilation, lighting facilities, drainage, sanitary facilities,
medical supervision, the supply of wholesome drinking water, washing
facilities, accommodation for clothing, facilities for resting for female workers
and first aid facilities.

The FO and the Workmen's Compensation Ordinance No 19 of 1934 (WCO)

mainly stipulate the employer's obligations regarding the health and safety of
its employees. The FO and regulations made under it provide for the health,
safety and welfare of factory workers. Safety measures must be taken in
factories in relation to machinery, equipment and ancillaries operated in the
factory, and with respect to the floor area, and amenities must be put in place
to provide first aid and medical attention and sanitary facilities. Provisions
relating to accidents, deaths, industrial diseases and working conditions are
also contained in the FO.
Taxation of employment income
30. What is the basis of taxation of employment income for:

 Foreign nationals working in your jurisdiction?

 Nationals of your jurisdiction working abroad?

Foreign nationals
For the period commencing from 1 January 2020 to 31 March 2020, foreign
national employees working in Sri Lanka are taxed at the tax rates applicable
to residents in Sri Lanka, but they are taxed only on their Sri Lankan-sourced
income.

Nationals working abroad

Non-resident individuals rendering services outside Sri Lanka are only subject
to income tax on the income received from Sri Lankan sources at the following
rates with effect from 1 January 2020:

 Employment income not exceeding LKR250,000: taxed at a rate of 6%.

 Employment income of between LKR250,001 and up to LKR500,000:
taxed at a rate of 12%.
 Employment income of LKR 500,001 and above: taxed at a rate of 18%.
Regulations regarding the applicable tax-free allowance (if any) for nationals
working abroad have not yet been published.

31. What is the rate of taxation on employment income? Are any

social security contributions or similar taxes levied on employers
and/or employees?

Rate of taxation on employment income

For the period commencing from 1 January 2020 to 31 March 2020, income
tax is levied on employment income and income received from Sri-Lankan
sources at the following progressive rates, depending on the aggregate of
income earned subject to a tax-free allowance of LKR750,000 for this period
(foreign national employees working in Sri Lanka are not entitled to this tax-
free allowance):

 Cumulative employment income of up to LKR750,000: exempt.

  Cumulative employment income of between LKR750,001 and up to
LKR1,500,000: taxed at a rate of 6%.
 Cumulative employment income of between LKR1,500,001 and up to
LKR2,250,000: taxed at a rate of 12%.
 Cumulative employment income of LKR2,250,001 and above: taxed at a
rate of 18%.

Social security contributions

Under the Employees Provident Fund Act No 15 of 1958 (EPF), the employer
is required to contribute 12% of the employee's monthly earnings, and deduct
and contribute 8% of each employee's salary, to the EPF Fund. Under the
Employees Trust Fund Act No 46 of 1980 (ETF), the employer is also required
to contribute a further 3% of each employee's monthly earnings to the ETF
Fund on account of each employee.

The EPF and ETF provide that the calculation of these contributions must be
based on the "total earnings" of the employee. This is supplemented by the
Court of Appeal judgment in Saifudeen Adamaly v Lawson Pest Control
Limited (C.A. Writ Application No 770/1995, decided on 28 March 1996) which
held that all fixed allowances paid in cash should be included in the
calculation of such superannuation benefits.

Special Allowances of Workers Law no. 17 of 1978

Section 2-

(1) The Commissioner shall be the competent authority for the

purposes of this Law.
(2) The competent authority may delegate to any officer of
the Department of Labour any power, function or duty
conferred or imposed on such authority by this Law

Section 3- TO PRIVATE SECTOR WORKERS:

(1) With effect from the 17th day of February, 1977, every employer, in
any trade, of a worker whose total earnings for the month do not
exceed eight hundred rupees shall pay to such worker in respect of
each month, an allowance calculated on the following basis:-
(a) in the case of a worker remunerated at a monthly rate, the
allowance payable shall be an amount not less than twenty per
centum of the wages or salary due to such worker for the month ;
(b) in the case of a daily-paid worker, the allowance payable shall be
an amount not less than twenty per centum of the daily wage due to
such worker for each day he has worked for the month;
(c) in the case of a worker who is employed on a piece-rate basis, the
allowance payable shall be a sum not less than twenty per centum of
the wages due to him at such piece rate during the month:
Provided that the allowance payable under paragraph (a)
or paragraph (b) or paragraph (c) shall not in any case
exceed fifty rupees.
(2) Every employer of a worker whose total earnings for
the month exceed eight hundred rupees but are less than
eight hundred and fifty rupees, shall, in respect of each
month, pay to such worker as allowance an amount
equivalent to the difference between eight hundred and
fifty rupees and the amount drawn by such worker as
salary or wages for that month.
(3) Where any worker referred to in subsection (1) or
subsection (2) is paid-
(i) a non-recurring Cost of Living Gratuity in accordance
with, or on the basis of, the provisions of any Collective
Agreement or in terms of an Order made by the Minister
under section 10 (2) of the Industrial Disputes Act, or
(ii) a Cost of Living Allowance determined in accordance
with the Colombo Consumers’ Price Index, the employer
may deduct from the amount payable to such worker as
such gratuity or such allowance, as the case may be,-
(a) where the total earnings of such worker for
the month do not exceed four hundred rupees, an
 amount equivalent to ten per centum of the
salary or wages of such worker or a sum of thirty
rupees, whichever is less; and
(b) where the total earnings exceed four hundred
rupees, a sum of fifty rupees.

SICK
LEAVE
- Under the Shop and Office Employees (Regulation of Employment &
Remuneration) Act No 19 of 1954, employees are entitled to seven
days' paid casual leave in any year, except during the first calendar year
of employment. During the first calendar year of employment, the
employee is entitled to one day's paid casual leave for every two
months worked. Casual leave can only be taken by the employee for
their own private business purposes or because of their own illness.

Entitlement to unpaid time off

There is no automatic entitlement to unpaid time off, and this is at the absolute
discretion of the employer.

Recovery of sick pay from the state

There is no provision to recover sick pay paid from the state.

Statutory rights of parents and carers

Maternity rights
The Shop and Office Employees (Regulation of Employment & Remuneration)
Act No 19 of 1954 (SOEA) provides for paid maternity leave and benefits for
female employees. Accordingly, 84 days' paid maternity leave is granted to
female employees where the confinement results in the delivery of a live child,
and 42 days' paid maternity leave where the confinement does not result in
the delivery of a live child. An employee who has given notice to her employer
that she is pregnant cannot be employed, or caused or permitted to be
employed, in any work that may be injurious to her or her child during that
notice period (this notice period must not exceed three months). In addition to
the employee's right to full wages during maternity leave, the employee
cannot be dismissed solely on the basis of her pregnancy or confinement or of
any illness consequent to her pregnancy or confinement.
Under the Maternity Benefits Ordinance No 32 of 1939 (MBO), female
employees are entitled to take 14 days' or two weeks' maternity leave prior to
the confinement and 70 days or ten weeks after the birth. Where the
confinement does not result in the delivery of a live child, the maternity leave
is 28 days or 4 weeks following the confinement. If the maternity leave prior to
the birth has not been taken, then that period of maternity leave must be
added to the period of maternity leave taken after the confinement.

Paternity rights
There are no statutorily recognised paternity rights in Sri Lanka.

Surrogacy rights
There are no statutorily recognised surrogacy rights in Sri Lanka.

Adoption rights
The maternity benefits available under the SOEA and the MBO do not apply in
situations of adoption and therefore there are no such provisions concerning
adoption under Sri Lankan law.

Parental rights
Under the MBO, women nursing children who are less than one year old are
entitled to nursing breaks during their hours of employment, which are in
addition to the rest breaks provided by law.

Carers' rights
There are no statutorily recognised carers' rights in Sri Lanka.
20. What rights do employees have when their employment or
employment contract is terminated?

Notice periods
Notice periods, or payments in lieu of notice, for dismissal are typically
stipulated in the contract of employment. However, where the provisions
concerning notice periods, or payments in lieu of notice, are exercised by the
employer during the course of an unjust dismissal, the employee can
challenge that termination on the basis of unjust dismissal.

In the case of a dismissal on disciplinary grounds, the Termination of

Employment of Workmen (Special Provisions) Act No 45 of 1971 (TEWA)
makes it mandatory for the employer to inform the employee, in writing, of the
reasons for the dismissal before the expiry of the second working day after the
dismissal has taken place.

