Employment termination in Nepal is regulated by Chapter 21 of the Labor Act, 2074 (2017) and the Labor Rules, 2075 (2018). Whether you are an employer planning a lawful dismissal or an employee facing termination, understanding the legal grounds, notice requirements, severance calculations, and dispute resolution procedures is critical. Section 139 of the Labor Act states that no employment can be terminated without a proper and sufficient reason as provided under the law. This guide covers every aspect of employment termination in Nepal, from voluntary resignation to retrenchment and unfair dismissal remedies.
| Law | B.S. Year | Relevance to Termination |
|---|---|---|
| Labor Act | 2074 (2017) | Primary law: Chapter 21, Sections 139–150 govern all termination grounds, notice, severance, retrenchment |
| Labor Rules | 2075 (2018) | Procedural details for performance evaluation, misconduct inquiry, retrenchment process |
| Social Security Act | 2074 (2017) | Retirement age, unemployment allowance, SSF contributions upon termination |
| Bonus Act | 2030 (1974) | Bonus entitlement calculation upon termination |
| National Civil Code | 2074 (2017) | Contract law provisions applicable to employment agreements |
The type of employment determines how termination is handled. Section 10 of the Labor Act defines five categories.
| Type | Definition | Termination Rule |
|---|---|---|
| Regular employment | Permanent, ongoing work with full benefits | Can only be terminated per Labor Act grounds (misconduct, incompetence, retrenchment, etc.) |
| Time-based employment | Fixed-term contract specifying duration | Ends when specified term expires; project-based contracts continue until project completion even if extended |
| Work-based employment | Contract for specific task or project | Ends when specified work is completed |
| Casual employment | 7 days or less within one month | Either party may request termination |
| Part-time employment | 35 hours or less per week | Protected against unfair dismissal; entitled to safe working conditions |
Section 139 of the Labor Act requires a proper and sufficient reason for any termination. The law recognizes the following grounds under Chapter 21.
| Ground | Section | Key Requirements |
|---|---|---|
| Expiry of term | 140 | Time-based or work-based contract naturally concludes; no additional process needed |
| Voluntary resignation | 141 | Employee submits written resignation; employer must accept within 15 days |
| Incompetence / poor performance | 142 | Unsatisfactory performance for 3+ consecutive years of evaluation; 7 days’ notice for clarification (enterprises with 10+ employees) |
| Health grounds | 143 | Medical doctor’s recommendation required; cannot terminate during hospital treatment for work injury or for 1 year of home treatment; 6 months protection for non-work illness |
| Misconduct | Chapter 18 | Serious offenses (theft, fraud, violence, sexual harassment, insubordination); requires investigation, show cause notice, hearing |
| Retrenchment | 145 | Financial difficulty, merger, restructuring, closure; 30 days’ notice to Labor Office + trade union; LIFO principle; severance required |
| Compulsory retirement | 147 | Mandatory at age 60; earlier retirement only for specific work types approved by the Council |
| Mutual agreement | General | Both parties agree in writing; allows smooth transition |
| End of probation | General | Employer may terminate if employee does not meet expectations during probation period |
Except in cases of termination for serious misconduct, both the employer and employee must provide prior written notice before ending the employment relationship. The notice period depends on the duration of employment (Section 144).
| Employment Duration | Minimum Notice Period |
|---|---|
| Up to 4 weeks | 1 day |
| 4 weeks to 1 year | 7 days |
| More than 1 year | 30 days |
If the employer terminates without providing the required notice, they must pay the employee an amount equal to the remuneration for the notice period. If an employee resigns without giving proper notice, the employer may deduct the equivalent amount from any dues owed. The notice period can be waived by mutual agreement or by paying salary in lieu of notice.
Employees terminated through retrenchment or without cause are entitled to severance compensation under Section 145 of the Labor Act.
| Scenario | Calculation | Notes |
|---|---|---|
| Retrenchment severance | 1 month’s basic salary per year of service | Proportionate for less than 1 year; based on last drawn basic salary |
| Gratuity (all terminations) | 1 month’s salary per year of service | Applicable from day 1 of employment; paid upon separation regardless of reason |
| Unfair termination compensation | Up to 10 months’ remuneration | Awarded by Labor Office; calculated at rate of final year salary |
| Payment in lieu of notice | Salary for the notice period not served | Applicable when notice period is waived |
| Accumulated leave encashment | As per leave balance | Home leave can accumulate up to 36 days; paid at termination |
| Employees receiving unemployment allowance | No retrenchment compensation | If entitled to unemployment allowance under Social Security Act |
Serious misconduct allows immediate dismissal, but employers must follow due process to avoid unfair termination claims. The Labor Act and company bye-laws define the procedural requirements.
