Labour Law Considerations After Incorporating in Nepal

After a company incorporation in Nepal, foreign investors must navigate the country's labour laws to ensure full compliance. Nepal’s labour framework has evolved in recent years (with major updates up to 2025) to protect employees and define clear obligations for employers. This article provides a detailed overview of the key labour law considerations for foreign companies operating in Nepal, covering practical HR and compliance guidance from hiring and contracts to working hours, wages, social security contributions, and workplace safety. Large multinational firms will find this guide useful for aligning their policies with Nepali regulations and avoiding penalties or disputes.

Employment Contracts and Hiring Requirements

Written Employment Agreements: Under Nepal’s Labour Act, 2017, every employee (except very short-term casual labour) must have a written employment contract. This contract should clearly outline the job role, working hours, remuneration and benefits, work location, and all other terms and conditions of employment. For casual engagements (such as work under 7 days a month), a formal contract may not be strictly required, but it’s best practice to document terms even for short assignments.

Probation Period: Employers can set a probation period to evaluate new hires. Nepali law permits a probationary period of up to 6 months. During probation, employees typically receive all statutory rights, but either party can terminate with shorter notice. After successful completion, the employee becomes a regular staff member with increased job security under the law.

Categories of Employment: Companies should be aware that Nepali law recognizes various types of employment contracts:

• Regular (Permanent) Employment: Indefinite-term employment for ongoing roles.

• Fixed-Term or Task-Based: Contracts for a specific project or fixed duration, or for work that is seasonal or time-bound.

• Casual or Part-Time: Engagement for 35 hours or less per week, or on an as-needed basis (often with no more than 7 days of work in a month). These may have simplified contract requirements.

Each category has specific legal implications for benefits and termination, so choose the appropriate contract type for each hire.

Local Hiring and Work Permits: Foreign companies should prioritize hiring Nepali citizens for positions unless specialized expertise is unavailable locally. To employ foreign nationals in Nepal, a work permit is mandatory. The Labour Act requires that employers obtain approval from the Department of Labour, demonstrating the necessity for a foreign worker. Failing to secure work permits for expatriate staff can lead to legal penalties and visa issues. Plan ahead if you intend to bring in foreign managers or technical experts, as the approval process can take time.

Working Hours and Overtime Regulations

Standard Working Hours: The standard work schedule in Nepal is 8 hours per day and 48 hours per week. Employers must provide at least one day off as a weekly rest day (in practice, most businesses observe Saturday as the weekly holiday). The Labour Act also mandates a 30-minute break (e.g., for lunch or rest) after every 5 hours of continuous work to ensure employee well-being.

Overtime Limits: Overtime work is permitted, but strictly regulated. An employee may work a maximum of 4 hours of overtime per day and up to 24 hours of overtime in a week. This cap prevents excessive working hours and promotes work-life balance. Employers should carefully monitor staff hours to stay within these limits. Importantly, overtime must always be voluntary – employees should not be forced to work beyond normal hours without consent.

Overtime Compensation: When overtime is worked, it must be compensated at 1.5 times the normal hourly wage (time-and-a-half pay). This legal requirement incentivizes employers to limit excessive hours and fairly rewards employees for extra work. Ensure your payroll system accounts for the higher overtime pay rate, and maintain records of hours worked (in case of inspections by labour authorities).

Night Shifts and Female Employees: If your operations involve night shifts or early-morning shifts, be aware of additional safety requirements. For any work that extends into late night or predawn hours, especially involving female employees, employers are obligated to provide safe transportation. Nepal’s labour regulations emphasize the safety of women working at night; companies should arrange pick-up/drop-off services or other security measures for female staff whose shifts end after sunset or begin before sunrise.

Minimum Wage and Salary Structure

Minimum Wage Standards: Nepal mandates a minimum wage that is reviewed and updated by the government periodically. As of the latest update (effective 2023/24), the national minimum wage for full-time workers is NPR 17,300 per month. This typically includes a basic salary plus a dearness allowance (cost-of-living allowance). All employers must pay at least this minimum amount to employees, and any in-kind benefits cannot substitute for the cash wage floor. Keep informed on government announcements, as the minimum wage is usually revised every few years to reflect inflation and living costs.

