Employee termination in Sri Lanka: legal process, notice, and severance guide

Last verified against the primary sources on 15 October 2026.

Terminate an employee the wrong way in Sri Lanka and the employer can face a reinstatement order, a compensation award, or both. A terminated employee has six months from the termination to apply to the Labour Tribunal [1]. Employers often lose not because the decision was wrong, but because the procedure was incomplete.

This guide explains the procedures for misconduct dismissal and for non-disciplinary termination, the final pay obligations, and the dispute pathway when a terminated employee raises a claim.

Misconduct dismissal vs non-disciplinary termination: the two tracks

Sri Lankan law treats two categories of termination differently:

Track 1: Dismissal for cause (misconduct). The employer believes an employee committed a disciplinary offence: insubordination, theft, fraud, habitual lateness or other misconduct. A termination by way of disciplinary punishment is outside the consent or approval requirement of the Termination of Employment of Workmen (Special Provisions) Act No. 45 of 1971 (TEWA). Where TEWA applies (an employer that averaged 15 or more workmen in the six months before, and a workman past the 180-day test), the employer must give the workman the reasons in writing before the end of the second working day after the termination [2]. Giving written reasons promptly is good practice for any employer. A Labour Tribunal will look at whether the dismissal was justified and fairly handled.

Track 2: Non-disciplinary termination. The business ends the employment for any other reason: redundancy, restructuring, closure, automation or poor performance that is not treated as misconduct. Where TEWA applies, the employer needs the workman's prior written consent or the Commissioner of Labour's prior written approval [2].

Mixing up the two tracks is a serious error. Dismissing for economic reasons using a misconduct procedure, or calling a misconduct case a redundancy, creates liability on both fronts.

For a new hire, review probation terms and confirmation records before assuming that probation removes the normal termination risks.

Dismissal for misconduct: the disciplinary inquiry process

A defensible misconduct dismissal rests on a proper internal inquiry. Procedural failures that commonly undermine a dismissal are:

• dismissing without a charge letter
• refusing the employee an opportunity to respond
• holding the inquiry without a genuine independent finding
• imposing dismissal as a disproportionate penalty for minor misconduct

A sound inquiry procedure is:

1. Issue a charge letter. State the specific acts of misconduct alleged with enough detail for the employee to prepare a defence.
2. Receive the employee's explanation in writing within a stated time.
3. Conduct an inquiry hearing if the charge is serious or the written response is disputed. Allow the employee to be accompanied by a trade union representative or a co-worker.
4. Make a finding, proven or not proven, with reasons.
5. Impose a proportionate penalty. For misconduct short of dismissal: warning, final warning, suspension, demotion. For serious misconduct: dismissal.
6. Issue a termination letter that states the date, the charge found proven and the penalty, and, where TEWA applies, within its two-working-day limit for written reasons [2].

Throughout the process, act consistently (same penalty for the same offence) and proportionately.

Non-disciplinary termination under TEWA

When TEWA applies. The consent or approval requirement covers the termination of even one workman. It does not apply to an employer who employed on average fewer than 15 workmen in the six months before the termination, or to a workman who has not completed 180 days of employment (counting approved absence and holidays) within the first 12 months [2].

What the employer must do. Obtain the workman's prior written consent, or apply to the Commissioner of Labour for prior written approval before terminating [2]. Set out the reasons and the selection criteria in the application, and apply them consistently.

Compensation. Where the Commissioner approves a termination, compensation is set under the Commissioner's formula [2]:

The total is capped at Rs 1,250,000 [2]. This is separate from, and in addition to, gratuity.

Take advice before any group termination.

Notice period obligations

Follow the notice period in the employment contract, or the Wages Board decision where one applies. In lieu of notice, an employer may pay the salary for the notice period; this is common in senior terminations. Notice does not replace the TEWA consent or approval where TEWA applies.

