Termination of employment contracts in Sri Lanka.

Termination of employment in Sri Lanka is governed by 2 principal statutes namely the Industrial Disputes Act No.43 of 1950, and the Termination of Employment of Workmen (Special Provisions) Act No.45 of 1971. On a collective reading of these statutes, termination and can be applied as follows circumstances:

  1. With the employee’s consent (generally in the form of a resignation);
  2. With the prior written approval of the Commissioner of Labour (“COL”);
  3. For justifiable cause.

Whilst It is common for contracts of employment to provide for termination with notice, termination by the employer under such provision without cause has been held to unenforceable and tantamount to unjust termination by Sri Lankan courts and tribunals.

Even if provided for termination without cause cannot be enforced in Sri Lanka Courts and tribunals.

Termination without will have to be brought under (a) or (b) above. The negotiation and entering into of a mutual severance arrangement with the employee under (a) above would be the preferred option (i.e. where the employee tenders his/her resignation on the payment of a severance sum which is generally regulated by a Severance Agreement). Where (a) cannot be achieved and the employer has had 15 or more employees on any date 6 months preceding the making of such Application, the employer may proceed to option (b) and make an Application to the COL under the TEWA seeking the COL’s approval for termination of the employee.

Termination with out cause will have to apply to A) or B) above. If disputed usually a mutual severance arrangement is reached.

Where the COL’s approval is sought for termination under (b) above the employer will have to demonstrate compelling grounds to justify why such employee(s) cannot be maintained in service. Such compelling grounds generally include:

  1. The removal of such job functions, generally in the course of a corporate restructure and/or where such scope of works is no longer carried out by such employer;
  2. Financial constraints of the employer where such a work cadre can no longer be maintained especially where there is a risk of closure of business.

Where the COL gives his approval for termination, the terminal benefit/compensation payable will be as per the formula contained in the Gazette attached.

Termination on account of Corporate Restructure

The process for severance/redundancy on account of a Corporate Restructure will have to be processed under (b) above.

Applications to the COL under the TEWA do not have to be in any prescribed format. However, the Application should contain detailed information (with supporting documents where possible) on the basis in which the employer is seeking the COL’s approval for termination. However, the Application should be supported by the mandatory information set out in the document annexed. The Application should be filed with the COL with a copy served on the applicable employee. On the COL inquiring into the matter, where no settlement is reached, the matter will be fixed for further inquiry by way of either a trial process or based on documents/information submitted via affidavits as may be mutually agreed upon by the parties or as otherwise directed by the COL. Each party will be given an opportunity to cross examine documents/evidence provided by the other party.

Where the employer is seeking to effect a redundancy, the option of seeking the COL’s approval under the TEWA should be considered the 2 nd best option by far and best avoided. Even though the TEWA provides for the COL’s determination on approval to be provided within 3 months from the date of receipt of the Application, in practice, this process can take a considerable period of time during the course of which the employer is required to keep paying the wages of the employee. Where approval for termination is granted the employer is required to pay compensation as per the formula contained in the Gazette at the time approval is granted. So in circumstances where the function of the employee ceases to exist (on account of a restructure) the employer will have to pay the wages up until approval is given in addition to the compensation computed according to the Termination Gazette which most often than not would be financially less viable than procuring a severance on mutually negotiated terms without the involvement of the COL.

Other Options to effect Termination

Termination under (a) generally include severance pursuant to negotiated terms between the employer and employee which generally involves the payment of a severance sum on terms more beneficial than those set out in the Termination Gazette. His is purely a matter between the employer and employee and entails no regulatory intervention.

The remaining option for termination would be termination for cause under (c) above. It must be borne in mind that termination under (c) would be amenable to challenge by the employee before a Labour Tribunal. under the Industrial Disputes Act No.43 of 1950, as amended. In such circumstances the employer would be called upon to justify termination. A key element in determining justifiable is the bona fides of the employer where the employer would have to demonstrate that the terminated employee was provided a fair and impartial opportunity to defend the allegations levelled against such employee. Where termination is based on non-disciplinary grounds, the bona fides of the employer can be demonstrated by the issuance of warnings before the ultimate step of termination. What is important is that the act of termination must correspond and be proportionate to the breach committed by the employee.