Business Law

National Diploma in Accounting

Level 5- 2nd Semester

6. Law Relating to Employment

6.1 Employee and Independent Contractor

6.2 Workmen’s Compensation Ordinance

6.3 Termination of Employment of Workmen Act

6.4 Shop and Office Employment Act

6.5 Employees Provident Fund Act

6.6 Employment Gratuity Act

6.7 Employee’s Trust Fund Act

6.1 Employee and Independent Contractor

Contract of employment

This refers to an agreement between the employer and employee/workman, whereby the employee
agrees to provide his services to the employer and the employer agrees to pay for these services a
consideration called a wage or salary. In addition to the main requirement above, a Contract of
Employment may contain other terms and conditions relating to this employment relationship.

Terms in an employment contract

An employment contract generally contains terms and conditions, on the following areas:

• Scope of work.

• Salary and other benefits.

• Salary increments and bonuses.

• Working hours and leave.

• Termination.

The contract of employment can be in writing, verbal, or implied by the conduct of the parties.

Difference between a ‘contract of service’ and a ‘contract for service’; Distinction between an
‘employee’ and an ‘independent contractor’

An independent contractor is hired under a contract FOR service and is free to determine the
manner in which the task is to be performed.

“An independent contractor…is one employed to do certain work but he has a right to exercise
his own discretion as to the time and manner of doing the work”

Contract of service - the employer can dictate terms about the manner in which work should be
done. The employee employed under a contract of service is entitled to all the benefits of labour
law.

Contract of Service vs. Contract for Service: Tests are available to identify whether a worker is
an independent contractor or an employee.

 Control Test
 Integration Test
 Economic Reality Test
 Multiple Test

Control Test –

If a worker is subject to the command of his master on the manner in which he shall do his work
(what, when, where, how), he is in a contract of service –

• Cannot delegate his work to another.

• Cannot work in any other place as he pleases.

Integration Test –
If a person’s work is done as an integral part of the business, it is a ‘contract of service’. If his
work is not integrated to, but only an accessory to the business, it is a ‘contract for service’.

Economic Reality Test –

Whether the worker is in business on his own account or works for another who takes the ultimate
loss or profit of the business.

Multiple Test –

If consideration of all these factors result in the conclusion that the person is ‘in business on his
own account’ then he is an independent contractor. Hence, one key determining factor is the
economic independence/dependence of the individual.

6.2 Workmen’s Compensation Ordinance

The Workmen’s Compensation Ordinance of 1935 and subsequent Amendments is to provide for
the payment of compensation to workers who are injured in the course of their employment by an
accident arising out of the and during the course of their work.

A workman is defined as “any person who has entered into or works under a contract with an
employer for the purposes of his trade or business in any capacity, whether the contract is specified
in writing or on an oral agreement, or whether it is a contract of service or apprenticeship or
contracted personally to execute any work or labor”

However, persons working as members of the Armed Forces of Sri Lanka, other than those persons
employed in a civilian capacity in those Forces, and members of the Police Force are not included
under this Ordinance.

When can a worker claim Compensation?

If any worker contracts a disease that could be reasonably attributed to the type of work he/she is
doing while employed in any process or contracts an occupational disease

Is anyone else entitled to claim worker’s compensation?

The Ordinance also provides for compensation to be paid to the dependents of the worker, in the
event of his/her demise as a result of a work related accident or occupational disease.

What is the amount of compensation that can be expected?

  Schedule I - addresses permanent partial disablement as a result from injury. Where the
injury is not listed therein compensation will be computed proportionately with the loss
of earning capacity.
In the event multiple injuries are caused by the same accident, the amount of
compensation will be an aggregated amount, but it will not exceed the amount payable if
permanent total disablement had been the result.
 Schedule IV - addresses instances where death results from the injury and the worker was
in receipt of monthly wages. It also addresses compensation for permanent total
disablement as a result of the injury sustained. The maximum payable is Rs.550, 000/- in
the case of death or permanent disablement.

6.3 Termination of Employment of Workmen Act No. 45 of 1971

This Act was established to make special provisions in respect of, the termination of the services
of workmen in certain types of employment, by their employers.

The employer’s common law right to terminate a contract of employment, for non-disciplinary
reasons at will, was repudiated by this.

Applicability of the Act

All employees in scheduled employment, employing 15 or more employees, who have worked for
more than 1 year, are covered by this Act.

Definitions

“Scheduled employment”, means employment in any of the following:

• A factory coming under the Factories Ordinance.

• A shop or office, coming under the Shop and Office Employees

• Any trade, in respect of which a notification has been published in the Gazette under the Wages
Boards Ordinance.

Non-applicability of the Act

o To an employer by whom less than 15 workmen

o To the termination of employment of any workman, who has been employed for a period
less than 180 days
 o To the termination of employment of any workman who has been employed by an
employer, where such termination was affected by way of retirement in accordance with
the provisions of any collective agreement, or any contract of employment.
o To the government in its capacity as an employer.
o To the Local Government Service Commission in its capacity as an employer.
o To any local authority in its capacity as an employer.
o To any co-operative society in its capacity as an employer.
o To any public corporation in its capacity as an employer.
o To the termination of employment of any workman who has been employed by an
employer in contravention of the provisions of any law for the time being in force

Conditions imposed by the Act on Termination

The Act introduced certain conditions which the employer has to comply with, prior to the
termination of a workman in scheduled employment. These conditions are:

• The prior written consent of the workman must be obtained, or

• The prior written approval of the Commissioner of Labor must be obtained.

