The ‘Colombo Port City’ (‘CPC’) conceived to function as a separate free trade zone in the form of a ‘business and financial district’, to allow Sri Lanka to emerge as a regional ‘commercial and financial Centre’. The enabling legal framework has as its principal legislation the ‘Colombo Port City Economic Commission Act No. 11 of 2021’ (the "Act") – the Act determines the CPC as a ‘Special Economic Zone’ under the regulation and supervision of the ‘Colombo Port City Commission’ (‘Commission’). The Commission is vested with broad regulatory authority to introduce independent regulations, including the power to exempt the application of some or all of the provisions of identified national laws.

The idea and the creation of a 'free trade zone' is nothing alien to Sri Lanka. The country has from time to time in keeping with its economic development policies experimented with designated 'special economic zones'. Aligning with the country’s shift to an ‘open market economy’ in the late 1970s and through the 1980s, and 1990s, Sri Lanka declared certain areas as Free Trade Zones (FTZs), later rebranded as Export Processing Zones (EPZs) –  the first of which being Katunayake (1978)  followed by Biyagama (1985) and Koggala (1991). The enabling legal framework being the Greater Colombo Economic Commission Law No.4 of 1978 (‘GCEC’) re-constituted in 1992 as the Board of Investment (BOI) under Act No.4 of 1978.

These zones, under the GCEC and later the BOI offered tax concessions, duty-free imports, and afforded some ease of doing business practices, such as facilitating resident/work visas for expatriates, on site services by informal arrangement from state authorities  to include the Labor Department and Health Department, within the scope of national laws.

The Labor Department facilitated support working closely with both the employers and workers to
maintain an environment of industrial harmony, a sine-qua -non for continued efficient business operations in the zone.  The arrangement, albeit informal, provided the required confidence to businesses and allowed for a healthy relationship as between the employers and workers and thus, was effective in averting large scale industrial unrest and disruption to business.

Labour Law Reforms 1990 and beyond:

Changes in International standards for imports and manufacture, to include the introduction of the GSP+ scheme (Generalized Scheme of Preferences Plus, a trade incentive program offered by the European Union (EU) to developing countries that implement 27 international conventions related to human rights, labor rights, environmental protection, and good governance.) and trade agreements embodying such requirements, led to stronger and stricter worker protections requiring to be implemented and enforced within the zones. Thus, the paradigm shifted drastically towards the ‘employee’ and emboldened the Unions. To demonstrate Sri Lanka’s commitment to compliance with the new trading standards amendments were made in relevant legislation reaffirming the application of national labor laws to include, stricter interpretation of eligibility criteria and implementation of superannuation fund contributions by employers, to the Employees Provident Fund and Trust Funds, strengthening the requirement for Labour Regulator’s intervention and enhancing the powers of the Labor Tribunal in matters of termination of employment.

These circumstances, progressively leading to a breakdown of the more informal and mediated approach to industrial disputes hitherto practiced in the zones within the parameters of national law. The resultant outcome being the concern on the part of investors of possible difficult labor relations and unrest which would affect businesses serving international market standards and of the ripple effect of Sri Lanka ceasing to be as attractive for investments as other countries in the region.

A shift in Sri Lanka’s employment law landscape?

The CPC continues to be governed by national labor law as have been all other zones, except that for the very first time the relevant legislation has recognized the need for some autonomy to the Regulator, namely; the Commission, to deal with the area of industrial relations and employment within the CPC.

The Commission whilst not having explicit and unfettered authority to amend national laws under the Act, has the power to exempt businesses operating in the CPC, identified as ‘businesses of strategic
importance’ from the application of the Termination of Employment of Workmen (Special Provisions) Act No. 45 of 1971 as amended ( ‘TEWA’) – the law brings within its scope the termination of employment in the situations of closure, retrenchment and redundancy, but for disciplinary reasons. The TEWA is a considered overly protective of workers with little flexibility resulting in businesses reluctance to hire workers to be more efficient. The legal empowerment granted to the Commission, to exempt businesses from the application of such a national law is encouraging and would be a critical aspect in favor of the CPC, vis-a vis interested investors.

Likewise, the Commission in terms of its wider regulatory powers to be exercised in the form of operational and development control regulations, is expected to regulate labor practices by introducing employment regulations to include, flexibility in employment contracts to allow for longer fixed-term contracts and extended probationary periods and to provide for alternative dispute resolution mechanisms to make more efficient labor dispute resolution which would otherwise be subject to protracted processes in the regular forums such as Labor Tribunals and the Industrial Courts.

Other than as discussed in this writing businesses operating in the CPC are subject to Sri Lanka’s national labor laws, to wit; -

• The Industrial Disputes Act No. 43 of 1950 as amended
• The Shop and Office Employees Act No 19 of l954 as amended
• The Factories Ordinance No 45 of 1942 as amended
• The Employees’ Provident Fund Act No. 15 of 1958 as amended
• The Employees’ Trust Fund Act No. 46 of 1980 as amended
• The Payment of Gratuity Act No. 12 of 1983 as amended
• The National Minimum Wage of Workers Act No. 3 of 2016 as amended
• Trade Unions Act No. 18 of 1958 as amended
• The Budgetary Relief Allowance for Workers Act No. 4 of 2016 as amended
• Maternity Benefits Ordinance No. 32 of 1939 as amended

The formation of FTZ’s and EPZ’s in Sri Lanka being the first steps towards creating a ‘business-friendly’ regulatory environment, but with no concessions on the application of relevant national laws, to include in the area of labor and industrial relations and so failing to achieve its potential. The Commission with powers hitherto not vested with a regulator is a much needed and welcome step in the Sri Lanka’s evolving economic landscape, being a significant development in the direction of recognizing the importance of labor laws and its application in economic zones with a view to making a success of such zones, whilst balancing economic interests with the rights of its workers. Thus, the CPC with its legal empowerment possesses the necessary regulatory authority to implement a more flexible and business-friendly employment framework and so, the potential to fulfill its purpose and vision of becoming a world-class Special Economic Zone in South Asia.