Hire employees in Sri Lanka using an Employer of Record

One employee in Sri Lanka means EPF registration, ETF contributions, gratuity calculations, and mandatory 14th-month salary payments. Most companies don't find out about these requirements until they're already non-compliant and facing back-payment demands.

Then there's the entity setup timeline. You need someone hired by next quarter, but incorporating a company in Sri Lanka takes 3-4 months minimum. Add another month for bank accounts, payroll systems, and tax registrations. The math doesn't work when you need to move fast.

You've got three ways to hire in Sri Lanka, each with different costs and timelines:

Option 1: Set up your own entity

• Cost: €15,000-35,000 upfront, €8,000-12,000 annual maintenance
• Timeline: 3-4 months minimum
• Complexity: BOI registration, tax setup, EPF/ETF enrollment, payroll infrastructure
• Makes sense when: Hiring 15+ people long-term, permanent market presence

Option 2: Hire contractors

• Cost: None upfront, but limited control
• Timeline: Immediate
• Risks: Misclassification fines (up to €25,000), back taxes, employee disputes
• Makes sense when: Short projects (< 6 months), specialized consulting work
• Note: Hire with Columbus also handles contractor agreements and payments

Option 3: Use an employer of record (Recommended for most)

• Cost: $179/month per employee
• Timeline: 2-3 days to hire
• Complexity: None - we handle everything
• Makes sense when: 1-15 employees, testing markets, multi-country teams

If you're hiring 1-5 people, entity setup costs more than 4-5 years of EOR fees ($179/month = $2,148/year per employee). An EOR like Hire with Columbus handles employment contracts, EPF/ETF contributions, gratuity calculations, tax filings, and compliance updates. Example: Hiring 3 people = $537/month vs €20,000+ entity setup plus €10,000/year maintenance.

Ready to hire in Sri Lanka without the compliance headaches? Get started with Hire with Columbus.

What employment types can you use?

You've got three ways to bring someone onboard in Sri Lanka. Here's how the costs and risks compare.

Most companies jump straight to discussing permanent vs. fixed-term contracts, but that's putting the cart before the horse. First, you need to decide how you'll legally employ someone in Sri Lanka at all.

How can you hire in Sri Lanka?

Setting up your own entity means incorporating a private limited company in Sri Lanka. You'll need a local director, registered office, and minimum share capital of LKR 100,000 (about €280). But the real costs hit you later: annual compliance runs €8,000-€12,000, plus payroll systems, HR infrastructure, and legal fees.

The math only works if you're hiring 20+ people long-term. For 5 employees, you're looking at €45,000+ in the first year alone.

Hiring contractors seems tempting because you can start immediately. But Sri Lanka's Department of Labour doesn't mess around with misclassification. If someone works set hours, uses your equipment, or follows your processes, they're legally an employee - regardless of what your contract says.

The penalties hurt: back taxes, social security contributions, and fines up to €18,000 per misclassified worker. One audit can cost more than years of proper employment.

Using an employer of record like Hire with Columbus means we become the legal employer in Sri Lanka while you manage day-to-day work. At $179/month per employee, you're hiring compliantly in days instead of months.

Here's the ROI: 5 employees cost $895/month with us versus €35,000+ to set up your own entity. You'd need to run payroll for 3+ years just to break even on entity costs.

Employment contract types in Sri Lanka

Once you've chosen your hiring approach, you'll need the right contract type. Sri Lanka recognizes four main employment contracts under the Shop and Office Employees Act and Industrial Disputes Act.

Permanent contracts are your go-to for core team members. No end date, full benefits, and maximum job security for employees. Most companies use these for roles they expect to last 2+ years.

The trade-off? Higher termination costs and longer notice periods. But you get better employee retention and can invest in long-term training.

Fixed-term contracts work for specific projects or temporary coverage. Maximum duration is 2 years, and you can't renew more than once without converting to permanent employment.

Use these carefully - if the role becomes ongoing, Sri Lankan courts will treat it as permanent employment anyway. The Department of Labour specifically watches for companies cycling through fixed-term contracts to avoid permanent obligations.

