Labor Law in Nepal
The Labor Act, 2017 (2074) (“New Labor Act”) came into effect following its enactment by the Parliament on August 11, 2017 (Shrawan 27, 2074) and presidential assent on September 4, 2017 (Bhadra 19, 2074). This legislation replaced the Labor Act, 1992 (2048), fundamentally reforming the labor law regime in Nepal. This article outlines the key provisions of the New Labor Act, highlighting critical changes that employers, employees, and foreign investors must understand for legal compliance.
Broad Definition of “Entity”
The Labor Act, 2017 applies to all types of entities, including companies, partnerships, cooperatives, NGOs, and any organization engaged in commercial or service activities, regardless of profit motive.
Removal of Headcount Threshold
Unlike the previous regime, which applied only to establishments with 10 or more employees, the Labor Act applies to all entities, regardless of the number of workers. However, certain internal labor relations structures (e.g., collective bargaining committees) are mandatory only if the entity employs 10 or more workers.
Foreign Entities Operating in Nepal
Entities incorporated abroad but conducting marketing, sales, or hiring employees in Nepal are within the Act’s scope. Workers engaged by such entities may seek redress in the Labor Office or Labor Court for violations of employment terms.
Domestic Workers
The Act introduces regulations for domestic workers, ensuring:
Minimum wage and weekly/public holidays,
Cultural and religious leave,
Deductions for food/lodging only if provided.
Exemptions
The Act does not apply to:
Civil servants,
Armed forces,
Special economic zone (SEZ) employees governed by separate laws,
Working journalists (unless otherwise provided by contract),
Employees of foreign diplomatic missions (due to diplomatic immunities).
Hiring Provisions Under Labor Law
Classification of Employment
The Labor Act introduces multiple categories of employment:
| Type | Description |
|---|---|
| Regular | Ongoing employment not categorized as casual, time-bound, or part-time. |
| Work-Based | For specific tasks or services. |
| Time-Bound | For a fixed duration. |
| Casual | Engagement up to 7 days in a month. |
| Part-Time | Less than 35 hours per week; eligible for proportional pay and social security benefits. |
Interns and Trainees
Interns: Permitted under educational programs via formal agreement. Capped at 8 hours/day or 48 hours/week.
Trainees: Training periods may last up to one year. Entitled to social security and minimum pay but not guaranteed employment.
Outsourcing of Labor
The Act formally recognizes labor outsourcing, which was previously practiced based on judicial interpretation.
Key Provisions:
Permitted Tasks: Outsourced workers cannot be engaged in an entity’s core business functions.
Licensing: Labor suppliers must be licensed by the Labor Office/Department.
Employer Responsibility:
Must verify payment of minimum wages and benefits.
Inform the Labor Office if violations occur.
Ensure labor suppliers comply with legal obligations.
Penalties
Non-compliant suppliers may be fined up to NPR 25,000, and workers’ dues may be recovered from the supplier’s bank guarantee.
Hiring Foreign Nationals under labor law
The Labor Act retains the restriction that foreign nationals can only be employed when no qualified Nepali workers are available. However, new flexibilities have been introduced.
Highlights:
Work Permit Requirement: Mandatory unless exempted by treaty or diplomatic immunity.
Vacancy Advertisement: Entities must advertise jobs locally before applying to hire foreigners.
Special Provisions:
Executive positions in foreign-invested companies may be recorded instead of undergoing full permit procedures.
Short-term technical experts (less than 3 months) can be recorded directly.
Employment Contract & Repatriation
Contracts must be in English or a language understood by the foreign national.
Income may be repatriated in convertible currency.
Probation Period under labor law
| Previous Act | Labor Act |
|---|---|
| 1 year | 6 months |
Working Hours & Overtime
Standard Work Hours: 8 hours/day, 48 hours/week.
Overtime: Increased to 24 hours/week (previously 20 hours).
Women Workers: Transportation must be arranged if work begins before sunrise or ends after sunset.
