EFC SUBMISSIONS ON ‘REVIEW OF LABOUR

LEGISLATION IN SRI LANKA’

INTRODUCTION

The employment relationship has been described in the Blackstone

Commentaries as the third most import human relationship next to parent-child
and husband-wife. Naturally, employers as well as employees want it to be a
continuing relationship for the mutual benefit of each other. There is however
a significant difference in the relationship between an employer and an
employee as opposed to the other two. This is not often acknowledged. The
difference is that the existence of the employment relationship is totally
dependent on a viable social or economic activity. In other words, the
relationship originates in order to pursue a clearly defined activity. The
relationship becomes irrelevant in the absence of such activity, or in the event
of the person employed becoming irrelevant to that activity.

Prior to the industrial revolution, employment was looked upon as yet another
contract between two parties, terminable at the will of the other, subject to
the condition of notice in certain cases. Even the law proceeded on the basis
that it would give effect to what the employer and employee have agreed
unless there agreement was illegal or contrary to public policy. Gradually, with
the replacement of the laissez-faire state with the modern welfare state,
legislation was enacted with regard to terms and conditions of employment.
The State intervened on the basis that it was imperative to balance the
unequal bargaining position of the employer and employee – in other words, to
protect the weaker party against the stronger. The impact of legislation on the
contract of employment has been significant thereafter.

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Sri Lanka, being under the British rule, was heavily influenced by English law
and most of the legislation in Sri Lanka reflects the labour laws enacted in
Britain during that time. However, what is unfortunate is that whilst the British
have discarded many of these laws which are now irrelevant in the context of
the present socio economic situation, Sri Lanka has held on to them and even
proceeded to further regulate rather than taking a pragmatic view of the
situation and looking at what is best for our country.

We would now like to make some specific comments/recommendations with

regard to some of the more important pieces of legislation which requires
urgent review/amendment.

THE INDUSTRIAL DISPUTES ACT NO.43 OF 1950

The preamble to this Act states that it is an Act for the prevention,
investigation and settlement of industrial disputes. Although the preamble
refers to the term “prevention” of industrial disputes, the mechanism under
the Act does not have anything concrete for prevention of an industrial
dispute. The dispute settlement mechanism such as conciliation, arbitration
etc set out therein are procedures which need to be followed after an
industrial dispute has arisen. Therefore, the dispute settlement mechanism
under the Act pre-supposes the existence of an industrial dispute and merely
lays down the procedure that needs to be followed with regard to settlement.
This reflects a total reactive approach rather than being proactive.

Employers and employees who have been successful in creating a healthy

industrial relations environment in their work places have on their own
formulated mechanisms to prevent industrial disputes. Some of the grievance
handling procedures that operate in enterprises are good examples in this
regard. Therefore, the prevention of industrial disputes should be
introduced through legislation, and mechanisms such as Codes of
Conduct/grievance handling procedures, given more recognition by law which
will create an enabling environment for the promotion of social dialogue and

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ensuring industrial peace. In this context, it is also important that the right to
strike should also be regulated through these Codes of Conduct in a manner
that would prevent sudden work stoppages without any notice to
employers.

The main dispute resolution mechanism set out under the Act, apart from
conciliation and entering into collective agreements which relate to mutual
agreement, are Labour Tribunals and arbitrations. Both these mechanisms
enable an Arbitrator or a Labour Tribunal to grant just and equitable relief to a
workman. This concept of “equity” has been stretched to the maximum and
sometimes even amounts to “sympathy”. In fact, in certain circumstances it
may be argued that it may be more beneficial for an employee to be
terminated by an employer and eventually obtain some payment either by way
of a settlement or through an order of compensation based on “equity” (in
addition to terminal benefits), rather than having an unblemished record of
service and receive nothing more than the terminal benefits under the law on
resignation or retirement from service. A dismissed employee may, therefore,
be in a more “enviable” position as opposed to his counterpart with faithful
service to the employer. In the case of a termination of service of a workman,
an Arbitrator or a Labour Tribunal is empowered to grant the relief of
reinstatement or compensation. The ability to award the relief of
reinstatement in service in the case of an unjustified termination has been
pointed out by us on many occasions as being counter productive to healthy
industrial relations. What needs to be appreciated in this context is that the
contract of employment is a contract for personal service and therefore
arbitrarily imposing an employee on an unwilling employer will not result in any
productive outcome either to the employer or the employee. It will only result
in an unhealthy industrial relations situation within a work place. Therefore
there needs to be a change in the law to require that a reinstatement order
should always grant an option to the employer to make payment of
compensation in lieu.

