Hire employees in Sri Lanka
What a foreign company needs to know before employing people in Sri Lanka in 2026: whether you need a local entity, what EPF, ETF and gratuity really cost, how APIT withholding works, why the 15-workman threshold changes the rules on termination, and what the data protection deadline of 1 January 2027 means. Written for CHROs, CFOs, General Counsel and founders.
Quick answers
The questions leadership teams ask first.
Do I need a local entity in Sri Lanka to hire?
No. There are three routes:
- Employer of Record. Dryft Global employs the person through a compliant Sri Lankan employer registered for the Employees' Provident Fund (EPF), the Employees' Trust Fund (ETF) and Advance Personal Income Tax (APIT), issues the letter of appointment and runs payroll, gratuity and benefits. You direct the work.
- Direct local entity. You incorporate a private limited company, bring capital in through an Inward Investment Account, and register for tax, EPF and ETF before the first payroll.
- Independent contractor. Lawful only for a genuinely independent business. Someone who works full time under your direction is an employee whatever the contract says.
When should I use an EOR instead of registering locally?
Use an EOR for your first hires and for engineering, analytics, finance or support teams of up to about 50 people. You start in days and avoid incorporation, the investment account and the registrations. Your own entity earns its keep for a large delivery centre, when you will sell into the Sri Lankan market, or when you want Board of Investment or Colombo Port City incentives.
What does an employee actually cost beyond salary?
The statutory cost is a predictable 15%: EPF of 12% and ETF of 3% on total earnings, with no ceiling and no other payroll levy. The employee pays 8% to EPF. Gratuity of half a month per year applies after five years where the employer has 15 or more workmen. With a gratuity accrual, medical insurance and a customary one-month bonus, the all-in figure is roughly 15% to 30%.
How difficult is termination in Sri Lanka?
Disciplinary dismissal needs a show-cause letter, a domestic inquiry and written reasons. Once the employer averages 15 or more workmen, non-disciplinary termination of an employee with 180 or more days of service needs the employee's written consent or the Labour Commissioner's approval, and compensation follows a formula capped at LKR 2.5 million. A termination that breaks this rule is void. Any termination can be challenged at a Labour Tribunal within six months.
Can Dryft Global legally employ my team in Sri Lanka?
Yes. Dryft Global acts as the legal employer in Sri Lanka. We issue letters of appointment under the Shop and Office Employees Act, register employees for EPF and ETF, withhold APIT, run gratuity and benefits, and manage leave, notice and terminations under the Termination of Employment of Workmen Act.
Hiring routes compared
Speed, local registration, tax administration and liability differ by route.
| Factor | Direct local entity | Dryft Global EOR | Independent contractor |
|---|---|---|---|
| Time to operational state | Several weeks including the investment account and registrations | Days to 2 weeks | Days |
| Local entity required | Yes, private limited company | No | No |
| EPF, ETF and APIT | Your registrations and filings | Handled by Dryft Global | Contractor self-reports |
| Statutory liability | Direct corporate exposure | Assumed by Dryft's local employer | High if reclassified |
| Best fit | Large centre, local sales, BOI or Port City incentives | Teams of 1 to about 50 | Discrete project work |
What an employee costs in Sri Lanka
Statutory contributions are a flat percentage of total earnings with no ceiling, so the statutory cost stays at 15% whatever the salary. The model below is a Colombo software engineer on LKR 400,000 a month in 2026/27.
| Component | Employer share | Notes |
|---|---|---|
| Employees' Provident Fund | 12% | On total earnings including fixed allowances; employee pays 8% |
| Employees' Trust Fund | 3% | Employer only |
| Statutory subtotal | 15% | About LKR 60,000 a month on the model salary |
| Gratuity accrual | ~4.2% | Half a month per year, payable after 5 years where the employer has 15+ workmen |
| Medical insurance | ~2.5% | Customary, typical budget |
| Annual bonus | ~8.3% | Customary, not statutory; often one month a year |
| Total employer on-cost | ~15% to 30% | Above base salary on the model salary |
For an employee on LKR 400,000 a month, budget roughly LKR 5.5 million to 6.2 million a year all-in before the EOR fee, approximately USD 16,600 to 18,800 at LKR 332.6 to the dollar. Ask us for a cost model with current rates applied.
Payroll and tax
Salaries are paid monthly in rupees. Under the Shop and Office Employees Act the wage period cannot exceed a month, and pay is due within 10 days after it ends. The employer withholds APIT each month and pays it to the Inland Revenue Department by the 15th of the following month. EPF and ETF are due by the last working day of the following month, with surcharges of 5% rising to 50% for late payment. Employers with 15 or more staff must pay ETF electronically from July 2026 contributions.
Income tax (APIT)
After an annual personal relief of LKR 1.8 million (LKR 150,000 a month), employment income is taxed at 6%, 18%, 24% and 30% on successive bands, then 36%. On LKR 400,000 a month, APIT is about LKR 50,000 and EPF LKR 32,000, so net pay is about LKR 318,000. Employee tax identification numbers are now required in the annual APIT statement.
Statutory minimum wage
The national minimum wage is LKR 30,000 a month, or LKR 1,200 a day, from 1 January 2026 under Act No. 11 of 2025. Wages Boards set higher sector rates for scheduled trades. Professional salaries are many multiples of the floor.
Leave and mandatory benefits
- Annual leave. 14 days on full pay each year after the first year, at least 7 consecutive. In the second calendar year it is 14, 10, 7 or 4 days depending on the quarter the employee joined.
- Casual leave. 7 days a year on full pay, which also covers short illness.
