Regulation of Labour Supply in Nepal

Introduction

Labour supply refers to an arrangement under which a licensed entity, known as a Labour Supplier, recruits and supplies workers to another entity, referred to as the Main Employer, to perform specified work or services. Under this arrangement, the workers are engaged and supplied by the Labour Supplier but perform their assigned duties at the workplace or under the operational requirements of the Main Employer. The arrangement allows businesses to obtain workers for certain support or non-core functions without directly employing those workers.

In Nepal, however, labour supply is not an unrestricted outsourcing arrangement. The prevailing labour laws regulate the manner in which workers may be supplied and limit labour supply to specified categories of work. 

Legal Framework

Labour Supply in Nepal is governed by the following legislations outlined below: 

1. Labour Act, 2074 (2017) (the “Act”)
2. Labour Rules, 2075 (2018) (the “Rules”)
3. Directive on the Management of Licensing and Renewal Procedures for Labour Supplier Companies, 2081 (2024) (the “Directives”)

Scope and Limitation of Labour Supply

From a compliance perspective, businesses should therefore undertake duty and responsibility before outsourcing labour including, but not limited to:

1. Labour supplier must maintain the required license to supply workers in accordance with the Labour Act, 2074 (2017);
2. act as the employer of the workers supplied to the Main Employer;
3. take responsible for paying the workers’ wages and benefits in accordance with applicable law;
4. determine whether the work qualifies as non-core work under the applicable legal framework; and 
5. ensure that workers engaged through the labour supplier receive all statutory remuneration and employment benefits. 

Licensing of Labour Suppliers

1.Requirement for a License

A company intending to supply workers must obtain a license from the competent labour authority. Where the proposed supply covers the areas of more than one Labour and Employment Office, the application is made to the Department of Labour and Occupational Safety (the “Department”). Where the supply is confined to the area of one Labour and Employment Office, the application is made to that Office.

The license identifies the work or service for which workers may be supplied and the applicable geographical area. A company may not supply workers for more than two works or services.

Labour supply without the required licence is prohibited. The Labour Act also provides for financial penalties and, in specified circumstances, treats workers supplied in violation of the Act as workers of the Main Employer.

2. Application Requirements

An application is submitted in the prescribed form under Schedule 7 of the Labour Rules, together with the documents and information required under Rule 27 and the Directive. These include, among other things:

1. Company registration certificate;
2. Memorandum of Association and Articles of Association, including an appropriate corporate objective covering the relevant labour-supply service;
3. PAN or VAT registration certificate, as applicable;
4. Tax clearance or other prescribed evidence of tax compliance;
5. Prescribed details of the work or services for which workers are to be supplied;
6. Prescribed documents relating to the directors and the required declarations; and
7. Evidence of registration as an employer with the Social Security Fund.

The competent authority may require additional documents or information in accordance with the applicable Rules, Directive and administrative requirements.

3. License Fee and Security

Where security is furnished by way of a bank guarantee, the  Directives requires the bank guarantee to remain valid for at least nine months beyond the validity of the labour-supplier license. 

4. Renewal of License and Validity of Bank Guarantee 

A company must submit an application for the renewal of the license obtained by it to the Department or Office issuing license before the end of the month of Ashwin (mid-September) of every year. 

Note: If a labour supplier fails to renew its licence within the prescribed period but applies within the same fiscal year, the Department or Office may renew the licence upon collection of an additional fee equal to 10% of the applicable renewal fee for each month of delay.

Permitted Areas and Restrictions on Labour Supply

A. Government-Notified Categories

The Government has, by notification in the Nepal Gazette, specified the categories of work in which workers may be engaged through labour suppliers. The notification was published in Ashoj 2075 (October 2018), and the current licensing framework continues to apply these categories.

The permitted categories broadly cover the following:

The Directive and the Department’s current administrative guidance should be consulted for the precise scope of each category. A labour supplier may obtain a licence for no more than two permitted works or services.

B. Restriction on Core Work

In addition to falling within a permitted category, the work must not constitute the core work of the Main Employer’s business or service. The Labour Act therefore imposes two separate conditions: the work must fall within a Government-notified category, and it must be outside the Main Employer’s core work.