Part-time contracts are for employees working less than 45 hours per week (Sri Lanka's full-time threshold). They get proportional benefits and the same hourly protections as full-time workers.

Popular for customer service roles covering different time zones. A part-time employee working 25 hours gets roughly 55% of full-time leave entitlements.

Casual/temporary contracts cover very short-term work - think event staffing or seasonal projects. Maximum 90 days per year with the same employer.

Beyond that, the worker automatically becomes permanent. These contracts offer the least protection but maximum flexibility.

Which contract type should you use?

Hire with Columbus handles all contract types through our EOR service. We draft compliant agreements, manage renewals, and handle conversions when fixed-term roles become permanent.

We also manage contractor agreements if you need genuine freelance work. Our legal team ensures proper classification and handles payments through our global platform.

The bottom line: most companies hiring 1-20 people in Sri Lanka should use an EOR with permanent contracts for core roles. You get compliant hiring in days, not months, without the €35,000 entity setup cost.

How does payroll and taxation work?

Your €60,000 employee actually costs €73,200 per year in Sri Lanka. The 22% bump comes from employer contributions that many companies forget to budget for.

Sri Lankan payroll isn't just about cutting monthly checks. You're dealing with progressive income tax, EPF contributions, ETF payments, and a 13th-month bonus that's practically mandatory. Miss a deadline and you're looking at penalties starting at LKR 50,000 (about €150).

Tax brackets and income tax

Sri Lanka uses a progressive tax system that hits different income levels at different rates. The good news? The first LKR 1.2 million (roughly €3,600) is tax-free for residents.

Non-residents get hit harder with a flat 30% rate on all income. If you're hiring expats, factor this into your salary negotiations upfront.

Social security contributions

Sri Lanka's social security system revolves around two main funds: the Employees' Provident Fund (EPF) and the Employees' Trust Fund (ETF). Both are mandatory and both add to your payroll costs.

The EPF works like a retirement savings account. The ETF funds training and development programs. You can't opt out of either one.

What gets expensive: these contributions apply to the full salary amount, not just the taxable portion. A €60,000 salary means you're paying €9,000 in employer contributions alone.

Payment schedule and bonuses

Sri Lankan employees expect monthly salary payments, typically by the last working day of the month. Most companies pay a 13th-month bonus equivalent to one month's salary.

The 13th month isn't legally required, but it's so standard that skipping it will hurt your retention. Budget an extra 8.33% of annual salary costs for this.

Public sector employees also get a mid-year bonus, and many private companies follow suit to stay competitive. That's potentially 14 months of salary payments per year.

Total employment cost breakdown

Let's break down what a €60,000 salary actually costs you in Sri Lanka:

Base salary: €60,000 Employer EPF (12%): €7,200 Employer ETF (3%): €1,800 13th month bonus: €5,000 Total annual cost: €73,200

That's a 22% markup on the base salary. For budgeting purposes, multiply any Sri Lankan salary by 1.22 to get your real cost.

Payroll cycle and deadlines

Sri Lankan payroll runs on strict monthly cycles with zero tolerance for delays. Income tax withholding (PAYE) must be remitted by the 15th of the following month. EPF and ETF contributions are due by the same deadline.

Miss the 15th and penalties start immediately. Late PAYE payments incur a 2% monthly penalty on the outstanding amount. EPF delays can trigger fines up to LKR 100,000 (€300) plus interest.

Annual tax returns are due by March 31st for the previous tax year. Your payroll system needs to generate detailed P60 forms for each employee by January 31st.

Common payroll mistakes

The biggest mistake? Treating all employees the same for tax purposes. Resident vs. non-resident status completely changes the tax calculation, and getting it wrong means penalties for both you and the employee.

Another trap: forgetting about gratuity provisions. Sri Lankan law requires gratuity payments after five years of service, calculated at half a month's salary for each year worked. This isn't a payroll deduction, but you should be accruing for it.