Severance payments
Employees can challenge a dismissal as an unjust dismissal and apply for a
severance payment by filing an application, within six months of the dismissal,
to the Termination Unit of the Labour Department under the TEWA (where the
employees come within the purview of that Act) or to a Labour Tribunal under
the Industrial Disputes Act No 43 of 1950 (IDA). TEWA will apply on the
termination of services where the employer has employed 15 or more
employees on average at any time during the six months preceding the
termination of services of an employee. Further, TEWA does not apply to
employees with less than one year's service, employees in the governmental
authorities, employees specifically covered under collective agreements,
employees retired with the attainment of the retirement age as stipulated in
the contract of employment or where termination is on disciplinary grounds.

The quantum of compensation that may be awarded by the Commissioner of

Labour (Commissioner) as a result of a successful application for unjust
dismissal under the TEWA is regulated as follows, depending on the
employee's length of service:

 Employee with one to five years' service: 2.5 months' salary paid as
compensation for each year of service competed (capped at 12.5
months' salary).
 Employee with six to 14 years' service: 2 months' salary paid as
compensation for each year of service competed (capped at 30.5
months' salary).
  Employee with 15 to 19 years' service: 1.5 months' salary paid as
compensation for each year of service competed (capped at 38 months'
salary).
 Employee with 20 to 24 years' service: 1 months' salary paid as
compensation for each year of service competed (capped at 43 months'
salary).
 Employee with 25 to 34 years' service: 0.5 months' salary paid as
compensation for each year of service competed (capped at 48 months'
salary).
The maximum severance payment that can be made under the above formula
is LKR1.25 million.

Whilst the quantum of compensation that can be awarded by the

Commissioner under the TEWA is regulated, the IDA confers wide
discretionary powers on Labour Tribunals to grant the relief they consider to
be "just and equitable" in the circumstances of the case, irrespective of any
provisions contained in the contract of employment. Therefore, a Labour
Tribunal's power to award compensation is not restricted by any formula, but
is based entirely on the Labour Tribunal's discretion when considering the
evidence placed before it.

Procedural requirements for dismissal

The dismissal process in Sri Lanka is governed by two principal statutes, the
IDA and the TEWA. Under the IDA, any "workman" can refer any industrial
dispute with an employer to the Commissioner for resolution by mediation,
conciliation or, in limited circumstances, arbitration. The IDA defines a
"workman" as any person who has entered into or works under a contract with
an employer in any capacity, including apprenticeship, or a personal contract
to execute any work or labour, and includes any person ordinarily employed
under any contract (whether such person is or is not in employment at any
particular time), and includes any person whose services have been
terminated. The IDA also provides for workmen to make applications relating
to unjust dismissals to Labour Tribunals set up under the IDA, which are
empowered to order reinstatement with the back-payment of wages, or
compensation in lieu of reinstatement and the back-payment of wages, in any
quantum it deems "just and equitable" in the circumstances.
The TEWA exclusively relates to dismissals and is applicable to specific types
of employment. The IDA applies to, and is available to, any aggrieved party
coming within the definition of a "workman". Applications under the TEWA will
only be permissible where the employer has employed 15 or more employees
on average at any time during the six months preceding the termination of the
services of an employee. Further, TEWA does not apply to employees with
less than one year's service, employees whose services have been
terminated on disciplinary grounds, employees in governmental authorities,
employees specifically covered under collective agreements and employees
retired with the attainment of the retirement age as stipulated in the contract of
employment. Employees not falling within the purview of TEWA can make an
application under the IDA Under both the TEWA and the IDA, an employee
can only be dismissed in the following circumstances:

 With the employee's consent.

 With the prior approval of the Commissioner of Labour.
 For justifiable cause.
Dismissal for misconduct and unsatisfactory performance both come within
the ambit of justifiable cause, which the employer must demonstrate in the
event that the employee seeks to challenge the dismissal before the
Commissioner or a Labour Tribunal.

Whilst there is no specific definition in either the TEWA or the IDA of what
constitutes justifiable cause, case law has identified that the following types of
conduct will constitute grounds for justifiable cause to dismiss on disciplinary
grounds (these are not exhaustive):

 Persistent and unauthorised absence, or late arrival, or early departure.

