Understanding Payroll System in Sri Lanka, What Global Companies Need To Know
Sri Lanka, renowned globally as a breathtaking island-nation and chest of natural resources, holds potential as one of the most powerful maritime hubs in the world. It is projected that with measures to improve the domestic production economy to enhance exports and attract foreign direct investment, the Sri Lankan external sector will be strengthened in the period ahead. This is aided mainly by the elements of political stability, policy consistency and forecast for the global economic recovery. The country is currently building a conducive environment for foreign businesses that could be established in the island-nation during the post COVID-19 era.
Although, Sri Lanka’s payroll regulations are welcoming and convenient, there are a few important regulations that businesses must adhere to while setting up in Sri Lanka.
Getting started
In accordance with the Article 221(1) of Companies Act No. 7 of 2007, company secretary must be appointed and a consent must be signed between the secretary and director before establishing the new company. The official process will begin from that moment onwards. The next step would be to register your company under a unique name with the Department of Registrar of Companies. The paperwork with the Registrar also includes submitting the Article of Association. Following the registration process, it will be time to give the public a notice via three newspapers, under all three languages, within a period of 30 days. It will then be time to open up a corporate bank account with any local bank.
There a few more registrations that the new company should adhere to when setting up. It must obtain a Tax Identification Number (TIN) and register for VAT at the Inland Revenue Department. The company should also obtain the EPF number from the Department of Labour before.
Wages, salaries and severance payments
Under the National Minimum Wage of Workers Act No. 3 of 2016, the minimum monthly wage for all employees, irrespective of the industry, is LKR 10,000 and the minimum daily wage is at LKR 400. Employees and employers are expected to negotiate on compensation and bonuses prior to the commencement of the employment. Although public sector organizations are encouraged to pay bonuses, it is not considered a strict requirement for the private sector companies and organizations to adhere to. Typically, unless agreed upon by an employment contract, bonuses are paid at discretion and largely depend on the employer’s financial performance. Meanwhile, private sector companies are also not of any obligation to pay pensions.
It is noteworthy that employees who have completed a 5-year employment period at a private company are eligible for a gratuity, at the rate of half of one month’s last drawn wage or salary for each year of completed service, which must be paid by the employer. However, this condition is only applicable to companies that employ 15 or more employees. The employers are also required to obtain an official approval from the Commissioner of Labour when dismissing an employee due to any non-disciplinary reasons.
Tax withholdings
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. Meanwhile, in accordance with 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. The EPF and ETF provide that the calculation of these contributions must be based on the total earnings of the employee.
Paid and unpaid leave
In accordance with the Shop and Office Employees (Regulation of Employment & Remuneration) Act No. 19 of 1954 (SOEA), employees are entitled to 14 days of paid annual leave. They are also entitled to all statutory holidays as paid leave. If an employee works on a statutory holiday, they should either be granted an alternative holiday before 31st of December of that particular year or must be paid an extra day’s wage. As employees are also entitled to a paid leave on a Full Moon Poya Day, he/she must be paid not less than one-and-a-half times their normal daily wage, if in the event they are employed on the day. Employees are further entitled to seven days of paid casual leave in any year, except during their first year of employment. In the first year, they are entitled to a single day of paid casual leave for every two months worked.
An employee who works for not less than 28 hours, excluding overtime and rest breaks, in any one week must be allowed one-and-a-half days of paid holiday in the particular week or in the week immediately thereafter. However, it is common for employers to provide paid leave of 48 hours covering each weekend.
Maternity and Paternity leave
As per Maternity Benefits Ordinance No. 32 of 1939 (MBO), female employees are entitled to take 14 days of paid maternity leave prior to the confinement and another 70 days of paid leave after giving birth to their newborns. However, in the unfortunate event where there is a stillbirth, the maternity leave will be 28 days following the incident. If the maternity leave prior to the birth has not been taken, then that period should also be added to the total period of maternity leave taken after the confinement. There however are no recognized or established paternity rights in the country.
Sri Lanka is growing and the island-nation is looking to partner with interested international business ventures which will bring mutually beneficial strengths to both parties. With the growing potentials ahead, the country is on the path of a much brighter business outlook for the next two decades and this will be the most suitable time for any smart business owner to tap into some of the key areas in the Pearl of the Indian Ocean.