Double-taxation treaties can reduce withholding rates for foreign employees, but you need to file the right paperwork upfront. Missing this costs your employees thousands in unnecessary taxes.

Setting up payroll in Sri Lanka yourself:

• Local accounting firm: €800-1,200/month
• Payroll software: €150-300/month
• Compliance risk: Fines up to €3,000 for errors
• HR expertise needed: €35,000+ salary

With Hire with Columbus: $179/month per employee, fully compliant, zero risk.

We handle all the EPF registrations, tax calculations, and deadline management so you don't have to become an expert in Sri Lankan payroll law. Your employees get paid on time, taxes get filed correctly, and you sleep better at night.

What benefits and leave are required?

Sri Lankan employees get 14 days minimum annual leave, plus they're entitled to 14 days sick leave without a doctor's note. But what catches most companies off guard is the 13th month salary (basically a bonus equal to one month's salary) and contributions to multiple mandatory insurance schemes.

Beyond salary, benefits in Sri Lanka add roughly 15-20% to your total employment costs. Let's break down exactly what you owe and when.

Annual leave

Every employee gets 14 days paid annual leave after completing one year of service. During the first year, they earn leave proportionally. So someone who works 6 months gets 7 days.

Employees can carry forward unused leave to the next year, but only up to 7 days. Any additional unused leave must be paid out at their current salary rate when they leave the company.

The tricky part: if an employee resigns or gets terminated, you must pay them for all accrued but unused annual leave. This includes the proportional leave they've earned in their final year.

Sick leave

Employees get 14 days paid sick leave per year without needing a doctor's certificate. For illnesses lasting longer than 14 days, they need medical certification and the payment responsibility shifts to the social security system (though you'll still need to coordinate this).

Sick leave doesn't carry over to the next year. It's use-it-or-lose-it. But you can't force employees to take sick days or count other types of leave against their sick leave entitlement.

If an employee is genuinely ill and has exhausted their 14 days, they can take unpaid sick leave with proper medical certification.

Parental leave

Maternity leave: 84 days (12 weeks) at full pay. That's 6 weeks before the expected delivery date and 6 weeks after. The employer pays the full salary during this period.

Paternity leave: 3 days paid leave when the child is born. It's not much, but it's mandatory.

There's no shared parental leave system like you'll find in European countries. The maternity leave is specifically for the mother, and fathers only get those 3 days.

Public holidays 2026

Sri Lanka has numerous public holidays, and employees get double pay if they work on these days. Check out the confirmed dates for 2026:

Note: Islamic holidays like Eid al-Fitr and Eid al-Adha are also public holidays, but dates vary based on lunar calendar observations.

Mandatory benefits and contributions

You'll contribute to several mandatory schemes on behalf of your employees:

Employees' Provident Fund (EPF):

• Employer contribution: 12% of monthly salary
• Employee contribution: 8% of monthly salary
• This is the pension system

Employees' Trust Fund (ETF):

• Employer contribution: 3% of monthly salary
• Employee contribution: 0%
• Additional retirement benefit

Workmen's Compensation:

• Employer pays insurance premiums (rates vary by industry risk)
• Covers workplace injuries and occupational diseases

13th month salary:

• Pay an additional month's salary as a bonus
• Usually paid in December or split across the year

Optional competitive benefits

Most international companies offer these additional benefits to attract talent:

• Private health insurance (beyond basic social coverage)
• Transportation allowances
• Mobile phone allowances
• Professional development budgets
• Flexible working arrangements
• Additional annual leave beyond the 14-day minimum

Common benefit mistakes

Mistake 1: Not registering for EPF/ETF within 30 days of hiring your first employee. The penalty is 2% per month on unpaid contributions.

Mistake 2: Forgetting to pay the 13th month salary. This isn't optional, it's a legal requirement that can result in labor disputes.

Mistake 3: Not maintaining proper leave records. The Department of Labour can audit your records, and missing documentation leads to fines starting at LKR 50,000.