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The rationale underlying the establishment of Labour Tribunals invested with
equitable jurisdiction was primarily to cater to an ordinary employee who may
not have the means to pursue his case in a court of law. In other words, Labour
Tribunals were primarily set up having regard to the lower category of workers
and not necessarily the top management executives such as chief executives
and managing directors. Therefore, we need to review the type of worker
who should be given access to a Labour Tribunal and limit it to the ones
who really require relief from such a Tribunal, as in the case of India.

THE SHOP AND OFFICE EMPLOYEES ACT NO.15 OF 1954

The rigid regulation of working hours and overtime is of serious concern to the
manufacturing and service sectors in the context of the need to look at flexible
working arrangements to adapt to market conditions. There are certain
provisions in the S&O E Act which are totally obsolete. For example, regulation
to sub section 1 prohibits employment of females in or about the business of
any shop or office for any period exceeding 9 hours a day (inclusive of a
interval). This in effect means that a female employee cannot work overtime
at all in a shop or office. Quite apart from this provision being an impediment
to women in the context of equal opportunities in employment, this restriction
is totally out of date and is irrelevant in the current labour market
environment. In this regard, it is also relevant to draw attention to the
observations made in 2006 to the government of Sri Lanka by the ILO
Committee of Experts on the application of Convention No.111. The
observations make special reference to the restrictions imposed on women and
the need to amend the law with regard to facilitating the employment of
women in the Information Technology sector. It is interesting to note the
following observation: “The Committee welcomes the information and asks the
government to keep it informed of any further development in this respect as
well as to provide it with copies of the relevant provisions as amended”. In
addition, the Act also restricts overtime work of an employee to 12 hours a
week. This restriction is unrealistic and cuts across the principle of “reasonable
overtime” and needs to be reviewed.

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The total prohibition of employing females after 8.00 p.m., other than in
certain identified establishments under the S&O E act also needs to be
reviewed in today’s context where females constitute a substantial proportion,
if not a majority in the service sector. In this regard specific reference is made
to the business process outsourcing industry which has developed in Sri Lanka
and has a lot of potential for employment generation, especially to females.
Call centres necessarily require working during the night for obvious reasons.
Despite repeated requests/submissions made to authorities, the provision still
remains in the statute book.

Another important matter that we have drawn the attention of the authorities
is with regard to holidays. This needs to be addressed from two angles. Firstly,
from the point of view of the excessive number of holidays. Secondly, from the
point of view of the provisions in the different statutes applicable to the
private sector. The following matters should be taken note of in this regard.

a) The period of 28 hours (inclusive of leave and holidays) a week to

qualify for the 1-1/2 days paid weekly holidays is not sufficient by way
of a qualifying period, as the objective of the weekly holidays provision
is to grant a reasonable period of rest to an employee each week.
There is no rationale in permitting an employee who does not work the
full week (45 hours) the benefit of 1-1/2 days paid weekly holidays.
The provision as it stands envisages 1-1/2 days paid holidays a week so
long as an employee works 28 hours (inclusive of leave and other
holidays). It is suggested that the qualifying period for 1/1-2 days
paid weekly holidays be 45 hours including leave and holidays. An
amendment on these lines will assist in permitting better
attendance at work and higher productivity.

b) It is not at all logical to insist on additional holidays by way of

weekly holidays when the normal weekly holiday coincides with a
statutory holiday. The public sector and a majority of the Wages

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 Boards do not stipulate such additional holidays. Many holidays are
granted each year on account of public holidays coinciding with normal
weekly holidays for employees covered by the S&O E act. When viewed
in the context of the number of holidays in the country, this gives rise
for even greater concern. Apart from the aspect of loss of working
time due to these additional holidays, much disruption and confusion
results as in many Companies, their offices need to be closed on such
days whereas their factories remain open. The issue of working time
lost and the resultant effect on productivity is exacerbated as these
situations invariably lead to long weekends.