Wage Structure and Payment: It is common in Nepal to structure salaries into components (basic pay, allowances, bonuses), but the sum of basic and mandatory allowances must meet or exceed the minimum wage. Wages are generally paid monthly. The law requires timely payment – monthly salaries should be disbursed within the stipulated time (often within a week after the end of the pay period). Delays or withholding of wages can result in legal penalties. It’s prudent for foreign companies to establish a reliable payroll process that complies with local norms, including providing payslips to employees and proper tax withholding as per Nepali tax law.

Annual Festival Bonus: A distinctive aspect of Nepali compensation is the mandatory festival allowance (often called a Dashain bonus). Employers must provide an annual bonus equivalent to at least one month’s basic salary (after one year of service). This is usually given during the Dashain festival (around September/October), which is Nepal’s major festival, but it applies regardless of the employee’s religion or background. Budget for this extra payment in your annual payroll planning.

Equal Pay and Non-Discrimination: Nepal’s labour law prohibits discrimination in remuneration. Male and female employees (and any other groups) must receive equal pay for equal work. Large companies should ensure that their compensation structure is based on role and performance, not on gender, caste, or other personal attributes. Violations of equal pay or any form of workplace discrimination can attract fines up to NPR 100,000 and damage the company’s reputation. It’s advisable to conduct periodic salary audits to ensure fairness and compliance with these requirements.

Leave and Holiday Entitlements

Weekly Rest and Public Holidays: Every employee is entitled to at least one full day off each week (typically Saturday by custom). In addition, Nepal recognizes numerous public holidays each year. Employers should provide around 13 to 14 paid public holidays annually to cover major national festivals and observances. Key holidays include Dashain (Navaratri festival period), Tihar (Diwali), Nepali New Year (mid-April), Buddha Jayanti, Maha Shivaratri, and others reflecting Nepal’s cultural diversity. If employees are required to work on a public holiday due to business necessity, they must be given a substitute day off (compensatory leave) or appropriate holiday pay as per law.

Annual Leave (Home Leave): Employees accrue paid annual leave at the rate of 1 day for every 20 days worked, equivalent to about 1.5 days per month (around 18 days of annual leave per year for a full-time employee). This leave (sometimes called “home leave”) is intended for personal time off or travel home. Unused annual leave can accumulate up to a maximum of 90 days if not taken; however, many companies encourage staff to utilize their leave for work-life balance. Some employers allow encashment of unused leave at the end of the year or upon termination of employment, but this should be aligned with company policy and legal provisions.

Sick Leave: Nepal’s labour laws provide for 12 days of paid sick leave per year. Employees are generally eligible for sick leave from the start of employment (with unused sick leave accruing proportionally during the first year). Unused sick leave can be carried over up to a limit (commonly up to 45 days maximum accumulation). When availing sick leave, employees should inform the employer as soon as possible, and a medical certificate may be required if the sick absence lasts more than a few days. Employers should not penalize employees for legitimate sick leave, as this time off is protected by law.

Maternity and Paternity Leave: To support workers with families, Nepal mandates generous parental leave benefits:

• Maternity Leave: Female employees are entitled to 14 weeks (98 days) of maternity leave for each childbirth. Out of this, the first 60 days (approximately 8½ weeks) are fully paid leave provided by the employer. The remainder of the leave period can be taken as unpaid leave if needed. New mothers typically take some leave before the due date and the rest after childbirth. Employers should not terminate or disadvantage an employee for taking maternity leave, and it’s prudent to plan workload coverage in advance of a maternity absence.

• Paternity Leave: Male employees are entitled to 15 days of paid paternity leave to support the mother and newborn, usually around the time of birth. This leave is shorter but gives new fathers time to attend to family needs. Paternity leave must be granted when requested around childbirth and cannot be denied if the timing is reasonable.

Other Leaves: Nepali labour law also provides for additional leave types:

• Bereavement (Mourning) Leave: In the event of the death of an immediate family member, an employee may take up to 13 days of bereavement leave with full pay. This aligns with cultural practices (such as 13-day mourning rituals) and allows employees time to perform funeral rites and cope with their loss.

• Educational Leave: Employees who are pursuing formal education (for example, attending school or university while working) are allowed up to 10 days of leave for examinations in a year. Employers should accommodate exam schedules so long as the total educational leave is within this limit.

• Replacement Leave: If an employee is required to work on a weekly day off or on a public holiday, they are entitled to a replacement leave (a paid day off in lieu) on another day. This ensures employees get proper rest even if the nature of work demands occasional holiday or weekend work.