Mistake 4: Paying out unused sick leave when employees resign. Unlike annual leave, sick leave doesn't get paid out. Only unused annual leave does.

Administering these benefits correctly requires local HR expertise (costing $40,000+ annually), benefits software ($200+ monthly), and legal review ($5,000+ yearly). Miss mandatory contributions and penalties start at 2% monthly on unpaid amounts.

Hire with Columbus handles all benefit administration, EPF/ETF registration, and compliance monitoring for $179/month per employee. We'll set up your accounts, calculate contributions, and make sure you never miss a payment deadline.

What are the compliance requirements?

Written contracts are mandatory in Sri Lanka within 14 days of employment starting. Skip this step and you're looking at invalid employment agreements plus potential back payments for any missed benefits or protections.

The good news? Sri Lanka's employment laws are relatively straightforward once you know the rules. The bad news? Get the termination process wrong and you'll face hefty compensation payouts plus potential reinstatement orders.

Employment contract requirements

Every employment contract in Sri Lanka must be in writing and include specific mandatory clauses. You can't rely on verbal agreements or basic offer letters here.

Required contract elements:

• Employee's full name, address, and NIC number
• Job title, duties, and reporting structure
• Salary, allowances, and payment frequency
• Working hours and overtime arrangements
• Leave entitlements and holiday schedule
• Probation period (if applicable)
• Notice periods for both parties
• Disciplinary and grievance procedures

The contract must be signed within 14 days of the employee's start date. Miss this deadline and the employment relationship is considered to have begun without proper documentation, which can void certain employer protections.

You don't need to register contracts with the government, but they must be available for labor inspectors if requested. Keep signed originals on file - digital copies aren't sufficient for compliance purposes.

Probation periods

Standard probation periods in Sri Lanka are three months for most positions. You can extend this to six months maximum, but only if specified in the original contract - you can't add time later.

During probation, either party can terminate with just one week's notice. No severance pay is required during this period, which is why getting the probation clause right matters so much.

After probation ends, full employment protections kick in immediately. This includes longer notice periods, severance requirements, and just cause standards for termination.

Working time regulations

The standard work week is 45 hours maximum, typically spread across six days. Most companies operate Monday through Friday with a half day Saturday, though five-day weeks are becoming more common.

Key time limits:

• Maximum 9 hours per day
• Maximum 45 hours per week
• Minimum 30-minute break after 5 hours of work
• Overtime rate: 150% of regular hourly wage
• Maximum 12 hours overtime per week

You must maintain accurate time records for all employees. Labor inspectors can request these during audits, and missing records can result in fines up to LKR 50,000 per violation.

Notice periods

Notice requirements depend on length of service and who's initiating the termination. Here's what you need to give:

You can pay in lieu of notice, but the employee must agree in writing. Forcing payment instead of working notice can be considered wrongful termination.

During notice periods, employees retain all rights and benefits. You can't reduce their responsibilities or exclude them from normal workplace activities.

Termination process

You can't fire someone in Sri Lanka without proper cause and process. "At-will" employment doesn't exist here - every termination needs justification.

Valid grounds for termination:

• Serious misconduct (theft, violence, fraud)
• Poor performance after warnings and improvement periods
• Redundancy due to business needs
• Breach of contract terms

For misconduct, you must conduct a proper investigation and disciplinary hearing. The employee has the right to respond to allegations and bring a representative.

Redundancy requires 30 days advance notice to affected employees and consultation about alternatives. You can't select people for redundancy based on discriminatory factors.

Severance pay requirements

Severance is required for most terminations except resignation or dismissal for serious misconduct. The calculation depends on length of service:

Severance calculations use basic salary plus regular allowances. Bonuses and overtime aren't included unless specifically stated in the contract.

Payment must be made within 7 days of termination. Late payments incur interest at 15% annually, which adds up quickly.

Data protection requirements

Sri Lanka's Personal Data Protection Act covers all employee information. You need explicit consent to collect, process, and store personal data beyond what's required for employment.