 Gross negligence in the discharge of duties.
 Insubordination.
 Abusive/unruly behaviour.
 Dishonesty.
 Theft.
 Intoxication whilst at work.
An employer's loss of confidence in an employee has also been held to be a
sufficient ground for dismissal, provided that it is coupled with a specific
ground of misconduct as set out above. Even where a loss of confidence
cannot be linked to a specific ground of misconduct, it is often pleaded by
employers to persuade adjudicating forums that reinstatement is not a suitable
remedy.

Case law has also identified the following as justifiable/valid grounds for
dismissal on non-disciplinary grounds:

 Inefficiency, incompetence or unsatisfactory discharge of duties.

 Breach of contractual terms of employment.
 Conviction of an offence involving moral turpitude or involving
imprisonment whilst in service.
The grounds for dismissal on disciplinary and non-disciplinary grounds are not
exhaustive and largely depend on the facts and circumstances of each case.
A key element in determining justifiable/valid dismissal is the employer's good
faith. Judicial decisions have also held that probationers can be dismissed
during their probation period without cause, provided that dismissal is not
tainted with bad faith on the employer's part.

What protection do employees have against dismissal? Are there

any specific categories of protected employees?

Protection against dismissal

There is no protection against dismissal. However, the dismissal can be
challenged by the employee as unjust before a Labour Tribunal under the
Industrial Disputes Act No 43 of 1950, claiming re-instatement with the back-
payment of wages, or compensation in lieu of reinstatement. In limited
circumstances an employee may challenge the dismissal by way of an
application to the Commissioner of Labour under the Termination of
Employment of Workmen (Special Provisions) Act No 45 of 1971 (see Question
20).

Protected employees
A pregnant woman cannot be dismissed solely on the basis of her pregnancy
or confinement. or of any illness consequent to her pregnancy or confinement.
Resolution of disputes between an employee and employer
Is there a governmental or independent organisation to which
employees can refer complaints in the event that there is a dispute
between the employee and the employer?
Any industrial dispute between an employer and employee can be referred to
the Commissioner of Labour (see the website of the Department of
Labour: http://www.labourdept.gov.lk/). An industrial dispute is "any dispute or
difference between an employer and a workman (or between employers and
workmen, or between workmen and workmen) connected with the
employment or non-employment, or the terms of employment, or with the
conditions of labour, or the termination of the services, or the reinstatement in
service, of any person". The Commissioner is empowered to:

 Refer an industrial dispute to be settled according to the collective

agreement, if one is available.
 Settle the dispute by conciliation.
 Refer the dispute to an arbitrator(s), if the parties to the dispute consent
for the dispute to be referred to be settled through arbitration.
If the dispute is not settled through one of these interventions of the
Commissioner, the Commissioner can perform any of the above powers as
often as is necessary to resolve the dispute.

Redundancy/layoff
How are redundancies/layoffs defined, and what rules apply on
redundancies/layoffs? Are there special rules relating to collective
redundancies?

Definition of redundancy/layoff
With the coming into operation of the Termination of Employment of Workmen
(Special Provisions) Act No 45 of 1971 (TEWA), there is no little or no
distinction between dismissal for cause or dismissal for reasons of
redundancy, and the same principles for dismissal apply (see Question 20).

Procedural requirements
The collective effect of the TEWA and the Industrial Disputes Act No 43 of
1950 (IDA) is that an employment dismissal by way of redundancy or the
making of a severance payment can only be done in the following
circumstances:

 With the employee's consent (generally in the form of a resignation).

 With the prior written approval of the Commissioner of Labour
(Commissioner).
The preferable option for the employer is to negotiate with the employee and
enter into a mutual severance arrangement with the employee (that is, where
the employee tenders his/her resignation on the payment of a severance
payment as regulated by a severance agreement). Where that cannot be
achieved, and the employer has employed 15 or more employees on average
at any time during the six months preceding the making of the application, the
employer can make an application to the Commissioner under the TEWA
seeking the Commissioner's approval to dismiss the employee.

