Employer of Record in Sri Lanka

Who Uses an EOR in Sri Lanka?

Companies use an EOR in Sri Lanka for several common scenarios:

• Market Testing: You’re not yet ready to commit to a full company setup in Sri Lanka. An EOR lets you hire one or two employees, test the market, and scale only after you’ve validated the opportunity.
• Small Team Without Entity Overhead: You need a small local team (1–5 people) and don’t want to deal with company registration, board meetings, annual filings, and director compliance obligations. An EOR eliminates all of this administrative burden.
• Rapid Hiring and Time-to-Value: You have a candidate ready to start next week. An EOR can onboard within 1–2 weeks for a resident, cutting months off the timeline compared to entity setup.
• Foreign National Hiring: You’re hiring a non-Sri Lankan who needs work visa sponsorship. The EOR handles all immigration paperwork, reducing the risk and timeline of visa denials or delays.

After the employee relationship matures or your team reaches a certain size, you can transition to a local subsidiary if desired, though many companies find the EOR model so efficient that they never need to establish a separate legal entity.

Typical Onboarding Timeline

Onboarding through an EOR in Sri Lanka follows this sequence:

• EOR Agreement & Employee Details (1–2 days): You and the EOR sign the service agreement. You provide employee name, role, salary, start date, and any special terms (e.g., probation length, remote work setup).
• Employment Contract Drafting & Review (2–3 days): The EOR drafts a contract compliant with the Shop and Office Employees Act and submits it for your review. You approve terms, and the contract is signed by both parties.
• Social Security & Tax Registration (3–7 days): The EOR registers the employee with EPF and ETF authorities, obtains tax identification, and files initial payroll setup with the Inland Revenue Department. For foreign nationals, work visa processing begins (6–12 weeks for employment visas).
• Payroll Setup & Benefits Enrollment (2–3 days): The EOR configures payroll in their system, sets up leave tracking, calculates annual leave entitlements, and confirms the employee’s bank account for salary deposits.
• Employee Onboarding & First Day (1 day): The employee receives their contract, payroll details, leave calendar, and company orientation. They can begin work once the contract is signed and payroll is activated.

Most EOR providers can onboard an employee in Sri Lanka within 1–2 weeks. Hiring a foreign national adds 6–12 weeks for employment visa processing. Medical checks, background verifications, or special licensing can extend timelines further.

Employment Laws and Regulations in Sri Lanka

Employment Contracts

All employment in Sri Lanka must be governed by a written contract. The governing law is the Shop and Office Employees Act No. 19 of 1954 for retail, office, and service sector employees. The contract must specify the job title, salary, working hours, probation period, leave entitlements, benefits, notice period, and termination clauses.

Contracts should be written in English, the standard for Sri Lankan business employment. The contract must clearly state whether the employment is indefinite or fixed-term. Fixed-term contracts are enforceable if the term is specified upfront and not used to evade statutory protections.

Probation periods are common and permitted. The maximum probation period is 6 months for standard employees and up to 12 months for senior or executive roles if both parties agree in writing. Probation must be explicitly mentioned in the contract along with performance conditions and grounds for early termination.

Working Hours and Overtime

The standard working week in Sri Lanka is 45 hours, with daily limits of 8–9 hours depending on sector. Under the Shop and Office Employees Act, office and retail employees work a maximum of 9 hours per day and 45 hours per week. Factory workers, governed by the Factories Ordinance, work a maximum of 8 hours per day and 45 hours per week.

Employees are entitled to at least one weekly rest day (typically Sunday). Excessive working hours can result in employer penalties of LKR 10,000–50,000 under labour law.

Overtime is strictly controlled. The maximum overtime permitted is 12 hours per week in most sectors. Employer consent is required for all overtime work, and records must be kept. Overtime payments are calculated on the hourly rate and must be paid no later than the next salary period. Compensation for rest day and public holiday work is separate from the base salary and must be calculated and paid in full.

Minimum Wage

The statutory minimum wage in Sri Lanka was recently increased. As of January 1, 2026, the monthly minimum wage is LKR 30,000 per month (approximately USD 100) under the National Minimum Wage of Workers (Amendment) Act No. 11 of 2025. From April 1 to December 31, 2025, a transitional rate of LKR 27,000 per month applied.

The Budgetary Relief Allowance (BRA) of LKR 3,500 per month was consolidated into this minimum wage effective April 1, 2025. This means all wage calculations (gratuity, leave encashment, severance) now use the higher base, benefiting employees.

