What Severance Pay Rules Must Employers Follow in Sri Lanka?

Which Employees Qualify for Severance Pay?

• Employees covered by the Termination of Employment of Workmen (Special Provisions) Act (typically private sector workers with 15 or more employees in the undertaking).
• Employees with at least one year of continuous service whose employment is terminated by the employer for non-disciplinary reasons (such as redundancy or closure).
• Employees whose termination requires and receives prior written approval from the Commissioner of Labour, triggering a statutory or approved compensation package.
• Employees not excluded by law, such as those outside senior managerial categories that may fall under separate contractual arrangements.
• Employees whose contracts, collective agreements, or company policies promise severance or enhanced termination benefits beyond the statutory minimum.
• Employees who are not dismissed for proven serious misconduct after due disciplinary process, where Sri Lankan law may allow termination without severance.

What Are the Legal Timelines for Paying Severance?

In Sri Lanka, severance is usually paid as a lump sum at or shortly after the effective termination date, once the Commissioner of Labour has approved the termination and compensation package where TEWA applies. In practice, you should aim to settle all dues - wages, unused leave, and severance - on the last working day or within a few days of receiving the Commissioner’s order. Delays can draw scrutiny from labour authorities and may be treated as non-compliance with the approved decision. Where compensation is agreed through negotiation or settlement, the payment timeline should be clearly documented in writing and followed strictly. If you plan staged payments, obtain written consent from the employee and ensure instalments are made on or before the agreed dates.

What Penalties Apply if Severance Is Not Paid Correctly?

If your company fails to obtain required approval or does not pay severance in line with Sri Lankan law or a Commissioner’s order, you risk both financial and criminal consequences. Non-compliance can trigger inspections, legal proceedings, and orders to reinstate or compensate employees on top of the original severance. Courts and the Commissioner of Labour have broad powers to enforce TEWA obligations and protect employees from unfair termination.

• Failure to obtain prior approval for covered terminations can result in the termination being declared invalid.
• Non-payment or underpayment of severance can lead to orders to pay arrears plus possible interest or additional compensation.
• Persistent non-compliance may expose directors or officers to prosecution and fines under labour legislation.
• Adverse findings can damage your company’s reputation and complicate future dealings with labour authorities.
• Disputes can escalate into litigation, increasing legal costs and management time.

Does Outsourcing Employment via an EOR Change Severance Liability?

Using an Employer of Record (EOR) such as https://www.playroll.com/employer-of-record does not remove the need to follow Sri Lankan termination and severance rules, but it can shift day-to-day compliance tasks. The EOR is typically the legal employer on paper and is responsible for calculating, obtaining approvals where required, and paying severance in line with TEWA and other labour laws. However, your company, as the client, usually bears the commercial and financial responsibility for those costs under the EOR agreement. If the arrangement is challenged and you are found to be the true employer in substance, you could still face liability for unpaid or incorrectly paid severance. A well-drafted EOR contract should clearly allocate who handles approvals, calculations, funding, and record-keeping for any termination.

Be 100 Percent Compliant in Offering Severance with Playroll

With Playroll, your team can manage Sri Lankan terminations without guessing how TEWA and related rules apply in each scenario. We help you understand when Commissioner of Labour approval is needed, which employees qualify for compensation, and how to align severance offers with statutory formulas and local practice. That means fewer surprises, smoother exits, and better protection for your company when restructuring or closing roles.

Playroll’s Employer of Record model lets you hire in Sri Lanka while we handle local employment contracts, payroll, and statutory benefits, including severance where applicable. When a termination is on the table, we coordinate the process, work with local experts, and ensure payments are made correctly and on time. Your managers stay focused on business decisions, while we take care of the compliance details behind every severance calculation.