Applications to the Commissioner under the TEWA do not have to be in any

prescribed format. However, the application should contain detailed
information (with supporting documents where possible) on the basis upon
which the employer is seeking the approval for dismissal. The application
should be filed with the Commissioner with a copy served on the applicable
employee. The Commissioner will investigate the matter, and where no
settlement is reached, the matter will be fixed for further inquiry by way of
either a trial process, or based on documents/information submitted by
affidavits as may be mutually agreed upon by the parties or as otherwise
directed by the Commissioner. Each party will be given an opportunity to
cross-examine the documents/evidence provided by the other party.

Where the Commissioner's approval is sought for dismissal, the employer

must demonstrate compelling grounds to justify why the employee(s) cannot
be retained in service. Such compelling grounds generally include:

 The removal of the relevant job functions, generally in the course of a

corporate restructure and/or where that work is no longer being carried
out by the employer.
 Financial constraints of the employer, which mean that the employer
can no longer maintain the relevant work functions (particularly where
there is a risk that the employer's business may close).

Redundancy/layoff pay
Where the Commissioner gives approval for redundancy, the severance
payment/compensation payable will be the same as the formula under the
TEWA (see Question 20).

Collective redundancies
The procedural requirements for dismissal under the TEWA and the
compensation pay under TEWA will similarly apply to collective redundancies.

Employee representation and consultation

24. Are employees entitled to management representation (such as
on the board of directors) or to be consulted about issues that
affect them? What does consultation require? Is employee
consultation or consent required for major transactions (such as
acquisitions, disposals or joint ventures)?

Management representation
Employees are not automatically entitled to representation on the board or to
take part in managerial decisions within the organisation. However,
employees may establish employment councils, which can consult with the
employer on the employees' behalf on certain employee grievances. Even
where the interests of the employee are represented by a trade union, the
trade union will have no say in the day-to-day management of the
organisation.

Consultation
Trade unions and employee representatives may be consulted in the decision-
making process on matters relating to employment. However, this is not a
mandatory requirement.
GRATUITY

What are the benefits under Payment of Gratuity?

 The Payment of Gratuity Act No. 12 of 1983 provides for the payment of
gratuity by employers to their employees under the Amendment to the Land
Acquisition Act, the Land Reform Law and the Industrial Disputes Act. The
Act has two parts:
 Part I applies to workers in the plantation sector who ceased to be
employed upon the take-over of estates or lands which were vested in the
Land Reform Commission.
 Part II of the Act makes every employer who has 15 or more workers on
any day during a 12 month period, liable to pay gratuity.
o If the worker has completed five years or more of service prior to
termination, the employer must pay that worker within a period of 30
days, half a month’s wages or salary for each year of completed
service.
o The gratuity will be calculated against the last month’s wage drawn
by that worker.
o When the worker is a piece-rated worker, the daily wage or salary
shall be computed by dividing the total wage received by him/her for
a period of three months immediately preceding termination, by the
number of days worked by him in that period.
 The Amendment Act No. 41 of 1990 has provided for the payment of
gratuity to employees of public corporations and government owned
business undertakings if they are converted into public companies.

Which categories of workers cannot benefit from the Payment of Gratuity

Act?

 Domestic workers
 Personal chauffeurs in private households
 Employees of co-operative societies
 Employees who are entitled to a pension under any non-contributory
pension scheme
 Workmen designated under the Indian Repatriates (Special Provisions) Law
of 1978
 Any establishment employing less than 15 persons during the period of 12
months immediately preceding the termination of services of a worker

Can my gratuity payment be forfeited?

  Your gratuity can be forfeited only if you have been terminated for reasons
of:
o Fraud
o Misappropriation of funds of the employer
o Willful damage to property of the employer
o Causing the loss of goods, articles or property of the employer

How is gratuity calculated in Sri Lanka?

 If the worker has completed five years or more of service prior to termination, the
employer must pay that worker within a period of 30 days, half a month's wages
or salary for each year of completed service. The gratuity will be calculated
against the last month's wage drawn by that worker.

INDUSTRIAL ARBITRATION
The Industrial Disputes Act has been enacted to achieve industrial peace through
maintenance of harmonious industrial relations. Industrial peace becomes increasingly
important inter alia to attract investors and to provide the services essential to the life of
the community. The Act provides mechanisms for settlement of industrial disputes
which consist of collective agreement, conciliation, arbitration, industrial court and
labour tribunal. Settlement of industrial disputes by conciliation is not always possible. In
such circumstances, settlement of industrial disputes by arbitration becomes an
appropriate method. The provisions of the Act confer jurisdiction, duties and powers on
an industrial arbitrator to achieve its objective.

