- Balancing worker protection and investment appeal
Sri Lanka hopes to achieve a $ 5 billion Foreign Direct Investment (FDI) target for 2025 to strengthen the country’s economic standing.
In the first quarter of 2025, Sri Lanka’s realised FDI totalled $ 203 million, a 90% increase compared to the $ 107 million recorded in the first quarter of 2024.
However, the country still has a long path ahead to achieve its investment goals, and economic analyses indicate the need for labour law flexibility, policy stability, regulatory reform, and improved transparency to attract large-scale investments.
The US State Department’s recently published 2025 Investment Climate Statement highlights Sri Lanka’s rigid labour laws and restrictions on foreign participation as weighing on investment prospects. However, stakeholders believe that while labour laws must be maintained in line with evolving labour requirements, maintaining policy consistency alongside this is of higher priority to ensuring a conducive investment climate in Sri Lanka.
Ensuring suitable amendments
Speaking to The Sunday Morning, Deputy Minister of Labour Mahinda Jayasinghe noted that a committee of independent experts had been appointed to amend labour laws while addressing concerns raised regarding them, especially investment and business-related concerns, as these had been raised by employers.
“The committee had several rounds of discussions and we have informed them to pay attention to these concerns. The possible approaches will be understood in the future based on the committee’s decisions regarding amendments.
“We must carefully consider all sides – the employees, employers, and investments – in order to reach decisions fair to all and make amendments suitable for the present context of the labour market. Based on the committee’s decisions, we hope to hold more negotiations with employees and employers to introduce amendments,” he said.
On alignment with International Labour Organization (ILO) standards and reforms, the Deputy Minister highlighted that the committee would consider all aspects, including ILO standards, the present context of labour laws internationally, and relevant experiences, to formulate a comprehensive report. This will then be discussed further with stakeholders.
Policy consistency vital
As of June, the Board of Investment (BOI) had received 79 investment proposals, consisting of 40 new (greenfield) projects and 39 proposals for the expansion of existing ventures.
The total estimated value of these investments is $ 4,669 million, with $ 3,899 million accounted for as foreign investment and the remaining $ 770 million as local investment. This represents an 18% increase compared to the investment proposals received during the corresponding period in 2024.
Commenting on investment concerns, University of Colombo (UOC) Department of Economics Professor Priyanga Dunusinghe explained that, with respect to labour laws, key concerns among investors involved the Termination of Employment of Workmen Act (TEWA), where termination of employment could be considered a difficult task and could be viewed as somewhat restrictive in terms of the flexibility required by investors.
In addition, he pointed out that the various public holidays available, certain employee-related benefits that employers had to bear financially, or the somewhat restrictive nature of employing female workers could also be considered concerning by investors.
Moreover, he noted that while Sri Lanka’s labour laws aligned with ILO standards to a great extent, certain laws could be rather archaic.
“We must not fail to reform labour laws over the years to fit the evolving needs of the economy and global trends. Thus, we need to revisit certain old labour laws in order to ensure a flexible labour market while still complying with ILO conventions.
“With two major labour markets in the same economy, including one governing public workers and the other private workers, a number of proposals have been made in the past to create similar situations for both. It is necessary to create a labour market with similar benefits for all, regardless of the sector.”
Thus, Prof. Dunusinghe highlighted the need to move forward with reforming labour laws in line with global standards, making the labour market more flexible. He also added that Sri Lanka had not introduced effective unemployment insurance schemes as of now, adding that making the labour market flexible in such a context would be difficult.
He also focused on the Industrial Disputes Act of 1950, the mechanism through which industrial disputes must be settled. He noted this required parties to before labour tribunals, while they could also be subject to the influence of labour unions, involve the costs of legal assistance, and may not be considered very straightforward when solving disputes, especially due to being a lengthy process.
Moreover, Prof. Dunusinghe also pointed to the Shop and Office Employees Act and the Wages Boards Ordinance (introduced decades ago and formally building the legal framework) as possibly contributing to restricting businesses financially, especially in terms of expensive costs of hiring and firing.