All these leaves are statutory minimums; employers are free to offer more generous leave benefits if they wish. It’s important to maintain accurate leave records for each employee and incorporate leave policies in the company’s HR handbook. Also, communicate to employees their leave entitlements and the procedure to request leave to foster transparency and compliance.

Social Security Contributions and Benefits

Mandatory Social Security Fund (SSF): Nepal has implemented a contribution-based Social Security Fund system to provide long-term social protection to employees. Effective from 2025, enrollment in the Social Security Fund is compulsory for all employers and employees in the formal sector. This means that every company operating in Nepal must register itself and its staff with the SSF and make monthly contributions. In fact, proof of regular SSF contributions is now required when renewing a business license in Nepal, underscoring how critical compliance has become.

Contribution Rates: The SSF contribution is shared between employer and employee, totaling 31% of the employee’s basic salary. The breakdown is as follows:

• Employer contribution: 20% of basic salary.

• Employee contribution: 11% of basic salary (deducted from the salary).

These contributions are allocated to various social security schemes managed by the government, such as pension (old-age benefits), medical and maternity benefits, disability and accident insurance, and dependent family support. Essentially, the SSF combines what used to be separate provident fund and gratuity contributions into one integrated scheme.

Provident Fund and Gratuity (Legacy System): Before the SSF became mandatory, employers were obligated to contribute to an employee provident fund (typically 10% from the employee’s wage matched by 10% from the employer) and to set aside gratuity (severance) pay liabilities. Under the current system, companies registered with SSF fulfill the provident fund and gratuity requirements via the 20% employer contribution. If a company has not yet transitioned to the SSF (which it legally should by now), it must still provide:

• Provident Fund (PF): 10% of the employee’s salary contributed by the employee, with a matching 10% from the employer, deposited into an approved fund (such as the government-managed Employees’ Provident Fund or a private fund scheme).

• Gratuity: A severance reserve typically equivalent to 8.33% of monthly salary (one month’s salary per year of service) to be paid out when an employee leaves after at least one year of service.

However, all new companies are expected to join the SSF, streamlining these benefits into the government fund. Non-compliance is risky — companies not enrolled in the SSF can face penalties, and employees could demand the PF and gratuity in cash. In practice, joining the SSF is now the standard route.

Other Mandatory Benefits: Employers must also ensure the following benefits as per law:

• Medical Insurance: Provide each employee with health insurance coverage of at least NPR 100,000 per year. The insurance premium for this coverage is shared equally between employer and employee (50% each). This insurance helps cover hospitalization or major medical expenses for employees.

• Accident Insurance: Every employee must be covered by an accident insurance policy of at least NPR 700,000 (approximately USD 5,500). This insurance, fully paid by the employer, provides compensation in case of workplace accidents, injuries, or death. It’s a critical safety net, especially for employees in higher-risk roles.

• Festival Allowance: (As noted in the wage section) a yearly bonus equivalent to a month’s basic salary is mandated after one year of service.

By complying with social security and insurance obligations, foreign companies not only fulfill legal requirements but also demonstrate commitment to employee welfare. Note that contributions to the SSF have tax benefits for employees (a portion of contributions can be tax-deductible), and the fund provides various benefits like pensions, maternity payments, medical coverage, and disability protection, which can aid in employee retention.

Enforcement and Penalties: The government is strengthening enforcement of social security compliance. Employers who fail to register for SSF or neglect contributions can be subject to back-payment of missing dues with 10% interest, fines up to NPR 100,000, and even imprisonment for up to 1 year in severe cases of non-compliance. Additionally, without SSF registration, companies will find it impossible to renew their operating licenses. Therefore, ensuring all employees are enrolled and contributions are deposited every month should be a top compliance priority.

Workplace Health and Safety Requirements

Safe Working Environment: Nepal’s labour laws obligate employers to provide a safe and healthy workplace. This includes proper sanitation facilities, adequate ventilation and lighting, safe drinking water, and necessary safety equipment and training. Workplaces should assess hazards and implement preventive measures. For example, if your company operates a factory or construction project, you must supply personal protective equipment (PPE) like helmets, gloves, and harnesses to workers and enforce their use. Office environments should also be kept free of hazards, with ergonomic setups for computer work and regular safety drills for emergencies.