| Misconduct | Description |
|---|---|
| Theft or embezzlement | Misappropriation of company property or funds |
| Fraud or dishonesty | Falsification of records, misrepresentation |
| Violence or physical assault | Physical harm or threats against colleagues or management |
| Sexual harassment | As defined under the Sexual Harassment at Workplace Prevention Act 2071 |
| Insubordination | Repeated refusal to obey lawful orders |
| Breach of confidentiality | Unauthorized disclosure of trade secrets or proprietary information |
| Habitual absence without leave | Repeated unauthorized absences despite warnings |
| Working under influence | Attending work under the influence of alcohol or drugs |
| Step | Action | Requirement |
|---|---|---|
| 1 | Investigation | Conduct fair and impartial investigation into the alleged misconduct |
| 2 | Show cause notice | Issue written notice detailing allegations; provide specified timeframe for response |
| 3 | Hearing | Provide employee opportunity to be heard, potentially with a representative |
| 4 | Decision | Based on investigation and employee response, decide on disciplinary action |
| 5 | Written termination order | Document the decision with clear reasons; deliver to employee |
| 6 | Settlement of dues | Pay all outstanding amounts (gratuity, leave, salary) even in misconduct cases |
Under Section 142, an employer may terminate employment if the employee’s work performance is found unsatisfactory for three or more consecutive years of performance evaluation. The evaluation must follow the rules and bye-laws prescribed under the Labor Act. For enterprises employing 10 or more workers, the employer must give at least 7 days’ notice for the employee to provide clarification before termination.
Retrenchment applies when an enterprise faces financial difficulties, undergoes merger or restructuring, or needs to partially or completely close operations. The Labor Act prescribes a strict procedure.
| Step | Action | Timeline / Detail |
|---|---|---|
| 1 | Notify Labor Office and trade union | At least 30 days before retrenchment; include grounds, date, and number of affected employees |
| 2 | Consult with trade union / labor relations committee | Explore alternatives to retrenchment; agree on selection criteria |
| 3 | Apply LIFO principle | Last hired among employees in similar work is retrenched first; trade union leaders retrenched last |
| 4 | Pay severance compensation | 1 month’s basic salary per year of service (proportionate for <1 year) |
| 5 | Issue experience certificate | Mandatory under Section 150 |
| 6 | Re-hiring priority | If enterprise resumes or needs workers within 2 years, retrenched employees get first priority (15 days’ notice) |
Exemptions: Retrenchment rules under Section 145 do not apply to enterprises employing 10 or fewer workers, or where closure is ordered by the Government of Nepal or the Labor Court. Enterprises in Special Economic Zones follow separate provisions.
| Situation | Protection Period | Employer Obligation |
|---|---|---|
| Employee hospitalized for work-related accident or occupational disease | Cannot terminate during treatment | Full wages unless employee receives SSF benefits |
| Home treatment after work injury | 1 year from start of home treatment | Full wages during protection period |
| Medical treatment unrelated to work | 6 months | Employment cannot be terminated during this period |
| Medical doctor advises incapacity before protection period ends | Employer may terminate early | Must assign suitable alternative work if employee is partially capable |
Employees who believe they were terminated without a valid reason or without due process have two primary avenues for redress under Nepali labor law.
| Avenue | Process | Outcome | Timeline |
|---|---|---|---|
| Labor Office complaint | File complaint within 45 days of termination; Labor Office attempts conciliation | Compensation up to 10 months’ remuneration at final year rate; or reinstatement order | 45 days to file |
| Labor Court lawsuit | If conciliation fails, file lawsuit within 35 days of Labor Office decision | Reinstatement with or without back pay; compensation adjustment | 35 days after Labor Office decision; Court must resolve within 90 days |
| Supreme Court appeal | Appeal Labor Court decision | Final adjudication | Within 35 days of Labor Court decision |
| Violation | Penalty |
|---|---|
| Termination against provisions of the Labor Act | Fine up to NPR 500,000 at a rate of NPR 10,000 per worker; plus order to reinstate and provide back pay |
| Forced or bonded labor | Imprisonment up to 2 years, or fine up to NPR 500,000, or both; compensation at double the remuneration |
| Failure to issue experience certificate (Section 150) | Directives from Labor Office; potential fines |
| Failure to settle outstanding dues | Interest on unpaid amounts; Labor Court enforcement |
| # | Step | Documentation Required |
|---|---|---|
| 1 | Identify valid ground under Labor Act | Reference specific section (140–147) |
| 2 | Conduct investigation (if misconduct/performance) | Investigation report, performance evaluation records |
| 3 | Issue show cause notice | Written notice with allegations and response deadline |
| 4 | Provide hearing opportunity | Hearing minutes, employee response |
| 5 | Give required notice period (or pay in lieu) | Written notice or salary payment proof |
| 6 | Calculate and pay all dues | Severance, gratuity, leave encashment, bonus, PF |
| 7 | Issue experience certificate | Mandatory under Section 150 |
| 8 | Notify Labor Office (if retrenchment) | 30 days’ advance written notice |
| Right | Detail | Legal Basis |
|---|---|---|
| Written reason for termination | Employer must provide proper and sufficient reason | Section 139 |
| Notice period or pay in lieu | 1 day / 7 days / 30 days depending on service length | Section 144 |
| Gratuity payment | 1 month’s salary per year of service from day 1 | Section 148 |
| Severance (retrenchment) | 1 month’s basic salary per year of service | Section 145 |
| Accumulated leave encashment | Payment for unused home leave (max 36 days) | Labor Act leave provisions |
| Provident Fund withdrawal | Employee + employer PF contributions (10% + 10%) | Social Security Act 2074 |
| Experience certificate | Mandatory; employer must issue upon separation | Section 150 |
| Re-employment priority | Retrenched employees get first priority within 2 years | Section 149 |
| Complaint to Labor Office | Within 45 days of termination for unfair dismissal | Labor dispute provisions |
Employment termination and divorce proceedings in Nepal frequently intersect. When a spouse loses employment during an ongoing divorce case, it directly affects alimony calculations, child custody arrangements, and property division under the National Civil Code 2074.