It is unfortunate that this issue was discussed before the Labour Law Reforms
Sub Committee of the National Labour Advisory Council last year and a
suggested compromise was that an amendment to section 5(2) of the S& O E
Act be introduced in relation to weekly holidays by way of an additional
proviso. The suggested proviso is as follows:

“Provided, however, that in the event a statutory holiday coincides

with a weekly holiday or a weekly half holiday the employer shall
either grant the additional holiday on any day prior to 31st
December in that year or make payment of an additional day’s or
half day’s wage as the case may be to the employee in lieu of such
additional holiday/half holiday”.

EMPLOYMENT OF WOMEN, YOUNG PERSONS AND CHILDREN ACT NO.47 OF

1956

The draft document refers to night work by women in factories and industrial
establishments in the EPZs. The document states: “The pre-conditions required
by law for night work such as employee consent and permission of the

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Commissioner General of Labour are largely observed in the breach and in any
case are virtually unforceable.

It is respectfully submitted that what actually happens in this regard is the

converse. Although the law requires the consent of a woman to work in the
night and does not in any manner indicate that such consent needs to be
periodically ascertained by the Commissioner of Labour, administratively the
Department of Labour follows the practice of obtaining this consent once in
every 6 months from women who are engaged in night work. There was a
dispute in a Company which recruited women to work a 3 shift operation with a
clearly stipulated condition of employment stating that they will be required to
work in the night, to which employees agreed and accepted, later on, took up
the position that they cannot agree. This happened when their consent was
ascertained by the Department of Labour in terms of this “administrative”
procedure. In fact therefore, what needs to be said about this provision is that
in practice it is even more regulated than what is set out in the law.

PAYMENT OF GRATUITY ACT NO.12 OF 1983

The Plantation industry has been, and remains to be, one of the most
important export industries contributing immensely to the country’s economy.
Labour productivity has become one of the key issues affecting this industry in
the recent past.

Over the years, the Regional Plantation Companies have impressed upon the
Unions the need to link wages to productivity. Quite apart from any such
linkage, we have seen wage revisions being imposed on Plantation Companies
on account of various other factors beyond their control. Wage revisions which
came into effect in November 2007 (more than a year before a revision was
due) is an example in this regard. One major problem that the industry faces in
the plantations is with regard to resident employees enjoying all benefits
granted by the Plantation Companies not reporting to work and continuing to
remain in employment and adding years of service to their employment record.

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The total population of 434 Regional Plantation Company estates in 2006 was
934,000. Out of this, only 249,000 are employed, which amounts to 27% of the
population.

However, a large proportion of workers who are employed and whose names
are in the checkroll report to work only as little as 5 – 10 days a month. For the
payment of gratuity on reaching retirement age, these workers are also paid
gratuity regardless of their irregularity at work over the years. The ultimate
payout by way of gratuity to workers is massive. More importantly, Companies
need to make provision for gratuity each year in their financial accounts and
this creates a huge financial impact on the Companies. The Gratuity provision
for the current year in respect of the 21 RPC’s is Rs. 1,945,162,071/-.

This is a unique problem which only affects the plantation industry, as in the
case of any other industry an employee will not be retained in employment if
he does not report to work regularly. The reason as to why workers names are
retained in the checkroll is once again due to the dearth of manpower.

PROPOSAL TO AMEND THE PAYMENT OF GRATUITY ACT NO.12 OF 1983

In view of what has been explained above, the Regional Plantation Companies
have from time to time discussed this matter with the Trade Unions stating
that there needs to be something done immediately with regard to employees
who do not report to work and still “tick in” years of service to employment
which ultimately results in a massive gratuity provision in the annual accounts
and a gratuity payout as well at the point of retirement. In the circumstances,
we proposed to the Hon. Minister of Labour and Manpower that we need to
introduce an amendment to the Gratuity Act in respect of the definition of an
“year” which is currently defined as a completed period of 12 months in terms
of section 20. In other words, if an employee is retained in employment
without a cessation of employment, irrespective of whether he reports to work
or not, his absence is authorized or not, provision for gratuity has to be made
on the basis that there is continuous employment.