The minimum wage applies across all sectors: manufacturing, services, retail, and public sector. Wages Board orders for specific industries (e.g., textiles, rubber processing) may mandate higher rates. Employers cannot pay below the statutory minimum except where permitted by collective bargaining agreements that exceed the minimum.

Probation Period

Probation periods in Sri Lanka are limited. The Shop and Office Employees Act permits a maximum probation of 6 months for standard employees. Senior or executive positions may extend to 12 months if both parties agree in writing at hire.

During probation, the employer may terminate with cause (poor performance, unsuitability, misconduct) with less formal notice than post-probation. However, grounds must be documented and communicated to the employee. After probation ends, termination is subject to full notice periods and severance requirements under the Termination of Employment of Workmen Act.

Leave Entitlements

Sri Lanka offers a comprehensive leave framework protecting employees. The entitlements vary by tenure and type of leave.

Annual Leave

Annual leave under the Shop and Office Employees Act is earned from the third calendar year of employment onward. In years 1 and 2, employees accrue no annual leave. From year 3 onwards, employees receive 14 working days of annual leave per calendar year. Leave can typically be carried forward unless the employment contract specifies otherwise, though many employers encourage leave to be taken in the year earned.

Casual Leave

Casual leave (which includes medical/sick leave) is separate from annual leave. In year 1, employees earn 0.5 days per completed month, totalling up to 6 days by year-end. From year 2 onwards, employees receive 7 days per calendar year. Casual leave is paid at 100% of regular earnings and must be approved by the employer, though medical grounds are typically accommodated.

Sick Leave

Statutory sick leave is 7 days per year at full pay, covered under the Shop and Office Employees Act and ISSA frameworks. This may be integrated into casual leave or tracked separately depending on company policy. A medical certificate is usually required after 3 consecutive days.

Maternity Leave

Female employees are entitled to 84 paid working days of maternity leave for a live birth, regardless of the number of previous children (this was amended in 2018). The leave is split as 14 days pre-confinement and 70 days post-confinement. For unsuccessful confinement (miscarriage), the entitlement is 42 days (14 pre- and 28 post-).

Maternity leave is paid at 100% of regular wage and is funded by the employer. Medical certification is required. There is no service period requirement; maternity leave is available to all female employees in covered establishments (15+ employees).

Paternity Leave

Statutory paternity leave is limited. The public sector provides 3 days of paid paternity leave anytime within 3 months of birth. The private sector has no statutory requirement, though some employers offer 1–3 days by company policy or collective agreement.

Leave is non-negotiable and protected by law. Employers cannot waive leave entitlements or pressure employees to forgo leave. Leave must be tracked, approved, and paid in full. Unused leave can be encashed upon termination if the employment contract allows, though carrying forward is more common.

Public Holidays in Sri Lanka (2026)

Sri Lanka observes 26 public holidays in 2026, including 12 Poya days (full moon Buddhist observances), the largest share of religious holidays in the region. Work performed on a public holiday must be compensated at 2.0× the regular wage, or the employee must receive a substitute day off within 7 days. An EOR tracks the lunar calendar and adjusts payroll automatically.

Payroll, Taxes, and Social Security Contributions in Sri Lanka

Income Tax (APIT)

Sri Lanka’s personal income tax system is called Advance Personal Income Tax (APIT), effective from April 1, 2025. APIT replaced the previous PAYE system and introduced a more generous personal relief threshold.

The personal relief for tax year 2025/26 is LKR 1,800,000 per annum (LKR 150,000 per month). This means the first LKR 1,800,000 of annual income is tax-free. Only income above this threshold is taxable.

Employers withhold APIT monthly from employees’ salaries based on the tax brackets. The employee’s EPF contribution (8%) is deductible from gross salary before calculating APIT. APIT is remitted to the Inland Revenue Department by the 15th of the following month.

Example: An employee earning LKR 200,000 per month (LKR 2,400,000 annually) would have:

• Annual gross: LKR 2,400,000
• Less personal relief: LKR 1,800,000
• Taxable income: LKR 600,000
• Tax due (6% of LKR 600,000): LKR 36,000 annually (LKR 3,000 per month)
• Plus EPF deduction (8%): LKR 16,000 per month
• Net take-home after tax and EPF: approximately LKR 181,000 per month

Employer Social Security Contributions

Employers must contribute to two mandatory social security funds in Sri Lanka: the Employees’ Provident Fund (EPF) and the Employees’ Trust Fund (ETF).