Key obligations:

• Secure storage of employee records
• Limited access on need-to-know basis
• Data retention limits (7 years for most employment records)
• Employee rights to access and correct their data
• Breach notification within 72 hours

Cross-border data transfers require additional safeguards. If you're sending employee information outside Sri Lanka, you need data processing agreements and adequate protection measures.

Common compliance mistakes

Most companies trip up on contract timing and termination procedures. Here's what goes wrong most often:

Invalid employment contracts: Missing mandatory clauses or late signing can void the entire agreement. You'll owe back payments for any missed benefits or protections.

Wrong termination process: Skipping disciplinary procedures or proper notice can trigger wrongful dismissal claims. Compensation typically runs 3-6 months' salary plus legal costs.

Improper probation handling: Extending probation periods without original contract terms or failing to confirm permanent employment status creates legal exposure.

Missing overtime records: Labor inspectors take time tracking seriously. Missing records result in automatic overtime calculations favoring the employee.

Penalties for violations

Sri Lanka's labor authorities don't mess around with employment law violations. Here's what non-compliance actually costs:

Common compliance failures in Sri Lanka:

• Invalid employment contract: LKR 25,000-50,000 fine plus contract reconstruction costs
• Wrong termination process: 3-12 months' salary compensation plus reinstatement risk
• Missing mandatory clauses: Contract deemed invalid, full back payments owed
• Improper dismissal: LKR 100,000-500,000 compensation plus legal fees
• Overtime violations: Double back-pay plus LKR 50,000 penalty per affected employee

The real cost isn't just the fines - it's the business disruption, legal fees, and reputation damage that comes with labor disputes.

Hire with Columbus ensures every contract and termination follows Sri Lanka law exactly. Our local legal team handles all compliance requirements, from contract drafting to termination procedures, so you never have to worry about missing a critical step or facing unexpected penalties.

What has changed recently?

Sri Lanka's hiring rules changed quite a bit in 2026. New regulations hit remote work arrangements hard, and updated tax structures are costing international employers more money.

The biggest headache is the Remote Work Regulation Act that started in March 2026. If you're hiring Sri Lankan employees for remote or hybrid work, you need specific contract clauses covering work-from-home allowances, equipment provision, and data security protocols. Miss this and you'll pay LKR 500,000 ($1,500) per violation.

New tax brackets for 2026

The government restructured personal income tax rates in January 2026. Your payroll calculations just got more expensive:

These increases mean higher payroll costs if you're grossing up salaries to maintain net pay levels. A senior developer earning LKR 3,000,000 annually now pays LKR 216,000 in taxes versus LKR 144,000 under the old system. That's an extra LKR 72,000 you might need to cover.

EPF contribution changes

The Employees' Provident Fund (EPF) rates went up in August 2026. Employer contributions jumped from 12% to 14% of gross salary, while employee contributions stay at 8%. This adds roughly $30-50 monthly to your employment costs per employee, depending on their salary.

Updated holiday calendar

Sri Lanka added Vesak Full Moon Poya Day as another public holiday in 2026, bringing the total to 26 public holidays. The new holiday falls on May 12, 2026. Plan your project timelines with this in mind.

Digital payroll requirements

Starting September 2026, all employers must submit payroll data through the Inland Revenue Department's new digital platform within 14 days of each pay period. No more manual submissions, and late filings cost you LKR 25,000 ($75) each time.

The platform requires specific data formatting that trips up most international companies. You'll likely need local HR support to get this right. Companies using an EOR like Hire with Columbus don't deal with these technical headaches since the compliance work shifts to the EOR provider.

Minimum wage adjustments

The national minimum wage increased to LKR 25,000 ($75) monthly in July 2026, up from LKR 22,500. This mainly affects lower-skilled positions, but it also changes overtime calculations and severance pay computations for all salary levels.

These changes make hiring in Sri Lanka trickier for international employers. The digital compliance requirements and remote work documentation are particularly annoying. Companies that started hiring before these changes need to update existing contracts and payroll systems to stay compliant.