Leave and Holidays
| Type | Previous Act | Labor Act |
|---|---|---|
| Weekly Off | 1 day/week | 1 day/week |
| Public Holidays | 13 days | 13 + 1 additional for women |
| Sick Leave | 15 days (half-paid) | 12 days (fully paid) |
| Maternity Leave | 52 days (fully paid) | 14 weeks, 60 days paid |
| Paternity Leave | Not provided | 15 days, fully paid |
| Home Leave | 1 day per 20 worked days (60 days max) | 1 day per 20 days (90 days max) |
| Leave in Lieu | Not provided | Provided if working on holidays |
| Leave Encashment | At end of service | Home (90 days) + Sick (45 days) |
Terminal Benefits
Gratuity
| Previous Act | Labor Act |
|---|---|
| Graded by years of service | Flat 8.33% of basic salary from day one |
| Annual allocation | Monthly contribution |
Provident Fund
10% contribution by employer and employee.
Mandatory from the first day of employment; deposited in the Social Security Fund.
Leave Encashment
Encashment of up to 90 days of Home Leave and 45 days of Sick Leave upon separation.
Additional Benefits
| Benefit | Labor Act |
|---|---|
| Festival Bonus | One-month salary annually (pro-rated for <1 year service) |
| Medical Insurance | NPR 100,000/year; 50-50 cost sharing |
| Accident Insurance | NPR 700,000; employer-funded |
| Disability/Death Compensation | Based on insurance policy |
| Housing Fund | Removed from employer obligation |
Safety & Health Provisions
Employer Obligations
Formulate and register a Safety and Health Policy.
Establish a Health and Safety Committee (if 20+ workers).
Provide training, protective equipment, and mitigate health hazards.
Prevent communicable diseases in the workplace.
Employee Duties
Use safety gear.
Report hazards.
Cooperate with health policies.
Special Provisions
Pregnant workers must be assigned light duties.
Workers may stop work in case of imminent risk of injury or harm.
Disciplinary Actions under the Labor Law
The Labor Act, 2017 introduces notable reforms to disciplinary measures in Nepal’s labor regime. Notably, suspension is no longer a form of punishment. Instead, salary deduction and withholding of promotion or salary increment have been introduced as legitimate disciplinary actions. The Act also revises the list of misconducts warranting disciplinary action. The comparative framework of misconducts and their corresponding disciplinary actions under the previous and current legislation is outlined below:
| Punishment | Misconducts (Previous Act) | Misconducts (Current Labor Act) |
|---|---|---|
| Warning | – Misuse of health/safety items- Frequent unauthorized absence- Violating internal directives- Misbehaving with customers | – Unauthorized absence or early exit- Frequent tardiness- Defying superiors’ work orders- Other misconducts as per Bylaws |
| Withholding of Annual Increment or Promotion for One Year | – Embezzlement- Participating in unauthorized strikes- Willful slowdown of work- Destruction or unauthorized removal of property | – Unauthorized use/removal of property- Reckless destruction of property- Obstructing essential supplies or movement- Willful misuse of health/safety arrangements |
| One-Day Salary Deduction | Not specified | – Refusal to accept punishment letter- Participating in illegal strikes- Delaying work collectively- Causing production loss- Submitting false information- Not using safety equipment |
| Suspension (up to 3 months) | – Creating unrest- Obstructing essential services- Accepting or offering bribes- Alcohol consumption | No longer applicable as punishment(Can be suspended for investigation or if in judicial custody) |
| Dismissal from Service | – Physical assault- Theft- Absence for 30+ days- Conviction for moral turpitude- Disclosure of trade secrets | – Physical harm- Bribery- Theft or embezzlement- Knowingly damaging property- Extended unauthorized absence- Falsification of documents- Drug/alcohol abuse- Repeated misconduct within 3 years- Sexual harassment |
The Act clearly establishes that workplace sexual harassment is subject to disciplinary action, including dismissal.
Termination of Employment
The Act specifies additional grounds for lawful termination of employment:
a. Voluntary Resignation
An employee may resign by submitting a written resignation, which must be approved within 15 days. If not approved, the resignation becomes effective on the 16th day. Continued service after that voids the resignation.
b. Compulsory Retirement
The retirement age has been raised from 55 (previous law) to 58 years.
c. Time-Bound Employment
Employment automatically terminates upon expiry of the contract period.
d. Work-Based Employment
Ends with the completion of assigned work unless the project is extended.
e. Poor Performance
Employment may be terminated after three or more unsatisfactory performance appraisals, provided the employee is given a seven-day window to respond.
f. Medical Inability
Termination is permissible upon medical certification of physical or mental incapacity. However, if the injury results from a workplace accident, the employer cannot terminate the employee within one year of beginning treatment.
g. Notice Requirement
Termination must be preceded by a notice based on the duration of employment:
| Employment Period | Notice Period |
|---|---|
| Up to 4 weeks | 1 day |
| 4 weeks to 1 year | 7 days |
| More than 1 year | 30 days |
Failure to provide notice requires compensation in lieu of notice.