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It is very pertinent to mention at this stage that at the time discussions were
held with regard to the revision of wages in the Plantation sector in October
2007 before His Excellency the President, this matter was highlighted as being
crucial and one which needs immediate attention of the authorities in terms of
not only granting “relief” to the Regional Plantation Companies but with the
more important objective of improving labour productivity and attendance at
work. His Excellency the President clearly articulated that labour productivity
needs to be improved along with the wage revision and instructed all parties to
take necessary steps in that regard. He clearly acknowledged the need for a
revision, in the law.

Immediately after the signing of the new Wage Agreement with the Unions, the
EFC on behalf of the Regional Plantations Companies made a written proposal
to the Hon. Minister of Labour Relations and Manpower to amend the Payment
of Gratuity Act in terms of what has been explained above. This letter was also
copied to His Excellency the President and we are glad to mention that a letter
was addressed to the Secretary, Ministry of Labour Relations and Manpower by
the Presidential Secretariat (Addl. Secretary to the President) regarding the
proposal made by us and requesting the Ministry of Labour Relations and
Manpower to take necessary action in that regard. A copy of this letter dated
1st November 2007 is also annexed for your information.

Although we do appreciate the efforts made by the Hon. Minister of Labour

Relations and Manpower who took this matter up for discussion at the National
Labour Advisory Council on many occasions, there has not been any concrete
measures taken up to now to introduce this amendment to the legislation.
However, the EFC has continued to pursue this matter as something urgent and
important from the standpoint of all stakeholders in employment. The contents
of our letter of 19th October 2007 explains that the proposed amendment will
bring in clarity to the gratuity law in Sri Lanka and will also help workers who
are engaged in “casual employment” and also in the informal sectors to qualify
for gratuity. Our specific proposal in this regard for the amendment is that the

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definition of “year” in terms of section 20 of the Payment of Gratuity act No.12
of 1983 be amended to read as follows:

“A “year” shall mean a completed period of 12 consecutive

months during which a workman has worked not less than 180
days”

EMPLOYEES’ PROVIDENT FUND ACT NO.15 OF 1958

Once again, we annex herewith a letter sent by the EFC dated 21st April 2008 to
the Hon. Minister of Labour Relations and Manpower consequent to a meeting
of the National Labour Advisory Council, at which matters relating to reviewing
EPF benefits were discussed. The thrust of our submissions is that what needs
to be done is not to increase rates of contribution but ensure that employees
receive adequate return on their investments through this superannuation
benefit.

TERMINATION OF EMPLOYMENT OF WORKMEN (SPECIAL PROVISION) ACT

NO.45 OF 1971 (AS AMENDED)

As we are all aware, this statute was enacted in 1971 during a period of a
closed economy totally different to the current economic environment. The Act
has wide coverage in the private sector and applies to “non disciplinary”
termination of employment. Though originally intended to cover all employee
retrenchments or lay offs due to enterprise restructuring or closure, “non
disciplinary” situations have now been interpreted to include employee
absence on account of ill health and even employee incompetence at work.
Employers are required to seek approval of the Commissioner of Labour in
relation to a non disciplinary termination, in cases where the employee has not
given written consent to the termination of his services. The Commissioner of
Labour has the power to either grant or refuse permission to terminate services

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under this Act in “non disciplinary” situations. Once again, this opens out a
possibility of imposing an employee on an unwilling employer. The
compensation formula which is currently gazetted by the Commissioner of
Labour which runs up to a maximum of 48 months salary (capped at Rs 1.25
million) is reported to be the third highest retrenchment formula in the world!
This clearly demonstrates the continuing mismatch of social/economic policies
of our country. This shows the adoption of a poor country’s economic policy
along with a developing country’s social policy.

Many employers, in situation of restructuring, closures, retrenchment or any

other non-disciplinary terminations offer voluntary retirement compensation
packages. Employers are often compelled to offer huge packages, especially in
situations where restructuring has to be done quickly without having to go
through a protracted inquiry before the Commissioner of Labour under the
Termination Act. Such packages are often offered even to executives, including
Chief Executives, as the provisions of the Act do not exclude them. There have
been many instances of executives identified as being redundant or even
inefficient, obtaining generous compensation packages. This has been due to
our courts of law construing inefficiency and incompetence as “non
disciplinary” situations. In other words, the system rewards the inefficient, and
not the efficient and productive worker. Therefore, an unproductive employee
who is no longer relevant to an employer is able to obtain an attractive
package, in addition to his statutory terminal benefits, as opposed to his
productive counterpart who continues to work having only his terminal benefits
at the end of his career. Is this security of employment? Or does it directly
stifle employment creation. Many trade unions argue as to why anyone should
object to extra generous VRS payments given to employees by employers as it
clearly demonstrates the capacity of such employers to make such payments.
Unfortunately, what is often ignored is the underlying reality, that none of
those employers would ever consider offering direct employment opportunities
in excess of the absolute minimum number they require. They also often resort
to work arrangements other than direct employment to satisfy their
requirements.

