Severance Pay in Sri Lanka?

In Sri Lanka, severance pay, commonly referred to as the "gratuity," is provided to employees under specific conditions when their employment is terminated. The payment and conditions are regulated by the Gratuity Act, No. 12 of 1983. Here's how severance pay is generally handled:

1. Eligibility for Gratuity

• Minimum Service Requirement: An employee is eligible for gratuity if they have completed at least five years of continuous service with the same employer.
• Type of Termination:Gratuity is payable upon termination of employment under the following circumstances:
  • Retirement: When an employee retires after completing the required period of service.
  • Resignation: If an employee resigns after five years of service (gratuity is payable if the resignation is voluntary and not due to misconduct).
  • Retrenchment: If an employee is retrenched (laid off) due to downsizing or redundancy.
  • Termination: When employment is terminated by the employer for reasons other than misconduct.

2. Calculation of Gratuity

• Formula: The gratuity is calculated as half a month's salary for each completed year of service.
• Calculation Method: Gratuity=12×Last Monthly Salary×Number of Completed Years of Service\text{Gratuity} = \frac{1}{2} \times \text{Last Monthly Salary} \times \text{Number of Completed Years of Service}Gratuity=21×Last Monthly Salary×Number of Completed Years of Service
• Example Calculation:
  • If an employee has completed 10 years of service and their last monthly salary was LKR 50,000:
• Gratuity=12×50,000×10=LKR250,000\text{Gratuity} = \frac{1}{2} \times 50,000 \times 10 = LKR 250,000Gratuity=21×50,000×10=LKR250,000
• Salary Considered: The "last monthly salary" typically refers to the basic salary, excluding allowances and bonuses, unless otherwise stated in the employment contract.

3. Payment Timing

• Upon Termination: Gratuity is generally payable at the time of termination or retirement.
• Within a Specific Period: Employers are required to pay the gratuity within 30 days from the date of termination of employment. If delayed, the employer may be liable to pay interest on the outstanding amount.

4. Exceptions and Special Cases

• Misconduct: If an employee is terminated for serious misconduct, they may forfeit their right to receive gratuity.
• Contractual Agreements: In some cases, employers and employees may have specific agreements regarding gratuity payments that may differ from the standard practice, as long as they are more favorable to the employee.
• Voluntary Retirement Schemes (VRS): In cases of VRS, the gratuity amount might be higher, based on the terms of the retirement scheme.

5. Legal Framework

• Gratuity Act, No. 12 of 1983: This law governs the payment of gratuity in Sri Lanka, outlining the rights and obligations of both employers and employees regarding severance pay.
• Industrial Disputes Act: In some cases, severance pay issues might be settled under the Industrial Disputes Act, particularly in cases of retrenchment or closure of an establishment.

6. Dispute Resolution

• Labor Tribunals: If there is a dispute over the payment of gratuity, employees can file a complaint with the Labor Department or approach a labor tribunal. The tribunal has the authority to determine the amount of gratuity payable and enforce its payment.

7. Voluntary Additional Payments

• Ex-Gratia Payments: Some employers may provide additional severance benefits or ex-gratia payments beyond the statutory gratuity, especially in cases of mass layoffs or voluntary retirement schemes. These are typically negotiated terms.

In summary, severance pay in Sri Lanka is primarily handled through the gratuity system, where eligible employees receive a lump sum payment based on their length of service and last drawn salary. The process is governed by the Gratuity Act and is subject to specific eligibility criteria and legal regulations.