The Employees’ Provident Fund (EPF) is a mandatory retirement and savings scheme. The employer contribution is 12% of gross monthly salary, and the employee contributes 8% (deducted from salary). The total is 20% of gross. Both contributions are paid into the employee’s individual EPF account and accumulated with interest. Contributions must be remitted by the last working day of the following month.

The Employees’ Trust Fund (ETF) is an additional mandatory benefit fund. The employer contributes 3% of gross monthly salary (employee contribution is zero). ETF funds are allocated to employee benefits such as sickness, disability, and death benefits, and surplus is shared with employees at the end of each financial year.

Employer contributions of 15% are not withheld from the employee’s salary; they are paid separately by the employer. These contributions are a direct employer cost above the gross salary.

Statutory Benefits and Compensation

Beyond payroll deductions and employer contributions, employers must provide statutory benefits to employees.

Gratuity is a mandatory lump-sum payment due to employees who have completed 5 or more years of continuous service (employers with 15+ employees only). The payment is calculated as 1/2 month’s salary per completed year of service. For example, an employee with 10 years of service receives 5 months’ salary as gratuity upon termination. The gratuity must be paid within 30 days of termination. The first LKR 5 million of gratuity is tax-exempt; amounts above LKR 5 million are taxed at 12%. The gratuity cap under the Payment of Gratuity Act No. 12 of 1983 is LKR 2.5 million (as of 2025).

Mandatory Health Insurance: There is no statutory employer-funded health insurance requirement in Sri Lanka. However, larger employers often offer voluntary health insurance plans as a benefit. Employees can purchase individual health insurance independently.

Pension/Retirement: The EPF is the primary retirement vehicle. Both employer and employee contributions accumulate in the employee’s individual account. Upon retirement (age 55 for men, 50 for women), employees receive a lump sum of their accumulated EPF balance plus dividends. The ETF also provides a supplementary lump sum at retirement.

Workmen’s Compensation: Employers must carry workmen’s compensation insurance covering work-related injuries, occupational diseases, and death. This is separate from EPF and is governed by the Workmen’s Compensation Ordinance.

Termination, Notice, and Severance in Sri Lanka

Notice Periods

Sri Lanka does not impose a fixed statutory notice period for all terminations. Instead, notice periods are contractually determined. The standard is 1 month’s notice for ordinary terminations, though contracts may specify shorter (1–2 weeks) or longer (2–3 months) periods for specific roles.

For retrenchment or redundancy (non-disciplinary termination), the Termination of Employment of Workmen (Special Provisions) Act No. 45 of 1971 (TEWA) applies to employers with 15 or more employees. Under TEWA, the employer must obtain written consent from the employee OR written approval from the Commissioner of Labour before terminating. This approval process typically takes 2–4 weeks.

Notice periods vary by employee category and tenure. The following table summarises the common notice-period conventions used in Sri Lankan employment contracts.

Payment in lieu of notice is permitted if the employment contract allows it. In practice, most Sri Lankan contracts include a payment-in-lieu clause to allow an immediate exit when needed.

Severance Pay

Severance is due only upon termination due to retrenchment, closure, or redundancy, not for resignation or cause dismissal. Severance is calculated based on years of service as follows:

Example Calculations:

• 3 years of service: 3 × 2.5 = 7.5 months’ salary
• 10 years of service: (5 × 2.5) + (5 × 2) = 12.5 + 10 = 22.5 months’ salary
• 15 years of service: (5 × 2.5) + (9 × 2) + (1 × 1.5) = 12.5 + 18 + 1.5 = 32 months’ salary

Severance is calculated on the last month’s basic salary or the average of the last 12 months (per contract or practice). The total severance cap under TEWA is LKR 2.5 million (increased from LKR 1.25 million in 2025).

If an employee has 5+ years of service, both severance AND gratuity may be payable. Severance applies to redundancy/retrenchment; gratuity applies upon any termination after 5 years of service in qualifying employers. The commissioner must approve severance calculations and may adjust amounts based on the circumstances.

Work Permits and Visas in Sri Lanka

Employment Visa

Foreign nationals seeking to work in Sri Lanka require an employment visa. The process begins with an Entry Visa (EV) for Employment, which is applied for by the employer through the Ministry of Labour and Department of Immigration & Emigration. The employment visa is valid for 1 year and renewable annually as long as employment continues.