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On the other hand, it is relevant to compare the severance pay packages of our
neighbouring countries which compete with us in the global market. Bangladesh
pays 30 days wages for each year of completed service provided the employee
has worked for more than 12 months. India, pays 15 days wages for each year
of service. Pakistan pays 20 days wages for each completed year of service, and
Indonesia, whilst paying one month’s wages for each year of service, limits
severance pay to a maximum of 5 months.

The specific amendments supported by the EFC to the Act envisaged the
following:

i. Where an employer has employed a worker for a period of not less than
twelve months continuously, and notwithstanding anything to the
contrary in the Termination of Employment of Workmen (Special
Provisions) Act No.45 of 1971 as amended, he may terminate the
employment of such worker for any reason, other than on disciplinary
grounds, subject to his making the following payments:-

a) Gratuity payable under the Payment of Gratuity act No.12 of

1983; and

b) One month’s wages/salary or written notice of one month; and

c) Two weeks wages/salary for each year of service; and

d) Two weeks wages/salary for ach year of service left up to the

age of 55 years

The maximum payment on account of (c) and (d) together shall not
exceed twenty months wages/salary.

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ii. Where an employer wishes to terminate a worker’s services and is
unable for financial reasons to pay the aforesaid compensation as set out
in (b), (c) and (d) of sub-section (i) above, he shall seek permission from
the Commissioner under the Termination of Employment (Special
Provisions) Act if the same is applicable.

iii. Where the employer due to reasons of closure of the whole or part of his
business has offered alternative employment elsewhere on terms not
less favourable than the existing terms and conditions of employment,
which offer has been rejected by the worker, the employer shall not be
liable to pay any compensation to the worker concerned and may
terminate the worker on giving one month’s notice in writing or payment
in lieu, subject to the right of the worker to seek relief before a Labour
Tribunal for compensation. The Labour Tribunal shall take into account
the offer of employment made and decide on the quantum of
compensation if any to be awarded, which shall not exceed the amounts
payable under (i) above.

iv. Where an application is made under the Termination of Employment

(Special Provisions) Act No.45 of 1971 as amended, the Commissioner
shall make inquiries based on affidavits tendered, and counter
submissions in writing by parties, within one month of the written
application. If no order is made within two months the Employer shall
have the right to terminate the worker subject to the final
determination of the Commissioner regarding the compensation payable.

v. Lay-off Procedure
Where an employer due to lack of raw materials, break down of
machinery or factors beyond his control, is unable to provide
employment for his workers or any part thereof, he shall, on proving
such fact to the Commissioner, be granted permission to refrain from
paying wages to the workers concerned.

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 The employer shall make a written application specifying the period of
lay-off which shall be supported by an affidavit and the Commissioner
shall give such matter priority and give his ruling within seven days of
receipt of the application. The Commissioner shall refuse an application
only if for reasons given by him in writing, he is convinced that the
application for non-payment of wages is inequitable in the circumstances
of the case. Where the period has to be extended the same procedure
would be followed by an employer and the Commissioner.

It is also submitted that employees over 60 years of age, probationers,

employees found incompetent and/or unable to discharge their duties
due to ill health, be excluded from coverage under this Act. They will
yet, under the Industrial Disputes Act, have recourse to the Labour
Tribunal in a situation of dismissal.

WHAT IS THE WAY FORWARD?

Employers in Sri Lanka view the current labour regulatory framework as an

impediment to business in a highly competitive global market. Undoubtedly,
such a regulatory framework also “scares away” many potential investors from
setting up business in Sri Lanka. Successful governments, whilst openly
proclaiming its policy for a free market economy and also recognizing the need
for labour market flexibility, have not yet been able to take the “plunge”.
Trade Unions have been extremely defensive and protective of existing
legislation.