- Sick leave. No separate statutory paid sick leave for office staff. Most professional employers grant medical leave by contract.
- Public holidays. 26 gazetted for 2026, including 13 Full Moon Poya Days. Work on a Poya Day is paid at least 1.5 times the daily rate.
- Maternity. Statutory maternity leave applies with full pay; leading local counsel reports 84 working days for a live birth under the amended Shop and Office Employees Act, so confirm the current entitlement before drafting. Nursing breaks apply until the child is one, and dismissal because of pregnancy is prohibited.
- Paternity. No statutory private-sector entitlement; many employers grant a few days by policy.
- Working time. 8 hours a day and 45 hours a week, with overtime at 1.5 times the hourly rate, limited to 12 hours a week. Executives are customarily not paid overtime.
- Gratuity. Half a month's salary per completed year after five years of service, where the employer has 15 or more workmen, payable within 30 days of termination.
- Supplementary benefits. Medical and hospitalisation insurance, an annual bonus, and transport or internet allowances for hybrid staff.
Termination and notice periods
Probation is customarily up to 180 days, extendable once, and must be stated in the letter of appointment. There is no general statutory notice period for office staff, so notice, commonly one month and longer for executives, is set by the contract.
| Situation | Requirement |
|---|---|
| Disciplinary dismissal | Show-cause letter, domestic inquiry, written reasons by the end of the second working day after termination |
| Non-disciplinary termination, employer with 15+ workmen | Employee's written consent or the Labour Commissioner's prior approval, decided within 3 months |
| TEWA compensation | 2.5 months per year for years 1 to 5, tapering after; capped at LKR 2.5 million |
| Gratuity | Half a month per year after 5 years, on top of any compensation |
- Void terminations. A non-disciplinary termination without consent or approval where TEWA applies is void and can lead to reinstatement with back wages.
- Mutual separation. The common practical route: resignation in return for an ex gratia package, often benchmarked on the TEWA formula.
- Labour Tribunal. Any termination can be challenged within six months; the Tribunal can order reinstatement or compensation.
- Pregnancy. Dismissal because of pregnancy is prohibited.
- Restrictive covenants. Non-competes must be reasonable to be enforced. Confidentiality and IP clauses are standard.
Can I use independent contractors?
Only where the person genuinely runs their own business: their own clients, schedule and tools, invoicing for output rather than a fixed monthly fee. Sri Lankan courts and Labour Tribunals look at control, integration and economic reality, and the broad definition of "workman" can capture personal-service contractors whatever the label. Misclassification can bring back EPF and ETF with surcharges, leave, gratuity and termination protection. For anyone who works like an employee, an EOR is the compliant route.
The legal framework in brief
Sri Lanka has no single labour code. A consolidation of the labour statutes has been proposed but not enacted. The instruments you will hear most:
- Shop and Office Employees Act No. 19 of 1954. Hours, overtime, weekly holidays, annual and casual leave, public holidays, written particulars and pay timing for office staff.
- Termination of Employment of Workmen Act No. 45 of 1971 (TEWA). Consent or approval for non-disciplinary termination, and the compensation formula.
- Industrial Disputes Act No. 43 of 1950. Labour Tribunals and unfair termination claims.
- EPF Act, ETF Act and Payment of Gratuity Act. The statutory funds and end of service gratuity.
- Inland Revenue Act. APIT withholding; corporate tax of 30%, or 15% on qualifying foreign-currency service exports.
- Data protection. The Personal Data Protection Act No. 9 of 2022, amended in 2025, with core obligations for controllers and processors in force from 1 January 2027. Prepare HR data processing now.
- Immigration and right to work. Residence visas for employment, starting with a recommendation from the employer's sector authority, generally valid for one year and renewable.
- Authorities. Department of Labour, Inland Revenue Department, EPF and the Employees' Trust Fund Board, Department of Immigration and Emigration, Board of Investment and the Data Protection Authority.
Where the talent is
About 21.8 million people at the 2024 census, a labour force of 8.6 million and unemployment of 4.0% in Q2 2026. The IT and BPM sector earned about USD 2 billion in exports in 2025, employs about 175,000 professionals and adds about 17,000 graduates a year. Sinhala and Tamil are official languages and English is widely used in business, law and technology. Sri Lanka Standard Time is UTC+5:30 with no daylight saving, which overlaps the European, Gulf and Asia Pacific working day.
| Region | Talent and industry concentration |
|---|---|
| Colombo and suburbs | Most IT, BPM, finance and analytics employers, and Colombo Port City |
| Kandy | Universities and a growing technology base |
| Galle | Southern hub with emerging technology and BPO centres |
| Jaffna | Northern hub with emerging technology and BPO centres |
Sri Lanka Implementation Kit
This page tells you the rules. The kit tells you what to do, in what order, and what goes wrong when you skip a step.
- Step-by-step checklist, from route selection to first payroll
- Letter of appointment essentials under the Shop and Office Employees Act
- EPF, ETF and APIT registration sequence with the monthly calendar
- APIT worksheet with the current bands and monthly relief
- Gratuity and TEWA headcount tracker
- Disciplinary inquiry and termination pack
- Every official Sri Lankan authority with direct links
This guide is general information, not legal, tax or immigration advice. The minimum wage, APIT tables and data protection commencement dates change by law and gazette, and a consolidated labour code has been proposed. Confirm current figures with a qualified adviser or with Dryft. Last reviewed November 2026.
Ready to hire in Sri Lanka?
Tell us who you want to hire and where they sit. You will get a cost model and a compliant route within a day, from a person who has done this before.