Termination of Employment under Labour Law of Nepal

Termination of employment in Nepal is strictly regulated under the Labour Act, 2074 (2017) and the Labour Rules, 2075 (2018). The law seeks to balance employer flexibility with strong procedural safeguards for employees, ensuring fairness, predictability, and protection against arbitrary dismissal. This article provides a comprehensive explanation of lawful grounds of termination, notice requirements, retrenchment procedures, collective bargaining, labour court jurisdiction, and sanctions for non-compliance.

1. Grounds of Termination of Employment

Employment may be terminated only on lawful grounds expressly recognized under the Labour Act, 2017.

a. Expiry of Term

In the case of fixed-term employment, employment automatically terminates upon expiry of the term specified in the employment agreement.

Exception:
Where employment is linked to a project, employment shall continue if:

• the project duration is extended, or

• the term is extended for completion of the assigned work.

  b. Completion of Work

For work-based employment, employment terminates upon completion of the work specified in the employment agreement.

Exception:
If the employment is project-based, it shall continue where:

• the project duration is extended, or

• additional time is required to complete the assigned work.

c. Casual Employment

Casual employment may be terminated voluntarily by either the employer or the employee at any time without prior notice.

d. Voluntary Resignation

An employee may voluntarily resign by submitting a resignation in accordance with the applicable statutory notice period.

e. Unsatisfactory Work Performance

Employment may be terminated where:

• the employee’s performance is found unsatisfactory in three or more consecutive performance evaluations.

Conditions:

• Performance evaluations must be conducted based on criteria prescribed in the enterprise bylaws.

• The evaluation process must be pre-informed to the employee.

f. Bad Health

Employment may be terminated where:

• the employee is physically or mentally disabled or injured, and

• a registered medical practitioner certifies that the employee is unable to perform work or requires prolonged treatment affecting enterprise operations.

Statutory Protection to Employees

If illness or injury is caused during the course of employment or due to occupational hazards:

• employment shall not be terminated during the entire hospital treatment period, or

• for one year if treatment is taken at home; and

• full salary must be paid during such period.

For illness not arising out of employment:

• employment shall not be terminated for six months, unless medical certification confirms inability to resume work.

g. Compulsory Retirement

For regular employees, employment terminates upon completion of 58 years of age.

2. Notice Period for Termination

Except in cases of termination due to misconduct, the following statutory notice periods apply:

Failure to Give Notice

• If the employer terminates without notice, remuneration equivalent to the notice period must be paid.

• If the employee resigns without notice, the employer may deduct equivalent remuneration from payable dues.

  3. Retrenchment

     a. Grounds of Retrenchment

Retrenchment may be carried out due to:

• financial difficulty of the enterprise;

• excess employees due to merger or restructuring; or

• partial or complete closure of the enterprise for any other reason.

  b. Notice of Retrenchment

The employer must provide 30 days’ prior notice, specifying:

• grounds of retrenchment;

• proposed date of retrenchment; and

• number of employees likely to be affected.

Notice must be submitted to:

• the Labour Office; and

• the authorized trade union, effective trade union, or Labour Relations Committee (if any).

  c. Priority Order in Retrenchment

Retrenchment must be carried out in the following order:

1. Foreign nationals

2. Employees frequently subjected to disciplinary action

3. Employees with poor performance records

4. Employees last appointed among those performing similar work

   d. Retrenchment Compensation

• One month’s basic salary for each completed year of service

• Proportionate compensation for service less than one year

• Employees receiving unemployment allowance are not entitled to retrenchment compensation

  e. Re-Hiring of Retrenched Employees

If the enterprise resumes operation or requires employees within two years of retrenchment:

• retrenched employees must be given priority for re-employment; and

• a 15-day notice must be issued.

Exception:
New employees may be hired where re-employment is not possible due to:

• installation of new technology or change in production process; or

• age or physical incapacity of the retrenched employee.

  4. Collective Bargaining

     a. Formation of Collective Bargaining Committee

An entity with 10 or more employees must form a collective bargaining committee through:

• an authorized trade union;

• joint trade unions (in absence of an authorized union); or

• signatures of 60% of workers where no union exists

b. Procedure for Settlement of Collective Disputes

1. Submission of collective claim to the employer

2. Employer to issue discussion notice within 7 days

3. Application for mediation to the Labour Office if unresolved within 21 days

4. Referral to arbitration if mediation fails

c. Collective Bargaining Agreement

The following matters may be regulated through collective bargaining:

• reduction of remuneration;

• interim management during transfer of ownership;

• facilities in lieu of overtime payment;

• facilities for which remuneration may be deducted;

• grounds of employee transfer;

• remuneration during lawful strikes or lockouts;

• additional grounds for termination upon misconduct; and

• alternative retrenchment options and criteria.

5. Labour Court

   a. Establishment

The Government of Nepal may establish Labour Courts by notification in the Nepal Gazette. Each Labour Court consists of one Chairperson and two members.

b. Jurisdiction and Powers

The Labour Court may:

• examine witnesses;

• seek explanations treating them as written statements;

• summon necessary parties suo motu;

• inspect workplaces;

• issue interim or interlocutory orders;

• confirm, invalidate, or modify decisions of the Labour Office or employer; and

• exercise powers equivalent to a District Court.

c. Enforcement of Decisions

Labour Court cases must be resolved within 90 days of filing. The Government of Nepal is responsible for enforcement.

d. Appeals

Appeals against Labour Court decisions may be filed before the Supreme Court within 35 days of the decision.

6. Sanctions for Non-Compliance

   a. Sanctions by the Labour Department

Sanctions include fines and compensation for:

• unlicensed labour supply;

• engaging foreign nationals without work permits;

• discrimination among workers;

• failure to issue employment agreements.

b. Sanctions by the Labour Office

Sanctions include indemnification and fines for:

• unlawful wage deductions;

• obstruction of government officials;

• illegal engagement of interns or trainees;

• failure to deposit gratuity, provident fund, or insurance;

• discriminatory reserve practices;

• unlawful termination.

c. Sanctions by the Labour Court

• Bonded labour: imprisonment up to 2 years or fine up to NPR 500,000, or both

• Fatal safety negligence: imprisonment and mandatory compensation to the injured party

  Disclaimer:
  This article provides a overview of termination of employment provisioned under Labour Act, 2074 (2017) of Nepal. It is for general informational purposes only and does not constitute legal advice. For professional legal consultation contact Sherpa Law Associates.