Due to this, he noted that certain firms would opt for not expanding beyond 15 employees, and foreign investors could view this environment as less flexible, as highlighted by the investment report as well.
In addition, Prof. Dunusinghe noted the other key areas highlighted by the report, such as the efficiency of the BOI and implementation issues, as well as regulatory and policy uncertainty with respect to decision-making by the current political regime regarding investment acceptance. As a country targeting FDI worth $ 5 billion, he highlighted the need for investments to be looked at carefully.
Moreover, he pointed to the impression, as highlighted by certain reports, of the State playing a bigger role in the economy, employing a State-led development model, adding that economic policy-related approaches could potentially impact investor confidence as well. Moreover, he noted that investors could be reluctant due to less efficient and coordinated approaches in the economy.
“Thus, Sri Lanka’s business environment could be considered as less conducive, especially for large-scale investments, although potential investors do exist. Regardless of opportunities, there can be reluctance. This report has been released at a time when policymakers can pay more attention and rectify any necessary issues in the upcoming budget. Policy consistency is essential for investment and the business climate,” he said.
Prof. Dunusinghe opined that it was essential for Sri Lanka to introduce necessary changes to strengthen foreign investments, making it a matter that required urgent attention.
Labour law not rigid
Meanwhile, speaking to The Sunday Morning, civil and labour lawyer, Commercial and Industrial Workers’ Union President Swasthika Arulingam highlighted that Sri Lanka did not have a rigid labour law but had high ethical standards, adhering to international labour standards adopted by the ILO to a considerable extent.
She cited sections such as maternity protection, protection for women engaged in night work, protection from arbitrary termination, and protection from child labour, all of which exist under the current labour law framework.
“I completely disagree with the notion that Sri Lanka has a rigid labour law, or that it does not allow employers to dismiss workers once hired, leading to the prevention of investments. All these are myths, since the Sri Lankan labour law is what a labour law is supposed to be; it serves the purpose of protecting the employee.”
Arulingam emphasised that labour laws were supposed to protect employees and that the laws in Sri Lanka had been developed over decades, resulting in a favourable labour law system at present. She did, however, acknowledge that there were still problems pertaining to the law on the side of the employee.
For instance, despite the fact that workers have the right to organise and unionise in factories, the Sri Lankan workforce’s unionisation rate is less than 10%. She attributed this to factories constantly dismissing employees for trying to form unions, despite the fact that it was illegal. For instances of this nature, she noted that better systems within the law were required.
TEWA is a law that restricts employers from terminating an employee’s ‘scheduled employment’ without either the workman’s prior written consent or the prior written approval of the Commissioner of Labour. This act provides special protection for ‘workmen’ by preventing employers from ending employment for non-disciplinary reasons without these conditions being met.
For instance, if a factory is facing closure and employees have to be dismissed, the consent of the employees and compensation need to be discussed. Alternatively, the consent of the Commissioner of Labour is required, where a negotiation would take place.
Arulingam noted that many employers were not in agreement with this, preferring to have the discretion to dismiss workers at will. Thus, since the introduction of the act, she noted that employers had been lobbying against it, claiming that it did not allow for the dismissal of workers.
However, she noted that this was not the case, since TEWA merely required conducting negotiations and/or at least informing the Labour Commissioner and paying compensation if a factory were to dismiss a large number of employees due to closure or another reason. Such mass-scale dismissal would otherwise pose a problem for the Government.
“The narrative has been created that investors are discouraged due to rigid labour laws. However, I have not heard of any such foreign investors or brands I’ve worked with pulling out of the country due to strict labour laws. In fact, we negotiate with brands and investors to strengthen labour protection measures that may not exist in the current labour law. Brands bargain with us for better labour protection, anti-harassment protection, and better factory access.”
Hence, she said that it was unlikely for investors to leave or enter the country simply based on labour laws. However, she noted that investors would determine their entry based on whether Sri Lanka had solid economic policies, consistency, and solid direction, as highlighted by several studies as well.