Processing Timeline: 6–12 weeks total (6–8 weeks for Ministry of Labour review, 2–3 weeks for immigration approval, then 2–4 weeks for the Residence Visa upon arrival).

Cost: Typically USD 200 per year for the residence visa. Employer sponsorship costs vary (USD 500–1,500 depending on EOR/legal provider).

Requirements: Foreign national must have a valid passport (6+ months validity), employment contract, health certificate, and clean background check. The employer must demonstrate the foreign national fills a skill gap not available locally.

Business Visa

A short-term business visa is available for visitors attending meetings, conferences, or negotiations without working. The visa is valid for 30–60 days and renewable. No sponsorship is required. Cost is approximately USD 20–40. A business visa does NOT permit employment or income generation in Sri Lanka.

Digital Nomad Visa

Sri Lanka launched a Digital Nomad Visa in early 2026, valid for 12 months and renewable. The visa is designed for remote workers employed by non-Sri Lankan companies or self-employed freelancers.

Eligibility: Applicant must be earning a minimum of USD 2,000 per month (solo), plus USD 500 per dependent (up to 2 dependents included). Proof includes bank statements, employment contract, or client letters. Mandatory health insurance and proof of accommodation (rental lease or property deed) are required.

Restrictions: The applicant cannot work for a Sri Lankan company or generate income from Sri Lankan sources. All work must be for international clients. This visa is ideal for remote employees of foreign companies or international freelancers wanting to reside in Sri Lanka.

Cost: Approximately USD 500 per year.

The employment visa is the standard path for hiring foreign employees. The digital nomad visa is ideal for remote workers or freelancers not based in Sri Lanka who want to establish residence temporarily. An EOR can handle employment visa sponsorship on your behalf, managing all Ministry of Labour submissions and immigration coordination.

How to Hire in Sri Lanka: EOR vs. Local Entity Setup

EOR vs. Private Company Comparison

When expanding into Sri Lanka, you face a choice: hire through an EOR or establish a private subsidiary company. The decision depends on your timeline, cost tolerance, and growth plans.

Cost Example: Hiring a developer earning LKR 200,000/month (approximately USD 667) through an EOR:

An EOR model is best for rapid hiring, minimal local setup, and predictable compliance. A local company is better if you plan to scale beyond 10 employees, require significant local control, or expect to operate in Sri Lanka long-term.

EOR vs. PEO in Sri Lanka

An EOR and a PEO (Professional Employer Organization) are often confused. Both manage payroll and HR administration, but the legal relationship is fundamentally different. A PEO operates under a co-employment arrangement and requires you to already have a registered legal entity in Sri Lanka. An EOR acts as the sole legal employer, so you can hire without any local entity at all. For companies entering Sri Lanka for the first time, an EOR is almost always the right starting point.

Most companies entering Sri Lanka begin with an EOR, then transition to a PEO (or in-house HR) once they have registered a local subsidiary and grown beyond 20 to 30 employees.

EOR vs. Contractors

Some companies consider hiring contractors instead of employees to reduce compliance burden. This carries risks in Sri Lanka.

Sri Lankan tax authorities scrutinize contractor arrangements. If a contractor works exclusively for your company, attends your office, follows your processes, and provides services for extended periods, tax authorities may reclassify them as an employee, retroactively assessing unpaid APIT, EPF, and penalties. Using a contractor for short-term, project-based work (e.g., consultancy, freelance design, temporary support) is safer than long-term outsourcing of core roles.

Hire in Sri Lanka with RemotePeople

Ready to expand your team into Sri Lanka? RemotePeople simplifies hiring with our EOR service. We handle employment contracts, payroll in LKR, APIT and EPF withholding, leave management, work visa sponsorship, and full compliance with Sri Lankan labour law. You can onboard your first employee within 1–2 weeks, no local company required. Whether you’re testing the market or scaling rapidly, RemotePeople removes the compliance burden so you can focus on building your team.

Contact us today at remotepeople.com/contact to discuss your Sri Lanka hiring needs and get a customized proposal.

Where companies hiring in Sri Lanka expand next

Companies hiring in Sri Lanka commonly expand across South Asia, drawing on shared English proficiency and deep tech talent pools. Many companies add Bangladesh first, drawing on Asia-Pacific connectivity and English-proficient hires. Hiring in Nepal follows as the Asia-Pacific gateway with multilingual workforce, while an EOR partner in India offers access to pan-Asian talent and supply-chain clusters. Pakistan is often the fourth step, valued for deep Asian tech and services talent.