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 Subject :“Impact of Labour Laws on Employment Generation in Sri Lanka”.. 18-06-2012 01:52:55 
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Position Paper of the Employers’ Federation of Ceylon based on the Findings of the Survey on the

“Impact of Labour Laws on Employment Generation in Sri Lanka”

The Employers’ Federation of Ceylon (EFC), during its 82 years of existence, has always promoted healthy work place relations based on sound labour standards. We are extremely proud to say that over these years, we have made every effort to ensure that our members comply with all labour laws and regulations in this country. Having said that, we firmly believe that the labour regulatory system in this country needs an overhaul, in line with the changes that are taking place in the world of work and business. We do not, at any point, propose to have a ‘hire and fire’ framework, which would inevitably be disastrous. We have always been making submissions to the government stating that a highly legalistic and inflexible labour law and relations systems should be replaced by a basic legal framework of labour protection, with room for flexibility in regard to contractual arrangements, work force size, working time and functions.

It is with this objective that the EFC, with the assistance of the International Labour Organization, embarked on conducting a survey amongst the EFC membership on the impact of labour laws on employment generation in Sri Lanka.

As soon as His Excellency the President, Mahinda Rajapakse took up office and formed his government, the Ten Year Horizon Development Framework was proclaimed as the country’s development formula for the next decade. We were extremely happy and encouraged to note the labour policy that was enshrined in chapter 11 of the framework. This policy had four policy directives. They were:

  1. Employment generation
  2. Flexible labour laws
  3. Enhancing skills and productivity, and
  4. Strengthening employer-employee relations. In other words, it was a perfect example of hitting the nail right on the head. It identified critical areas of concern to be addressed. Consequently, labour law reforms invariably become imperative in order to address issues relating to these policy directives.


Data for the survey was collected by means of a questionnaire sent to all members of the EFC in March 2011 numbering 525 at that time, as well as a sample of 40 enterprises in the small business sector which are not in the EFC membership. A total of 206 completed questionnaires were received. The return rate was 63% from the large scale enterprises, 30% from the medium scale enterprises and 7% from the small enterprises. The service sector and the manufacturing sector were represented predominantly among them.

Key Findings

91% of those who responded to our survey observed that labour laws are a constraint on employment generation in Sri Lanka. Amongst them, 94% of the manufacturing sector respondents and 97% from the service sector respondents and 96% from the plantation sector respondents have indicated that the Sri Lankan labour laws have a negative impact on employment generation.

Termination of Employment of Workmen (Special Provisions) Act No.45 of 1971

Almost half the number of respondents ranked the Termination of Employment (Special Provisions) Act of 1971 as having the worst impact out of all the existing labour laws. This is understandable as the provisions of this Act directly impinge on the employers’ ability to restructure manning levels quickly to suit sudden business needs. The authority given to the Commissioner General of Labour to grant permission to terminate the services of a workman on non disciplinary grounds is something that is unique in the context of Asian industrial relations. 75% of the respondents which ranked this law as having the worst impact on employment generation were from the large scale enterprises employing more than 150 employees.

Industrial Disputes Act

The highest number of respondents which indicated that the Industrial Disputes Act had the worst impact on employment generation were from the manufacturing sector. Once again, the larger enterprises have been more emphatic on the degree of impact than others in this case as well.

In respect of reforms in relation to the Industrial Disputes Act, the EFC recently proposed that the Industrial Disputes (amendment) Act No.56 of 1999, which only stipulates unfair labor practices on the part of employers and is discriminatory of employers, should be repealed and be replaced by a framework that would encourage strengthening workplace relations. The EFC proposed a draft piece of legislation in this regard and has already submitted it to the government. We have also made submissions on the basis that the relief of reinstatement in service given by Labour Tribunals is not at all conducive to good industrial relations, as an employment relationship is essentially a contract of personal service which has an element of understanding and mutual cooperation that is needed between the employer and the employee. If for whatever reason this is broken, it cannot be forced on parties. The remedy therefore should be, if at all, compensation for loss of employment

The Shop and Office Employees Act

The Shop and Office Employees’ Act also has been identified, especially in the manufacturing and service sectors, as a piece of legislation having a negative impact on employment generation.

