This paper looks at the nature of informal employment in Sri Lanka along three dimensions: its extent and nature; the characteristics of workers that increase the probability of engaging in informal employment, rather than in formal employment; and the determinant of informal employees’ wages when compared with formal employees’ wages. It is the first study in Sri Lanka that looks at informality in employment arrangements in terms of occupations or jobs as well as in terms of production units. Therefore, it uses the broader and internationally accepted definition of informality determined by the 15th International Conference of Labour Statisticians, which takes into account changes in employment relations that have occurred worldwide during the last 20 years. Almost two-thirds of total employment in Sri Lanka is informal which is a serious concern. Therefore, Sri Lanka has to formulate better policies to concentrate on ensuring decent work standards in informal jobs, particularly on implementing measures that improve productivity and incomes, enforce regulations relating to occupational safety and health, and strengthen social insurance, assistance and welfare schemes.