We need to change our mindset. It is of paramount importance for us to accept

the need for a social partnership, and ask ourselves ‘what are the changes
necessary for sustainable development and economic stability?’ There must be
a genuine appreciation on the part of the government, unions and employers
that changes need to be made to our regulatory framework to achieve
economic development, which is a pre-requisite for stability and employment
creation.

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Charles Handy, in his book entitled “The Empty Raincoat” states: “If we are to
cope with the turbulence of life today, we must start by finding a way to
organize it in our minds. Until we do that we feel impotent, victims of events
beyond our control or even our capacity to understand”.

We need to take stock of the current situation and genuinely ask ourselves the
questions

a) Is this the regulatory framework required to sustain employment and

create more opportunities for employment?

b) Does this framework model secure employment?

Our current labour laws are essentially what existed prior to 1997 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 paradoxical for such
laws to remain in the statute books and for us to also expect investment and
employment generation.

What is unfortunate is that the rigidities in law entice some employers to find
devices to circumvent the laws. As John Rawls states (A Theory of Justice):
“However attractive a conception of justice might be on their grounds, it is
seriously defective if principles of moral psychology are such that it fails to
engender in human beings the requisite desire to act upon it”. Some of our
labour laws, unfortunately, encourage evasion rather than compliance. The
large informal sector which operates outside the rule of inspectors testifies to
this fact.

What we need to realize is that labour laws is not only one element of an
industrial relations system and not necessarily the most important one. It
cannot be evaluated independent of the labour relations system. What we

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need, in place of the highly legislative and inflexible labour laws and relations
systems is one which provides a basic legal framework of labour protection,
with room for flexibility in regard to contractual arrangements, work force
size, working time and functions. Balancing work protection with flexibility and
aiming for higher productivity should be a key objective. There needs to be a
shift in labour relations from traditional concepts to a greater emphasis on
developing and managing people, resulting in mutual gains.

A long time is past since the aftermath of the industrial revolution which
resulted in the State intervening with legislation to “protect” the employee.
Employment creation and job security can no longer be “protected” by an
inflexible legal regulatory framework. Laws relating to terms and conditions of
employment, collective bargaining and trade union rights cannot, per se
“protect” employment. Protection depends to a large extent on whether the
employer is in a position to carry on his business and continue to provide
employment. The perception that employment can only be “protected” and
“secured” by a regulatory framework must change. We need to look at the
challenges and threats to employment creation and sustenance. Unless we
address these issues positively, with a national focus, employment, in general
will not have any “protection”. We need to be proactive and move towards
mechanisms that would give us positive protection as opposed to ‘superficial’
protection.

The Ten Year Horizon Development Framework (Mahinda Chintana) in setting

out the employment policy in its chapter entitled “Towards a flexible and a
globally employable work force” spell out 4 policy directives which are clearly
consistent with moving towards attaining this goal. The focus areas to these
policy directives are employment generation, skills development and labour
productivity, flexible labour laws and regulations, and strengthening employer-
employee relations. Therefore, we have a clear defined policy in place in
relation to employment. What needs to be done is to translate these policies
into positive action through bringing about the necessary changes in the legal
framework.

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A clear example that we can refer to is with regard to the concept of
productivity. Successive governments have openly acknowledged and accepted
the need for higher productivity. Governments formulated national productivity
policies, productivity task force and separate institutions to enhance
productivity. All these initiatives are commendable. However, it is equally
important that this message is translated into positive action and not merely
limited to what is written down on policy statements and documents. We need
to introduce the productivity culture through adequate legal reforms. We need
to recognize performance based pay, productivity linked wages and agree on a
wider meaning to the definition of “wage” which will acknowledge all
opportunities available to an employee to enhance his earning capacity.

CONCLUSION

This submission is not exhaustive. There are obsolete and impractical provisions
in our labour laws. What is discussed herein are the most significant issues and
the related legislation which needs to be revised. What is important is that our
labour law needs to supplement and facilitate socio economic progress and
development. Our country cannot afford the delay in synchronizing the labour
law regime with our economic environment.

We are confident that you will give due regard to our submissions set out above
and facilitate the required reforms which can be initiated through a policy
statement in the National Budget Proposals for 2008/2009.

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