One of the significant drawbacks that has been identified in relation to the inability of Sri Lanka to gain demographic dividends has been the unusually low labour force participation rate of Sri Lankan females. We record a low participation rate of 35%. At a time when Sri Lanka needs to exploit the opportunities in breaking into the knowledge economy, it is extremely important that equal opportunities are available for women to gain employment without having archaic legal restrictions which are now obsolete in the context of today’s world of work.

In this regard, we need changes in relation to the law relating to employment of women during night. Right now, there are restrictions in the Shop and Office Employees Act which prohibit women from working during the night in shops and offices. The BPO industry is fast gathering momentum in Sri Lanka with huge opportunities for both young men and women to obtain gainful employment. It is therefore necessary for us to ensure that they would not be hindered by any legislative restrictions in relation to night work.

We have already proposed to the Hon. Minister of Labour and Labour Relations that the Shop and Office Employees Act should be amended to enable female employees in the business of Information Technology enabled services to work during the night in an office. We have also proposed that a similar amendment be brought in under section 10 by an insertion of an additional provision that would enable any female who has attained the age of 18 years to be employed in the business of a shop, which is in the nature of a supermarket store for the period, or any part of the period between 6.00 p.m. and 11.00 p.m.

Five Day Week and Spread Over

87% of the respondents have also indicated that the Wages Boards Ordinance negatively impact on employment generation. One of the crucial issues that we have been lobbying with the government, especially in relation to some of the factories in the manufacturing sector, is the spread over of hours of work on five days of the week.  Flexibility in working arrangements is imperative for an enterprise to be competitive in the global market. One of the serious impediments in our labour law has been the rigidity with which our laws have been interpreted, which, has resulted in employers being unable to adjust work arrangements even with the consent of workers.

The Employers’ Federation of Ceylon, during the time of the economic recession in 2009, made extensive submissions to the Hon. Minister of Labour and Labour Relations and the National Labour Advisory Council regarding the granting of the option to employers to spread over the working hours on a short working day, on the other days of the week in a manner that would not exceed 45 hours a week. In doing so, we submitted that no additional payment needs to be made even though an employee would work an additional extra hour from Monday to Friday in order to be relieved from work on the short working day. It was also made very clear that such an arrangement should only take place subject to the mutual agreement on the part of the employer and the workers/trade unions on behalf of workers as the case may be.

Our submissions also clearly pointed out that this work arrangement is fully in line with the ILO Conventions on working hours (Convention No.1), which provide for such a spread over of working hours, provided that such an arrangement is arrived at by an agreement between employers and worker representatives and the spread over would not exceed more than 1 hour a day.

The National Labour Advisory Council, at its meeting held on 5th August 2011 presided by the Minister of Labour and Labour Relations, unanimously agreed to allow such a work arrangement. The Employers’ Federation of Ceylon, following up on this matter, has even suggested as to what needs to be done by way of an introduction of a regulation to the existing regulations under the Wages Boards Ordinance. However, thereafter the National Labour Advisory Council decided to permit this work arrangement where appropriate for a period of three months, subject to permission being granted by the Commissioner General of Labour. This is by way of an administrative relaxation and is not a final solution to the problem. It is imperative that we regularize this work arrangement by making the necessary changes, as suggested by us.

Gratuity Act No.12 of 1983

The majority of the respondents in the plantation industry have identified the Gratuity Act as having the worst impact. One significant feature in this industry is that it has resident employees enjoying all benefits granted by the Plantation Companies, irrespective of whether they report to work or not. However, a large proportion of workers who are employed and whose names are in the checkroll report to work only as little as 5 to 10 days a month. Unlike in other sectors, their names remain in the checkroll and there is continuity of service for which the Companies have to make provision for gratuity. The gratuity provision that Companies make is huge on account of having to do so even in respect of employees who rarely come to work when work is offered. This is a problem unique to the plantation as, in the case of any other industry, an employee will not be retained in employment if he does not report to work regularly.

