Gratuity in Sri Lanka: Who Qualifies, Who Doesn’t, and Why the 15-Employee Threshold Matters?

 

Gratuity is one of the most important retirement benefits for Sri Lankan workers, designed to recognize long-term service and provide financial security at the end of employment. Yet, many employers and employees remain unclear about when gratuity is payable, who qualifies, and why the law sets a threshold of 15 employees.

This article unpacks the Payment of Gratuity Act, No. 12 of 1983, explains the rules, and illustrates them with real-world examples.

Employer Coverage: The 15-Employee Rule

The Act applies to any employer who has employed 15 or more workers at any time during a calendar year.

• If a company crosses this threshold even once in a year, it becomes liable under the Act.
• Importantly, once covered, the obligation continues even if the workforce later drops below 15.

This rule ensures that medium and large employers cannot escape responsibility by downsizing after crossing the threshold.

Employee Eligibility

To qualify for gratuity, an employee must complete at least 5 years of continuous service.

• Exceptions: Gratuity is payable even before 5 years in cases of death or termination due to ill health.
• Gratuity is payable upon retirement, resignation (after 5 years), termination (except misconduct), death, or incapacity.

Calculation of Gratuity

The formula is straightforward:

• Half a month’s wages for each year of service, based on the last drawn salary.
• Wages include basic salary + cost of living allowance.

This ensures that gratuity reflects both the employee’s tenure and their final wage level.

When Employers Are Not Liable

Employers are not required to pay gratuity in the following situations:

• Companies that have never employed 15 or more workers in any year.
• Employees with less than 5 years of service, except in cases of death or ill health.
• Employees lawfully dismissed for misconduct (fraud, theft, gross indiscipline).
• Certain employees covered under alternative pension or provident fund schemes.

Examples in Practice

Example 1: Threshold Coverage

A company had 18 employees in 2019–2020 but only 12 employees in 2021–2023.

• An employee who worked continuously since 2018 retires in 2023.
• Because the employer was covered in 2019–2020, the employee’s entitlement is protected.
• Gratuity is payable for the entire service period (2018–2023), not just the years when the threshold was met.

Example 2: Small Employer Exemption

A small shop with 12 employees has never crossed the 15 thresholds.

• An employee resigns after 10 years of service.
• The employer is not liable to pay gratuity, as the Act does not apply to establishments below 15 employees.

 

Why the 15 Threshold Exists

The threshold was introduced for policy and practical reasons:

• Balance: Protects workers in medium and large establishments while shielding micro-businesses from heavy statutory obligations.
• Capacity: Small employers may lack financial stability to bear gratuity costs.
• Administrative simplicity: A clear numerical threshold makes enforcement easier.
• Continuity principle: Once crossed, liability continues even if workforce numbers later decline, ensuring workers are not deprived of benefits.

 

In Sri Lanka, gratuity is a right for employees with 5+ years of service in establishments that have employed 15 or more workers at any time in a year. The law balances worker protection with employer capacity, ensuring that medium and large businesses provide retirement benefits while small enterprises are exempt.

For employees, understanding these rules is crucial to claiming their rightful benefits. For employers, compliance is not just a legal duty but a commitment to fairness and dignity in the workplace.

Dilakson.S