Labour compliance in Nepal is more than a procedural requirement; it is the structural foundation for a stable, lawful, and efficient business. Compliance ensures that employers mitigate financial, operational, and reputational risks while fostering harmonious employer-employee relations.
The legal framework governing labour compliance is anchored primarily in:
- Labour Act, 2074 (2017);
- Labour Regulations, 2075 (2018);
- Social Security Act, 2075 (2018);
- Bonus Act, 2030 (1974);
- Social Security Schemes Operational Directives, 2075 (2018).
These laws set the minimum standards for employment, meaning any employment contract offering less than the prescribed benefits is legally void. While employers may voluntarily provide better benefits, compliance with the statutory baseline is mandatory.
1. Applicability
The Labour Act applies broadly to employment relationships across the private and organized sectors in Nepal. The law adopts a wide definition of both “employer” and “enterprise,” ensuring that most forms of organized employment fall within its regulatory scope. In general, unless an employment relationship is specifically governed by another law providing service conditions and benefits, the Labour Act applies as the default labour legislation in Nepal. For clarity, the scope of application can be understood as follows:
Applicable:
- Any person or enterprise employing labour;
- Managers acting on behalf of an enterprise;
- Labour suppliers providing workers under labour-supply arrangements;
- Enterprises including companies, private firms, partnership firms, cooperative organizations, associations, or any organization established or operating under prevailing law, whether operating with or without profit motive.
Non-Applicable (Section 180 of the Labour Act):
- Nepal Army, Nepal Police, Armed Police Force, and National Investigation Department;
- Civil service employees governed by civil service laws;
- Services established under special legislation where service conditions and benefits are governed by such laws;
- Services operating within Special Economic Zones where separate legal provisions apply.
Where a special law governing employment does not address remuneration, service conditions, or employee benefits, the relevant provisions of the Labour Act shall automatically apply. Likewise, where an employer governed by the Working Journalists Act, 2051 (1993) executes an employment contract applying the Labour Act, the provisions of the Labour Act shall apply to those employees.
2. Employment Categories and Contractual Obligations
A well-defined employment structure is key to legal and operational clarity. Nepalese law recognizes five distinct categories of employment, details of which are as follows:
- Regular Employment: Ongoing employment that does not fall under other types of employment;
- Work-Based Employment: Tied to a specific work/task, ends when the work/task is completed;
- Time-Based Employment: Fixed-duration contracts for completing a specific task;
- Casual Employment: Short-term work up to 7 days per month;
- Part-Time Employment: Employees working 35 hours or less per week.
Nepalese labour law requires a written employment agreement for all employees except for “Casual Employment.” These agreements define the employment relationship, remuneration, benefits, and working conditions.
Probationary Period: New employees are subject to a maximum of 6-month probation. Employers may terminate unsatisfactory employees during this period.
3. Working Hours, Overtime, and Leave Entitlements
3.1 Working Hours
The standard work schedule is 8 hours per day and 48 hours per week, with a mandatory 30-minute break after 5 hours of continuous work.
3.2 Overtime
Overtime work is permitted up to 4 hours per day and 24 hours per week, compensated at 1.5 times the hourly rate.
3.3 Leave Entitlements
Employees are entitled to different types of leave, some of which are guaranteed by law, while others are provided at the discretion of the employer:
- Weekly Holiday (1 day/week);
- Public Holidays (13–14 days).
- Sick Leave (12 days/year, which can be accumulated up to 45 days);
- Home Leave (1 day per 20 worked, which can be accumulated up to 90 days);
- Maternity Leave (98 days, 60 fully paid);
- Paternity Leave (15 days);
- Paternity Leave (15 days).
While sick, maternity, and mourning leave are matters of right and must be granted as per law, home leave, paternity leave, and public holidays are considered discretionary, and the employer may adjust the timing based on operational requirements.
4. Remuneration, Benefits, and Social Security
Fair remuneration and social security compliance are critical pillars of labor law in Nepal. They protect employees and reduce employer liability.
Current Minimum Wage: NPR 19,550 per month, generally structured as 60% basic salary and 40% allowances.
Other Benefits:
4.1 Grade Increment
Employees are entitled to an annual grade increment of at least half a day’s basic salary for each completed year of service, unless a higher increment is provided under company policy or employment agreement.
