Labor Law in Nepal: Key Takeaways from the Labor Act, 2017 (2074)

In 2017, Nepal introduced a comprehensive overhaul of its labor regulations through the Labor Act, 2017 (2074) and its accompanying Labor Rules, 2018 (2075). This legislation governs the rights, duties, and relationships between employers and employees, setting the stage for a more equitable and structured working environment across Nepal. Whether you’re an employer, employee, or just interested in the evolving labor landscape in Nepal, this guide offers a concise yet thorough breakdown of the key provisions.

The Scope of the Labor Act

The Labor Act of Nepal is no lightweight. It covers a broad spectrum of entities, including companies, private firms, partnerships, cooperatives, associations, and even foreign entities operating in Nepal. Unlike its predecessor (the 1992 Labor Act), which applied only to entities with 10 or more employees, the 2017 Act eliminates the headcount threshold—meaning every registered business, regardless of size, must comply with the new labor regulations. If you're a foreign business with a branch or liaison office in Nepal, you're also required to follow these rules when employing local labor.

Applicability: The Labor Act covers most entities operating in Nepal, including:

• Companies and private firms
• Partnerships
• Cooperatives
• Associations or organizations
• Foreign companies operating in Nepal for business promotion

However, it doesn’t apply to civil services, Nepal Army, Nepal Police, or the Armed Police Force. Additionally, any labor laws specific to Special Economic Zones may supersede the general provisions of the Labor Act.

Types of Employment

Employment isn’t one-size-fits-all. Under the Labor Act, employment is divided into several categories:

1. Regular Employment: Full-time employees with long-term contracts.
2. Work-based Employment: Employees hired for specific tasks or projects.
3. Time-bound Employment: Temporary employees working for a specified period.
4. Casual Employment: Employees hired for short-term work (up to 7 days in a month).
5. Part-Time Employment: Employees working less than 35 hours per week.

This nuanced classification allows employers to adjust staffing models according to their business needs while ensuring clarity about employee rights.

Interns and Trainees: A New Class of Workers

An interesting development under the Labor Act is the recognition of interns and trainees as distinct types of workers, each with their own set of rights.

Interns can work up to 48 hours a week under the agreement between an employer and an educational institution. The Act ensures that interns have access to health and safety protections, and—perhaps most importantly—any intern doing work beyond their defined scope automatically qualifies as a regular employee, opening them up to the full range of employment rights. This provision is crucial for companies looking to manage internships ethically.

Trainees, on the other hand, can train for up to one year, during which they are entitled to social security benefits like provident fund, insurance, and gratuity. Trainees do not need to be employed once their training is completed, but if they are, they skip the probation period. This setup encourages employers to invest in training while protecting trainees from exploitation.

Employment Agreement: A Must-Have

Gone are the days of handshake agreements. The Labor Act mandates that every employee must have a written employment agreement, except for casual employees. This agreement must outline key details like job responsibilities, salary, benefits, terms of employment, and conditions for termination. Employers who fail to provide an appointment letter or employment agreement face hefty fines—up to NPR 5,00,000, at the rate of NPR 10,000 per laborer!

Having a formalized employment agreement protects both the employer and the employee, providing a clear reference point for dispute resolution.

Probation: The Six-Month Test

For new hires, the Labor Act establishes a six-month probation period. This timeframe allows employers to evaluate an employee’s performance before confirming them as permanent staff. It’s a crucial window for assessing skills, fit, and work ethic. On the flip side, employees get a chance to familiarize themselves with the work culture and expectations, making the probation period a two-way street.

Work Permits for Foreign Nationals: A Regulated Process

Hiring foreign nationals? You'll need to navigate a strict process to obtain a work permit. Here’s the breakdown:

1. Vacancy Notice: Publish a job vacancy in a national daily newspaper and on the government’s prescribed portal.
2. Application Submission: Submit an application for a work permit to the Department of Labor.
3. Department Review: If deemed reasonable, the Department will request the Ministry of Home Affairs for a no-objection certificate.
4. Permit Issuance: Once approved, the Department of Labor issues the work permit.
5. Visa Process: Foreign nationals can then obtain a non-tourist visa based on the work permit.

This layered process ensures that local labor markets are prioritized while allowing businesses to hire foreign expertise when necessary.

Working Hours and Overtime

The Labor Act sets clear guidelines on working hours:

• 8 hours a day, 48 hours a week.
• Overtime cannot exceed 4 hours a day or 24 hours a week.
• Employees must be given a 30-minute break after five continuous hours of work.

These regulations ensure a work-life balance for employees while giving businesses flexibility with overtime, provided it's compensated fairly.

Salaries and Benefits

The minimum salary in Nepal as of the latest government gazette stands at NPR 17,300. This includes a basic salary of NPR 10,820 and dearness allowances of NPR 6,480. Employers must also offer several additional benefits:

• Annual Increment: At least half a day’s basic salary added annually.
• Festival Allowance: One month’s basic salary per year.
• Deductions: Income tax, social security contributions (11% of basic salary), and deductions for absences.

Employees must be well-compensated for their work, and the structured approach ensures they receive regular increments, allowances, and fair deductions.

Leave Provisions

Nepal’s labor law is also quite generous when it comes to leave entitlements. Employees can expect a variety of paid leaves, including:

• Weekly Leave: 1 day per week.
• Public Holidays: 13 paid days for male employees, 14 for female employees.
• Home Leave: 1 day for every 20 working days.
• Sick Leave: 12 days of paid sick leave per year.
• Maternity Leave: 14 weeks total, with at least 2-6 weeks to be taken post-delivery.

Moreover, employees can accumulate unused leave (up to 90 days of home leave and 45 days of sick leave) and encash the excess.

Social Security Fund (SSF): A Safety Net for Workers

One of the most significant provisions of the Labor Act is the introduction of the Social Security Fund (SSF). Both employers and employees contribute to this fund, which covers provident funds, gratuities, and medical insurance. Here’s the breakdown:

Contribution	Employer	Employee
Provident Fund	10%	10%
Gratuity	8.33%	-
Social Security Tax	-	1%
Medical Insurance	1.67%	-

This system ensures that workers have access to a robust social safety net, providing for their medical needs, retirement, and unforeseen contingencies.

Disciplinary Actions: Serious Misconduct Has Consequences

For employees who breach company policies, the Labor Act outlines a range of disciplinary actions, from formal warnings and salary deductions to termination for more severe offenses like theft, embezzlement, or absenteeism for more than 30 consecutive days.

Employment Termination and Retrenchment

Employment in Nepal can be terminated for several reasons:

• End of contract (time-bound or work-based).
• Voluntary resignation with proper notice.
• Health issues that prevent continued employment.
• Retirement at the age of 58.
• Poor performance in consecutive reviews.

For retrenchment, employers must give 30 days’ notice and pay compensation equivalent to one month’s salary for each year of service.

Non-Compliance: Penalties and Fines

The Labor Act provides for serious consequences for non-compliance, including fines, imprisonment, or both. Employers found guilty of forced labor, discrimination, or failure to issue contracts, for instance, can face fines of up to NPR 5,00,000 or even imprisonment.

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Final Thoughts: Moving Towards a Fairer Labor Market

Nepal’s Labor Act, 2017, reflects a strong push towards modernizing the labor market and ensuring workers’ rights are protected. With clear provisions around contracts, work conditions, and social security, this law holds employers accountable while providing employees with a fair and structured environment to thrive in.

The key takeaway? For businesses and employees alike, understanding these rules isn’t just beneficial—it’s essential. Businesses can avoid penalties, and employees can ensure they receive the benefits they are entitled to under Nepal’s comprehensive labor laws.