Severance pay, gratuity, provident fund, and accumulated leave encashment received upon termination are considered income during divorce proceedings and may be subject to division. Our experienced divorce lawyer in Nepal can advise on how termination-related payments affect your divorce case.
Additionally, the Labor Act 2074 and workplace discrimination protections may be relevant if an employer terminates an employee because of their marital status change during divorce. For NRNs abroad who face simultaneous job loss and divorce proceedings, a power of attorney arrangement can help manage both matters in Nepal. Contact us at +977 9841114443.
Employment termination in Nepal is governed by Chapter 21 (Sections 139–150) of the Labor Act, 2074 (2017) and the Labor Rules, 2075 (2018). Section 139 requires that no employment can be terminated without a proper and sufficient reason as provided under the law.
The notice period depends on the duration of employment: 1 day for employment up to 4 weeks, 7 days for 4 weeks to 1 year, and 30 days for employment exceeding 1 year. The employer may pay salary in lieu of notice instead of serving the notice period.
Upon retrenchment, employees receive 1 month’s basic salary for each year of service (Section 145). For less than 1 year of service, severance is calculated proportionately. Employees receiving unemployment allowance under the Social Security Act are not entitled to retrenchment compensation.
The Labor Act 2074 recognizes: expiry of contract term (Section 140), voluntary resignation (Section 141), incompetence after 3+ years of poor evaluation (Section 142), health grounds with medical recommendation (Section 143), serious misconduct, retrenchment due to financial difficulty or restructuring (Section 145), compulsory retirement at age 60 (Section 147), and mutual agreement.
Yes. Under Section 142, if an employee’s performance is unsatisfactory for 3 or more consecutive years of evaluation, the employer may terminate employment. For enterprises with 10+ employees, at least 7 days’ notice must be given for the employee to provide clarification before termination.
Serious misconduct includes theft, embezzlement, fraud, violence, sexual harassment, insubordination, breach of confidentiality, habitual absence without leave, and working under the influence of alcohol or drugs. The employer must still follow due process: investigation, show cause notice, hearing, and written termination order.
The employer must: (1) give 30 days’ advance notice to the Labor Office and trade union, (2) consult with the union to explore alternatives, (3) apply the last-in-first-out (LIFO) principle, (4) pay 1 month’s basic salary per year of service as severance, and (5) give retrenched employees re-hiring priority within 2 years. Retrenchment rules don’t apply to enterprises with 10 or fewer workers.
No. The Labor Act protects employees from termination during hospital treatment for work-related injury or occupational disease, and for 1 year of home treatment after work injury. For non-work illness, employment cannot be terminated for at least 6 months. Full wages must be paid during the protection period unless the employee receives SSF benefits.
An employee can file a complaint with the Labor Office within 45 days of termination. The Labor Office attempts conciliation and can award compensation up to 10 months’ remuneration or order reinstatement. If conciliation fails, the employee can file a lawsuit in the Labor Court within 35 days of the Labor Office decision. Appeals go to the Supreme Court.
Employers face a fine of up to NPR 500,000 at a rate of NPR 10,000 per worker for termination against the Labor Act. The Labor Court may also order reinstatement with back pay. For forced or bonded labor, penalties include imprisonment up to 2 years, fines up to NPR 500,000, and compensation at double the remuneration.
Yes. Under Section 150 of the Labor Act, employers are legally obligated to issue an experience certificate to the employee upon termination of employment, regardless of the reason for termination. Failure to issue the certificate may result in directives from the Labor Office.
Under Section 147 of the Labor Act 2074, all regular employees must retire at the age of 60 years. Earlier compulsory retirement is allowed only for specific types of work that demand it due to the nature or conditions of the job, and must be formally approved by the relevant Council.
Yes. Under Section 149, if an enterprise resumes operations or needs employees within 2 years of retrenchment, retrenched employees must be given first priority. They must receive 15 days’ notice. The employer may hire new workers only if retrenched employees cannot be hired due to new technology, changed processes, or age/physical capability issues.
Gratuity is a terminal benefit calculated at 1 month’s salary per year of service, applicable from day 1 of employment. It is paid upon any form of separation including resignation, termination, retrenchment, or retirement. It is separate from severance compensation and must be settled along with other final dues.
Severance pay, gratuity, provident fund, and leave encashment received upon termination are considered income during divorce proceedings and may be subject to property division. Job loss also affects alimony and child custody calculations. Contact our divorce lawyer in Nepal for guidance.
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