4.2 Festival Allowance
Employers must provide a festival allowance equivalent to one month’s basic salary to employees who have completed one year of service. Employees who have not completed one year are entitled to the allowance on a pro-rata basis. In practice, this allowance is commonly paid during major national festivals such as Dashain, though the timing may be determined by the employer.
4.3 Social Security Fund (SSF)
The Social Security Fund is a mandatory contribution-based social protection system established under the Social Security Act, 2075. Employers are required to enroll employees in the SSF and deposit monthly contributions based on the employee’s basic salary.
The contribution structure is as follows:
Employer Contribution (20%):
- Provident Fund : 10%
- Gratuity : 8.33%
- Social Security Schemes : 1.67%
Employee Contribution (11%):
Provident Fund and insurance schemes deducted from the employee’s basic salary. Mandatory contribution-based system:
4.4 Bonus Entitlement
The Bonus Act, 2030 (1974) establishes a statutory profit-sharing framework between employers and employees. Enterprises that earn net profit in a fiscal year are required to allocate a portion of that profit for employee bonus distribution. The objective of the law is to ensure that employees benefit from the financial performance of the enterprise.
The key compliance requirements under the Bonus Act are as follows:
- Eligibility:
Employees who have worked for at least six months during the fiscal year are entitled to receive bonus.
- Bonus Allocation:
Enterprises must allocate 10% of net profit to a bonus fund after payment of taxes and statutory allocations.
- Maximum Bonus Limit:
The Act prescribes ceilings on bonus distribution:
- Employees earning up to twice the minimum wage: up to eight months’ salary.
- Employees earning more than twice the minimum wage: up to six months’ salary.
- Distribution Timeline:
Bonus must be distributed within eight months from the end of the fiscal year.
- No-Profit Situation:
If the enterprise does not generate net profit in a fiscal year, bonus distribution is not mandatory. However, employers should maintain proper financial records to demonstrate the absence of distributable profit.
5. Termination of employment
The Labour Act, 2074 (2017) provides specific rules governing the termination of employment in Nepal, which vary depending on the nature of employment and the grounds for termination. Compliance with these provisions is essential to ensure that termination is legally valid and enforceable.
In the case of time-bound employment, the employment relationship automatically terminates upon expiry of the period specified in the employment agreement. However, where the duration of a project is extended due to the nature of work, the employment may continue until completion of the extended term.
Similarly, work-based employment terminates upon completion of the specific work or project for which the employee was engaged. Where the scope of work expands or remains incomplete due to operational requirements, the employment must continue until such work is fully completed.
For casual employment, which is inherently short-term and intermittent, the employment may be terminated by either the employer or the employee at any time, without the requirement of formal notice.
Apart from termination based on the nature of employment, an employee may voluntarily terminate the employment relationship by submitting a written resignation. The employer is required to acknowledge such resignation within fifteen days, failing which it is deemed accepted. Termination may also be initiated by the employer on legally recognized grounds, including unsatisfactory performance, physical or mental incapacity affecting work, or misconduct. In such cases, the employer is generally required to follow due process, including providing the employee an opportunity to respond before taking a final decision.
Except in cases of misconduct or where otherwise exempted, termination of employment requires prior notice. The applicable notice period is based on the period of employment, which includes, for employment up to 4 weeks: 1 day; for employment of 4 weeks to 1 year: 7 days; and for employment period of more than 1 year: 30 days. Where notice is not provided, payment in lieu of notice must be made.
Employers may also terminate employment through retrenchment in circumstances such as financial constraints, restructuring, or closure of operations, subject to payment of statutory compensation. Additionally, employees are subject to compulsory retirement upon attaining the age of 60 years, unless otherwise approved.
Upon termination, the employer must settle all outstanding remuneration and statutory benefits within the prescribed timeframe and provide a certificate of employment. Any employee aggrieved by termination has the right to seek legal remedy before the Labour Court.
Disclaimer: This article is for general informational purposes only and does not constitute legal advice, advertisement, personal communication, solicitation or inducement. No attorney-client relationship is created through this content. Gandhi & Associates assumes no liability for any consequences resulting from actions taken based on information contained herein.
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