A guide for employers
How gratuity works in Sri Lanka, with a worked example
Gratuity is a payment you owe an employee once they have completed five years of service or more and then leave, under the Payment of Gratuity Act.
Who owes it, who qualifies
It applies after five years, at employers of fifteen or more.
Who owes it. An employer who has employed fifteen or more people on any day in the twelve months before the employee leaves.
Who qualifies. An employee who has completed five years of service or more, on leaving for any reason: resignation, retirement, dismissal or redundancy. On death in service it is paid to the family. Only fully completed years count.
How it is calculated
Half a month's salary for each completed year.
For a monthly-paid employee, gratuity is half of the last drawn monthly salary for each completed year of service. The salary used is the basic or consolidated salary together with any living allowance, not overtime or reimbursed expenses.
An employee who is not paid monthly earns fourteen days' wages for each completed year, taken on the average of their last three months' earnings.
Worked example. An employee on Rs 75,000 a month who has completed seven years is owed seven times half of Rs 75,000, which is Rs 262,500.
When it is paid
Within thirty days, then a surcharge applies.
Gratuity is due within thirty days of the employee leaving. Once that window passes, a surcharge on the amount owed applies, rising the longer it stays unpaid.
- Up to 1 month late: 10 per cent.
- 1 to 3 months late: 15 per cent.
- 3 to 6 months late: 20 per cent.
- 6 to 12 months late: 25 per cent.
- More than 12 months late: 30 per cent.
Dismissal rarely cancels it. Gratuity can be forfeited only where the employee was dismissed for fraud, misappropriation, wilful damage to property or causing the loss of company goods, and then only up to the value of that loss. A dismissal for ordinary misconduct does not wipe it out, and the correctness of any forfeiture can be tested at a Labour Tribunal.
Putting the money aside
It is a liability that builds every year, so provide for it.
Gratuity is not a one-off cost that appears on the day someone resigns. It accrues as your people build service, and accounting standards treat it as a liability to be provided for year on year. Setting the amount aside as it builds, rather than finding it in one month, is what keeps a retirement or a wave of long-service exits from becoming a cash problem.
Knowing who has crossed five years, and what each of them would be owed today, turns gratuity from a surprise into a figure you already hold.
This guide is general information for employers, not legal advice, and does not create a client relationship. Sri Lankan law and the applicable figures change, and how they apply depends on your circumstances. Confirm your position with a qualified adviser before acting.