Do I Need a Local Entity to Hire in Sri Lanka?

In Sri Lanka, a "local entity" typically refers to a registered business presence, such as a subsidiary or branch office, that can act as the employer. This setup allows you to fulfill local payroll and employment obligations, ensuring compliance with Sri Lankan labor laws.

Without a local entity, you generally can't manage payroll, register as an employer, or comply with mandatory employment protections. An Employer of Record (EOR) can be a practical alternative, allowing you to hire employees while navigating local regulations.

What is Required to Employ Someone in Sri Lanka?

• Local employing entity required to directly employ? Yes (unless using an EOR)
• Payroll registration required? Yes (registration with the Department of Inland Revenue is necessary)
• Withholding/tax remittance required? Yes (employers must withhold income tax from salaries)
• Social contributions required? Yes (mandatory contributions to the Employees' Provident Fund)
• Local employment agreement required? Yes (written contracts are standard practice)
• Mandatory benefits to budget? Yes (statutory leave, EPF, ETF, and other entitlements)
• Works council/collective agreements considerations? Usually (certain sectors may have collective agreements)

Best Options If You're Hiring in Sri Lanka

Can I Hire Contractors Instead of Setting Up an Entity?

Yes, but you should be cautious about misclassification risks.

Hiring contractors in Sri Lanka can be a viable option, but it's essential to ensure that the contractor is genuinely independent. Misclassification can lead to legal issues if the contractor is deemed to be functioning as an employee. Here are some key points to consider:

• Ensure the contractor has multiple clients and operates independently.
• Avoid controlling the contractor's work hours, location, or methods.
• Be mindful of how integrated the contractor is within your business.

How Long Does Entity Setup Take And What Does It Cost?

Typical entity setup timeline: It often takes 4–8 weeks to establish an entity in Sri Lanka, depending on the type of business and required registrations.

Ongoing cost categories (entity route):

• Accounting, bookkeeping, and statutory filings: Estimated LKR 30,000–50,000 per month ($100–$170)
• Payroll provider: Estimated LKR 5,000–15,000 per employee per month ($17–$50)
• Employer registrations and recurring compliance: Varies by complexity
• Corporate tax filings and annual reporting: Estimated LKR 100,000–300,000 per year ($340–$1,020)

EOR cost components (no-entity route):

• A per-employee EOR service fee (from $399 per month with Playroll)
• Pass-through statutory costs (e.g., employer social security contributions)
• Any optional benefits you choose to provide beyond statutory minimums

How an Employer of Record Can Help You Hire in Sri Lanka

Hiring in Sri Lanka can be complex, but it doesn’t have to require setting up a local entity or taking on long-term overhead. With an Employer of Record like Playroll, you get a simple, predictable way to hire compliantly while keeping costs transparent and under control. We help you:

• Hire employees in Sri Lanka quickly without establishing a local entity, eliminating incorporation costs, ongoing administration, and exit complexity.
• Stay fully compliant with local payroll, tax, and employment regulations with Playroll’s payroll services.
• Control your total employment costs, with a clear monthly EOR service fee (from $399 per employee).
• Focus on growing your business, while we manage contracts, payroll, compliance, and labor law obligations end to end.
• Scale up or exit the market easily, without the financial or legal burden of closing a local entity.