Retrenchment Flexibility
The requirement for prior approval from the Department of Labor has been replaced with a simplified mechanism. Employers can retrench workers through an agreement with a trade union or labor relations committee. If an agreement is not reached, the employer must notify the Labor Office.
Retrenchment Compensation: One month’s salary per year of service.
Exclusion: No compensation for workers receiving unemployment benefits or if the business employs fewer than 10 individuals.
Collective Bargaining and Dispute Resolution
Formation of Collective Bargaining Committee
In workplaces with 10+ employees, a committee must be formed by an authorized trade union, or by 60% of workers where no union exists.
Exclusions from Collective Demands
Collective demands must not:
Contradict the Constitution
Be baseless or defamatory
Involve personal conduct
Be unrelated to the entity
Conflict with existing agreements
Address social security rates or benefits
Procedure for Dispute Resolution
Written claim by committee
Employer must call for talks within 7 days
If unresolved within 21 days, mediation may be initiated
Strike Provisions
Employees may strike if mediation fails, with a 30-day notice
No secret ballot required
Must be peaceful and must not obstruct premises
Mandatory arbitration in cases involving:
Essential services
Special Economic Zones
Declared state of emergency
Arbitration Tribunal
Composed of representatives from labor, employer, and government. Awards and agreements are binding.
Lockout
Management may initiate a lockout with Labor Office approval during illegal or violent strikes.
Remuneration During Disputes
Lawful strike/lockout: Half salary
Unlawful strike: No salary
Unlawful lockout: Full salary
Government Intervention
Government can mandate arbitration if a dispute poses economic risks.
Industry-Wide Bargaining
Collective bargaining can be conducted at the industry association level, eliminating the need for individual negotiations at each entity.
Sanctions
The labor law of Nepal imposes tiered sanctions based on the authority and nature of violations:
a. Labor Office Sanctions
| Offense | Consequence |
|---|---|
| Unauthorized deductions | Double indemnity |
| Obstruction/fraud | Fine up to Rs. 20,000 |
| Misuse of interns | Fine up to Rs. 10,000/intern |
| Failure to deposit gratuity or insurance | Double indemnity |
b. Labor Department Sanctions
| Offense | Consequence |
|---|---|
| Unlicensed labor supply | Fine up to Rs. 200,000 |
| Hiring without work permit | Fine up to Rs. 200,000 + Rs. 5,000/month/person |
| Discrimination | Fine up to Rs. 100,000 |
| No appointment letter | Rs. 10,000/worker (up to Rs. 500,000) |
c. Labor Court Sanctions
| Offense | Consequence |
|---|---|
| Bonded labor | Up to 2 years’ imprisonment or Rs. 500,000 fine or both |
| Death/injury due to neglect | Up to 2 years’ imprisonment; compensation required |
Social Security
The Act mandates that retirement benefits such as gratuity and provident fund be deposited into the Social Security Fund established under the Social Security Act, 2017.
Other Key Provisions
a. Composition of Labor Court
The court comprises a chairperson and two members. Decisions are made by majority vote.
b. Appeal Process
Appeals against Labor Office/Department decisions must be filed within 35 days.
Termination or disciplinary actions by an employer can also be appealed within 35 days.
Final appeals are made to the Supreme Court.
Labor Court appellate decisions are final.
c. Enforcement of Decisions
Orders from the Labor Court must be implemented upon finality. Non-compliance leads to enforcement measures, including property freezing, suspension of permits, or fines/imprisonment up to one year.
d. Restrictions on Management
Managerial-level employees are barred from participating in collective bargaining or strikes.
e. Performance Appraisals
Annual appraisals must be based on transparent criteria. Employees have the right to contest and request review of the appraisal.
f. Work Experience Certificates
Upon termination, the employee has the right to receive a certificate stating the duration of service and position held.