Final pay obligations on termination

Whether the termination is for cause or not, the employer must calculate and pay:

• Outstanding salary for all days worked up to the last day of service
• Accrued unused annual leave: a shop or office employee whose employment ends is paid for the leave due [3]
• Gratuity, where the employee has at least five completed years of service and the employer employed 15 or more workmen in the 12 months before termination, payable within 30 days of termination whatever the reason for leaving [4]. See the gratuity payment guide for the calculation
• EPF and ETF contributions on earnings up to the last working day, remitted by the last day of the following month [5] [6]
• Any agreed bonus or commission that was earned but not yet paid, under the terms of the employment agreement

Document all final payments in a full settlement statement signed by both parties.

Labour Tribunal: the dispute resolution pathway

The Labour Tribunal, under the Industrial Disputes Act, hears applications by workmen whose services have been terminated. The application must be made within six months of the termination [1].

Possible outcomes of a Labour Tribunal order:

• reinstatement, with or without back pay
• compensation in lieu of reinstatement

Employers lose cases mainly through procedural failures: no charge letter, no hearing, inconsistent application of policy or a disproportionate penalty. Good HR documentation throughout the employment relationship, not just at termination, is the best defence.

The Industrial Disputes Act and collective action

Where a recognised trade union is involved, the dismissal or termination of a union member may raise further obligations. Collective agreements may require prior union consultation before redundancies, or additional severance terms. Review any applicable collective agreement first.

Employer checklist: complete this before issuing a termination letter

• Identify the track (misconduct or non-disciplinary) and do not mix them
• For misconduct: follow the full inquiry procedure with a written charge, response and finding, and give written reasons promptly (within two working days where TEWA applies)
• For a non-disciplinary termination: check the TEWA 15-worker and 180-day tests, and obtain consent or the Commissioner's approval where they apply
• Calculate final pay: salary, leave, gratuity and any TEWA compensation
• Prepare a written settlement statement and obtain signature
• Bring EPF and ETF contributions fully up to date
• Note the six-month Labour Tribunal window

For complex terminations, particularly where misconduct is disputed, the TEWA tests are uncertain or a senior employee is involved, take advice from a labour law specialist before issuing any notice.

Talk to us. If you need end-of-service amounts worked out, including gratuity, leave, EPF and ETF to the last working day and a settlement statement, our payroll team can help; book a consultation at our contact page.

This guide is general information on the law as at 15 October 2026 and is not advice on your specific situation.

References

1. Department of Labour, Labour Code. Industrial Disputes Act, s.31B(7). https://labourdept.gov.lk/downloads/labour_code/4.pdf . Primary. Accessed 15 October 2026.

1. Department of Labour, Labour Code. Termination of Employment of Workmen (Special Provisions) Act No. 45 of 1971, ss.2(1), 2(4), 2(5), the exclusions section, 6B and 6D, and the Commissioner's compensation formula. https://labourdept.gov.lk/downloads/labour_code/12.pdf . Primary. Accessed 15 October 2026.

1. Department of Labour, Labour Code. Shop and Office Employees (Regulation of Employment and Remuneration) Act No. 19 of 1954, s.6(6). https://labourdept.gov.lk/downloads/labour_code/20.pdf . Primary. Accessed 15 October 2026.

1. Parliament of Sri Lanka. Payment of Gratuity Act No. 12 of 1983, s.5(1). https://www.parliament.lk/uploads/acts/gbills/english/3120.pdf . Primary. Accessed 15 October 2026.

1. Central Bank of Sri Lanka. Employees' Provident Fund Act No. 15 of 1958 (reprint), s.10. https://www.cbsl.gov.lk/sites/default/files/cbslweb_documents/laws/acts/en/epf_act.pdf . Primary. Accessed 15 October 2026.

1. Employees' Trust Fund Board. Employees' Trust Fund Act No. 46 of 1980, s.16. https://etfb.lk/wp-content/uploads/2021/03/ETF-Act.pdf . Primary. Accessed 15 October 2026.