Procedure on Termination

When an employee in a scheduled employment is terminated through a disciplinary action, the

employer must notify the workman in writing the reasons for such termination. This notification
must be done within 2 working days from the date of termination.

When an employee in a scheduled employment is terminated due to the closure of the trade,
industry or business by the employer, the Commissioner may order the employer to pay to such
workman a compensation and any gratuity or any other benefit due to the workman.

Computation of the compensation under the Act

Number of year(s) of Number of months’ salary Maximum compensation

service completed at to be paid as compensation (cumulative)
termination for each year of service
 1 to 5 2.5 12.5 months

6 to 14 2.0 30.5 months

15 to 19 1.5 38.0 months

20 to 24 1.0 43.0 months

25 to 34 0.5 48.0 months

6.4 Shop and Office Employment Act No. 19 of 1954

Employees covered under the Act This Act applies to all employees working in shops and
offices, in the whole of Sri Lanka or in certain areas specified by the Minister by Order published
in the Gazette.

Working hours and their restrictions, intervals & overtime

Conditions of Service

6.5 Employees Provident Fund Act No.15 of 1958

The main objective of the Act is to ensure that an employee gets a lump sum payment in his old
age/retirement (similar to a retirement benefit plan).

“The Commissioner of Labour shall be in charge of the general administration of this Act.

In accordance with the Act, both the employer and employee contribute monthly, to this Fund.
These contributions are added on monthly, during the period of employment, to an account
allocated to that particular employee.

The Act provides for the payment of superannuation benefits to employees in covered
employment, through a contributory provident fund.

“Covered employment”, “means an employment declared by a regulation to be a covered

employment.”

The following types of employment do not fall within the definition of “covered employment”.
They are employment in:

• Public service

• Local government service

• Domestic service

• Charitable institutions, employing fewer than 10 employees

• Institutions giving training to juvenile offenders

• Establishments where only family members are employed

The Contribution

If the employer is in covered employment, then it is compulsory for the employer to register with
the Commissioner of Labour as an EPF contributor, within 2 weeks of commencing the business.
Thereafter the employer must adhere to the following:

• To calculate for every employee, the provident fund contribution for each month, as follows:
Employer’s contribution (12% of total earnings of employee) + Employee’s contribution (8% of
total earnings of employee). [Section 10]

• The employer shall deduct the employee’s contribution of 8%, from the earnings of such
employee. [Section 15].

• This total monthly contribution shall be remitted to the Fund, before the last day of the succeeding
month. [Section 10]

Monthly contribution due date

The contribution for the month of March 2017 has to be remitted to the Fund, by the employer, on
or before 30th April 2017.

• When the employer fails to make the contribution payment to the Fund on the due date, he will
be liable to a surcharge. [Section 16].

• The employer and an employee can elect to pay to the Fund, a contribution calculated at higher
percentages than the 12% and 8% mentioned above. But, once, this decision to pay at higher
percentages is implemented, it cannot be reversed. [Section 11].

• The employee is entitled to an interest, on the amount standing to the credit of his/her individual
account in the Fund as at 31st December of each year. [Section 14].

• The interest and the contribution applicable to the employee will be credited to his individual
account in the Fund. [Section 18].

• The employer shall not reduce the earnings or other benefits of the employee, in order to reduce
the contribution or surcharge payable to the Fund, in respect of that employee. [Section 19]
Withdrawals from the provident fund by employees / Benefits of the fund

6.6 Employment Gratuity Act (No. 12 of 1983)

Exempted employees

Employees working in government, provincial councils or local authorities

Employees working in a Co-op society

Domestic servants like house made

Employees entitled to a non-contributory pension scheme

Apprentices recruited under the national apprentice board

Gratuity Computation

Deductions from Gratuity

6.7 Employee’s Trust Fund Act

All registered employees are known as members of the Fund. Each such member is automatically
covered by a life insurance policy.

Functions of the fund

Applicability of the Act

Non-applicability of the Act

The provisions of this Act do not apply to the following categories of employees:

• Domestic servants.

• Employees in religious, sociable or charitable institutions employing less than 10 persons.

• Industrial undertakings for training of juvenile offenders, deaf and blind persons, orphans and
destitute. • Undertakings where only family members are employed

The Contribution

In ETF, the full contribution is made by the employer. No contribution is made by the employee.

• The contribution made by the employer is, 3% of the total earnings of the employee, (from his
employment under that particular employer). [Section 16(1)

As per section 44, “earnings” shall mean;

(a) Wages, salary or fees;

(b) Cost of living allowance, special living allowance, and any other similar allowances;

(c) Payment in respect of holidays;

(d) The cost value of any cooked or uncooked food provided by the employer to employees

(e) Meal allowances; and

Withdrawals from the Fund,

By a member/employee Section 23(1) lays down the general rule on the withdrawals by a member
from the Fund.

The rule is that; he/she can withdraw the amount standing to his/her credit in the Fund, upon the
termination of his/her employment. But, such withdrawal can be done only once for every five (5)
year period.

Penalties / Surcharges of ETF