This was one of the important issues that we highlighted even to the Committee on Development and Management of Estates which was set up under the Plantation Monitoring Division in 2008. The Committee recommendations concede that this is a problem that needs the attention of the policy makers. It accepts that the gratuity law needs an amendment to ensure that employees who report to work regularly are the ones in respect of whom the gratuity provision should be made in respect of a particular year.

The EFC made a proposal to amend the definition of “year” stipulated in terms of the Gratuity Act to mean a completed period of 12 consecutive months during which a workman has worked not less than 180 days. There has not been any change up to now.

Do Labour Laws have an Impact on Employee Recruitment?

During the period 2010/2011, out of the 206 enterprises which responded to the survey, there have been 70,853 recruitments made by 193 enterprises. The majority of the recruitments have been made to the manufacturing sector, which has taken 67.27% of the total recruitments.

A further analysis of the data reveals however that out of this total number of recruitments, 66% were replacements and the recruitments for new job positions were only 32% of the total recruitments. New recruitments have been predominantly in the service and manufacturing sectors, amounting to 76%.

The findings have also revealed that the inability to find skilled and qualified employees is also a significant reason for employers being unable to recruit new employees for new job positions.

Have the Labour Laws Influenced Employers to Resort to Different Work Arrangement Methods?

61% of the employers have admitted that they resort to hiring labour through contractors, mainly due to the following reasons:

  • Flexibility in work arrangements
  • Possibility of hiring workers to meet temporary needs
  • Deploying contract labour to carry out peripheral functions
  • It has also been stated that this method has been used by employers in view of the rigid labour regulatory system.

Hiring labour through a contractor is not illegal, but there are various complications attached to it. Obviously, employers would prefer to have direct employment if the regulatory framework supports a flexible work arrangement option.

Do our Labour Laws Allow Flexible Arrangements?

63% of the respondents have clearly indicated that our labour laws provide little or no room for flexible work arrangements, such as flexible hours, part time work and spread over of working hours etc. If we are to improve labour market efficiency, it is imperative that these elements be included in our Labour Law framework.

Way Forward

Sri Lanka has been recording a very healthy economic growth during the last few years. The challenge before us is to sustain this growth. To do so, it is imperative that the current levels of investment increase from 32% to 35% of GDP. In other words, we need to increase both local and foreign direct investment.

One crucial impediment to investment (both local and foreign) has been the rigid labour market framework.

The World Economic Forum, which released the Global Competitive Report of 2011/2012 states that Sri Lanka has made a significant stride in moving up 10 places in the rankings, from 62nd to 52nd place. But it is disappointing to note that, amidst this positive indication there has been a remarkable drop in the rankings in relation to labour market efficiency this year. Sri Lanka has dropped down 13 places in the rankings to 117 as opposed to 104 in the previous Report. This has been the most noteworthy decline in the competitiveness index in comparison with other indices.


Our current labour regulatory framework consists of labour laws which have essentially existed prior to 1977, when our industry was heavily protected through stringent import substitution methods. The free market economy introduced after 1977 necessarily requires a National economy driven by massive private sector investment. It is therefore paradoxical for our laws to remain in the statute books and for us to expect investment and employment generation.

In one of the volumes of the International Labour Review published by the International Labour Office, Geneva, an article entitled “Is Asia adopting flexicurity?” featured six Asian countries, namely, China, Korea, Singapore, Malaysia, India and Sri Lanka. This article stated that these countries need to provide an adequate degree of labour flexibility to remain competitive. In respect of India and Sri Lanka, the article stated that very few reforms to the labour laws have been introduced and these countries continue to rely on an older model of employment based security.

The Sri Lankan labour law framework is a classic example of a country having an economy of a developing country attempting to implement social policies of a developed country.

It is therefore time for the policy statements that are enshrined in the Ten Year Horizon Development Framework to also translate into our labour relations framework so that Sri Lanka could fully exploit the opportunities for growth and development.

Lastly, what is extremely important in a labour regulatory framework is to ensure that we strike the correct balance between efficiency and equity. One cannot be achieved without the other. If we only support one and ignore the other, we are bound to lose both.

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