PROBATION PERIOD

There is no clear provision in labour laws on the duration of probation period in

Sri Lanka. Generally, probation period is six months. The Shop and Office
Employees Act requires the employer to clearly mention the period of probation,
conditions governing such probation and circumstances under which the
employment contract may be terminated during probation.

Employment of Trainees (Private sector) Act No. 8 of 1978 provides that

employers and workers may enter a contract of training for up to maximum one
year. At the end of the training period, unless for disciplinary reasons or for failure
to attain satisfactory competencies in the vocation chosen, the Employer should
provide employment to the trainee or in the alternative find him a suitable
employment.

Source: Regulation 15(g) of the Shop and Office Employees (Regulation of

Employment and Remuneration) Act, 1954; Employment of Trainees (Private
sector) Act No. 8 of 1978
Workmen's Compensation in Sri Lanka

The Workmen’s Compensation Ordinance of 1935 and subsequent

Amendments is to provide for the payment of compensation to workers
who are injured in the course of their employment by an accident arising
out of the and during the course of their work.

Who is entitled to claim compensation under the Workmen’s Compensation

Ordinance?

A workman is defined as “any person who has entered into or works under a
contract with an employer for the purposes of his trade or business in any
capacity, whether the contract is specified in writing or on an oral agreement, or
whether it is a contract of service or apprenticeship or contracted personally to
execute any work or labour”.

CALCULATION

The payment is calculated by time done, or work done or otherwise. The

Ordinance considers ‘period of service’ as a continuous period which has not
been interrupted by a period of absence from work not exceeding fourteen days

The law applies to

1. Government Department and local bodies.

2. in the case of workmen who are masters of registered ships or seamen
subject to certain modifications detailed in Section 25 (As per Part IV of the
Ordiance)

However, persons working as members of the Armed Forces of Sri Lanka, other
than those persons employed in a civilian capacity in those Forces, and members
of the Police Force are not included under this Ordinance.

When can a worker claim Compensation?

If any worker contracts a disease that could be reasonably attributed to the type
of work he/she is doing while employed in any process or contracts an
occupational disease as described in Schedule III, such as Anthrax infection,
poisoning by lead, nitrous fumes etc., (please see Schedule III for the entire list),
then the compensation can be claimed under the terms of this Ordinance.

Is anyone else entitled to claim worker’s compensation?

The Ordinance also provides for compensation to be paid to the dependants of
the worker, in the event of his/her demise as a result of a work related accident or
occupational disease.

What is the amount of compensation that can be expected?

Part III of this Ordinance addresses the compensation payable in detail. The
amount of compensation payable for injuries sustained to a worker is listed in the
relevant Schedules under this Ordinance.

 Schedule I - addresses permanent partial disablement as a result from

injury. Where the injury is not listed therein compensation will be computed
proportionately with the loss of earning capacity.
In the event multiple injuries are caused by the same accident, the amount
of compensation will be an aggregated amount, but it will not exceed the
amount payable if permanent total disablement had been the result.
 Schedule IV - addresses instances where death results from the injury and
the worker was in receipt of monthly wages. It also addresses
compensation for permanent total disablement as a result of the injury
sustained. The maximum payable is Rs.550,000/- in the case of death or
permanent disablement.

LIMITATIONS ON THE LIABILITY

Under section 3 (a), the liability of the employer does not extend to personal injury
that does not result in the total or partial disablement of the worker for a period of
three days. Similarly under (b) of the same Section, the Ordinance states that in
respect of an injury not resulting in death caused by an accident directly
attributable to negligence on the part of the worker, the employer is not liable to
pay compensation. Negligence is defined as: if the worker had been at the time of
the accident been under the influence of alcohol or drugs, if the worker willfully
disobeyed an order expressly given or framed for the purpose of securing the
safety of the workers, or the willful removal or disregard by the worker of any
safeguards or safety devices which he/she was aware were provided for securing
his/her safety.

The employer is not liable to pay compensation to a worker in respect of any

disease unless the disease can be directly attributable to a specific injury by
accident as a result of his/ her employment or if the disease is reasonably
attributable to the nature of his/ her employment.