This distinction is important in practice. The fact that a particular function appears to be a support service does not, by itself, make the arrangement lawful if the function forms part of the Main Employer’s core business.

C. Restriction on Related Labour Suppliers

A Main Employer may not obtain workers through a labour-supply enterprise established with the involvement of the Main Employer or, on behalf of the Main Employer, its manager, director or family member, as prohibited by the Labour Act.

Responsibilities of the Labour Supplier

1. maintain a valid licence and comply with the conditions attached to the licence;
2. provide supplied workers with remuneration and other benefits not less than those prescribed by law;
3. regularly obtain information from the Main Employer concerning occupational safety and health arrangements at the workplace;
4. recommend immediate corrective measures where required safety and health arrangements have not been made; and
5. inform the Department or concerned Labour and Employment Office where the Main Employer fails to implement the recommended safety and health measures.

A Labour Supplier may not collect any fee or commission from a worker whom it has supplied.

Responsibilities of the Main Employer

The Main Employer has substantial statutory responsibilities even though the workers are supplied through a separate entity. In particular, the Main Employer must:

1. engage workers only through a licensed Labour Supplier and on the basis of an appropriate written agreement;
2. ensure, before entering into the agreement, that the remuneration and benefits to be provided to the supplied workers are not less than those prescribed under the Labour Act and Labour Rules;
3. regularly monitor whether the Labour Supplier is paying the required remuneration and providing the required benefits;
4. request the Labour Supplier to make immediate payment where a failure is identified and inform the Department or concerned Office as required;
5. provide the required occupational health and safety measures at the workplace;
6. pay any statutory increase in remuneration or benefits that becomes applicable after the supplier agreement has been entered into, as required by the Labour Act; and
7. avoid obtaining workers through an enterprise established in violation of the statutory restrictions on related labour suppliers.

Additional Compliance Duties

The licensee who has obtained a license from the Office, or the Department has to submit the following details, to the Office, or the Department before the end of the month of Poush every year: 

1. Details, number, establishment of employment, and name of the principal employer of the workers supplied in the previous fiscal year;
2. Details of the remuneration, allowance, and facilities distributed to the supplied workers, and the amount of contribution deposited in the Social Security Fund for each worker;
3. Report of the labor audit conducted;
4. Details of any change in the address of the company, name of the director, contact number, or any other details related to the company.

Enforcement and Consequences of Non-Compliance

I. Unlicensed or Improper Labour Supply

The Labour Act provides for a fine of up to NPR 200,000 against a person supplying labour without the required licence and against a person employing workers through an unlicensed supplier. The Department may also issue the necessary orders under the Labour Act.

A more significant consequence is the statutory deeming provision: where a Main Employer obtains labour through an unlicensed person or company, or otherwise uses labour supply in violation of the Labour Act, the supplied workers may be treated as workers of the Main Employer.

II. Failure to Pay Remuneration and Benefits

The Labour Act provides a mechanism for protecting workers where a Labour Supplier fails to pay remuneration or other benefits. In specified circumstances, the Department or concerned Office may arrange payment from the supplier’s security deposit or bank guarantee.

Where a supplier’s licence is cancelled, the supplier is required to settle outstanding remuneration and benefits within 15 days. If the supplier fails to make the payment, the statutory mechanism for payment from the security deposit or bank guarantee may be invoked.

III. Suspension, Cancellation and Fines

Depending on the nature of the breach, the competent authority may cancel or suspend a labour-supply licence and may impose fines where permitted by the Labour Act. Before suspension in the circumstances prescribed by the Rules, the supplier is given an opportunity to submit its defence within the prescribed period.

The Labour Act also provides for a fine of up to NPR 25,000 for specified violations of conditions or directions. The applicable sanction depends on the nature and circumstances of the breach.

Conclusion

Labour supply in Nepal is a regulated form of outsourcing, subject to licensing requirements and restrictions on the types of work that may be outsourced. Both Labour Suppliers and Main Employers have statutory responsibilities regarding workers’ remuneration, benefits, social security and workplace safety. Compliance with these requirements is therefore essential to avoid fines and other legal consequences.

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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