The Proposed Employment Act of Sri Lanka
A Legislative and Policy Analysis
In response to longstanding criticisms of Sri Lanka's fragmented and outdated labour laws, the government has initiated the formulation of a comprehensive Employment Act that aims to modernize, consolidate, and streamline the regulatory framework governing labour and employment relations. As of July 2025, the proposed Employment Act remains in draft form, having received Cabinet approval in principle and undergoing translation and legal vetting prior to submission to Parliament. This analysis explores the legislative trajectory, key reforms, policy objectives, and critiques of the draft legislation.
Legislative Trajectory and Current Status
The idea of a unified employment law in Sri Lanka emerged from consultations among tripartite stakeholders, including the government, employers, and trade unions. In August 2023, the Cabinet granted approval to draft a comprehensive bill based on recommendations from these discussions. The draft law has been finalized in Sinhala and is currently under translation into Tamil and English. Concurrently, it is being reviewed by the Attorney General's Department for legal clearance. Once these stages are complete, the draft bill is expected to be tabled before Parliament. An associated reform, the introduction of a National Social Security Scheme, is also pending Cabinet approval and is designed to complement the proposed Act.
Objectives and Scope of the Proposed Act
The primary aim of the proposed Employment Act is to unify over 40 separate statutes that currently regulate various aspects of employment in Sri Lanka, including laws on wages, termination, maternity benefits, and industrial disputes. The unified Act seeks to:
- Provide legal clarity and predictability for both employers and employees.
- Increase labour market flexibility to encourage investment and employment.
- Ensure basic protections and decent working conditions for all workers, including informal and gig economy workers.
- Comply with international labour standards, including ILO conventions.
Key Reforms Proposed under the Draft Act
The draft Employment Act introduces 34 core reforms that significantly alter the regulatory landscape. Notable reforms include:
- Standardized Employment Contracts: Mandatory written contracts for all categories of employment.
- Gratuity Payments: Reforming eligibility so gratuity is no longer tied to a minimum of five years of service or the number of employees in a business.
- Flexible Work Arrangements: Legalization of part-time work, work-from-home options, and flexible hours including compressed workweeks.
- Expanded Leave Benefits: Inclusion of paternity leave and enhanced maternity protections.
- Prohibition of Discrimination and Harassment: Codification of workplace rights against sexual harassment and discrimination.
- National Remuneration Council: Replacing existing wage boards with a centralized body to determine minimum wages across sectors.
- Trade Union Rights: Simplification of procedures to form unions, and mandatory representation of women in union executive bodies.
- Formalization of Informal Labour: Extending protections to domestic workers and informal sector employees.
- E-Wage System: Mandatory digital salary payments to improve transparency and reduce exploitation.
- Occupational Licensing: Introduction of a regulatory framework for 20 selected professional categories.
Proposed National Social Security Scheme
In tandem with the Employment Act, a new social protection architecture is proposed, encompassing:
The National Social Security Fund (NSSF) is envisioned as a unified scheme that will consolidate the existing Employees’ Provident Fund (EPF), Employees’ Trust Fund (ETF), and state pension entitlements into a single, streamlined system. This integration aims to reduce administrative fragmentation, increase fund efficiency, and ensure that all workers—regardless of whether they belong to the formal or informal sector—receive consistent retirement and savings benefits. By bringing EPF and ETF under one umbrella, the government also seeks to enhance transparency and portability of retirement benefits, and provide greater long-term financial security for Sri Lanka's aging workforce.
Unemployment insurance will be a pioneering addition to Sri Lanka’s social protection landscape, offering temporary income support to individuals who lose their jobs involuntarily. This safety net is designed to ease financial stress during periods of unemployment, allowing workers to meet basic living expenses while they search for new employment. The inclusion of unemployment insurance represents a major shift toward a more responsive labor market, where workers can transition between jobs without falling into poverty or social insecurity, especially during economic downturns or unexpected layoffs.
The proposed system also includes disability and injury coverage, which would compensate workers who suffer temporary or permanent disability due to work-related accidents or illnesses. This component is crucial in upholding the dignity of labor, as it ensures that injured employees are not left financially vulnerable. It also aims to reduce dependency on ad hoc employer payments or court settlements by institutionalizing support through a state-managed insurance scheme that offers timely and adequate compensation for medical care, rehabilitation, and loss of earning capacity.
Health and maternity insurance is another integral pillar of the proposed social security architecture. It would provide access to affordable healthcare services and maternity benefits, reducing the financial burden on employees during medical emergencies and pregnancy. For women, in particular, this initiative promotes workplace inclusivity by supporting maternal health, reducing dropout rates due to pregnancy, and encouraging employers to retain and support female staff. By broadening access to health coverage, this provision aims to create a healthier, more resilient workforce, ultimately boosting national productivity and well-being.
This system is aimed at creating a universal and portable safety net for workers across both formal and informal sectors.
Critiques and Stakeholder Responses
Despite the Act's ambitions, it has attracted significant criticism from trade unions, labour rights organizations, and international human rights groups. Key concerns include:
- Erosion of Worker Protections: Critics argue the bill weakens provisions related to overtime, night work, unjust termination, and collective bargaining.
- Gender Implications: While the Act mandates female representation in unions, some feminists note potential risks in allowing unrestricted night work for women.
- Compliance with ILO Standards: Local rights bodies have expressed concerns about the Act's compatibility with ILO conventions, particularly regarding freedom of association and protection from arbitrary dismissal.
Conversely, employer groups and business chambers have largely welcomed the reforms, emphasizing the benefits of reduced regulatory burden, enhanced labour market efficiency, and greater alignment with global investment norms.
Conclusion
The proposed Employment Act of Sri Lanka represents a landmark attempt to harmonize and modernize labour legislation in the country. While its final form remains under review, the Act’s emphasis on simplification, flexibility, and inclusion marks a critical turning point in the development of labour law in Sri Lanka. However, successful implementation will require a careful balancing of the interests of employers, workers, and the broader socio-economic fabric, with robust safeguards to prevent the dilution of fundamental labour rights. The Parliamentary debate and stakeholder negotiations in the coming months will be crucial in shaping the future of employment regulation in Sri Lanka.
Devika Weerakoon, Attorney-At-Law
LL.B & LL.M (Col), Partner, D & D Associates
devikasweerakoon@gmail.com
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