Occupational Health and Safety (OHS) Compliance: Employers are expected to follow the Labour Act and any industry-specific safety regulations. It is wise for large companies to develop an OHS policy or manual in line with Nepali standards. This may involve:

• Forming a safety committee or appointing safety officers (especially if the workforce is large or the work involves significant risk).

• Conducting periodic safety trainings and drills (e.g., fire evacuation, first aid, equipment handling).

• Keeping first aid kits and emergency medical supplies on site.

• Recording any workplace incidents or accidents and reporting serious accidents to the authorities as required by law.

Female Employee Safety: Nepal places emphasis on safeguarding female employees. Apart from providing transportation for late shifts as mentioned, employers should ensure zero tolerance for sexual harassment and gender-based violence in the workplace. While specific anti-harassment provisions are outlined in separate regulations (such as the Sexual Harassment at Workplace Act), it’s imperative to establish an internal complaint mechanism and provide training to prevent harassment, aligning with legal expectations and best practices.

Consequences of Non-Compliance: Failing to adhere to workplace safety standards can lead to severe consequences. If an employer’s negligence results in an employee’s injury or death, the company can face legal action. The Labour Act provides that serious breaches of safety duties can result in up to 2 years of imprisonment for the responsible employer/manager, aside from the requirement to cover medical expenses and compensation for the injured worker. Moreover, maintaining a poor safety record can attract increased scrutiny from labour inspectors and harm the company’s reputation.

By proactively investing in safety measures and training, foreign companies can protect their employees and avoid costly incidents or legal actions. Remember, a robust safety culture is not just about compliance but also contributes to productivity and employee morale.

Termination, Severance and Dispute Resolution

Lawful Termination Grounds: Dismissing employees in Nepal must be done in accordance with the law to avoid wrongful termination claims. Acceptable grounds for termination include misconduct (after warnings and due process), poor performance (after providing opportunities to improve), redundancy or organizational restructuring, closure of business, or employee retirement. Nepal’s official retirement age for private sector employees is 58 years, after which an employer can compulsorily retire a worker. Voluntary resignation by the employee is, of course, allowed. In any case of termination (except resignation or summary dismissal for gross misconduct), the employer should have a justifiable reason and be able to document it.

Notice Period Requirements: The length of notice required before termination depends on the employee’s length of service:

• Employed up to 4 weeks: 1 day notice required.

• Employed 4 weeks to 1 year: 7 days notice required.

• Employed more than 1 year: 30 days notice required.

This notice can be given by either the employer or the employee (in case of resignation). Employers have the option to pay in lieu of notice (i.e. pay the salary covering the notice period instead of having the employee work through the notice). It’s important to issue the notice in writing, stating the reason for termination, and to maintain a record of it.

Severance Pay: Nepalese labour law ensures that long-serving employees receive a financial cushion upon termination. If an employee with at least one year of service is terminated for reasons other than serious misconduct, the employer must provide severance pay at the rate of one month’s salary for each year of service. For example, an employee with 5 years of service would receive 5 months’ worth of salary as severance compensation. Severance is due in addition to any other end-of-service obligations like paying out unused leave balances, provident fund (or SSF) benefits, and any due gratuity. (Notably, if an employee resigns voluntarily, severance pay is not legally mandatory, but the employee is still entitled to their provident/SSF funds and payment for unused leaves. Some companies also offer a goodwill gratuity in such cases, though it’s not required by law.)

Dispute Resolution: In the event of a dispute or grievance (whether it’s a disciplinary matter, a termination dispute, or any labour rights issue), companies should attempt to resolve it amicably through an internal process or mutual settlement. However, if no resolution is reached, the matter can be taken to the labour office or labour court in Nepal. Labour disputes might first go through mediation or arbitration facilitated by government labour officers before reaching the court. It’s advisable for foreign companies to engage a local HR/legal expert when drafting termination letters or handling sensitive dismissals to ensure proper procedure is followed. Wrongful termination claims can lead to orders for reinstatement of the employee or compensation payouts, so caution and legal consultation are key.

Additionally, be mindful of Nepal’s trade union landscape. Employees have the right to unionize, and if your company has a union or collective bargaining agreement (CBA), termination and disciplinary actions may need to follow the processes outlined in the CBA as well. Engaging in good faith with unions and following due process can prevent escalations of disputes.

Compliance Best Practices for Foreign Companies in Nepal

HR Policies and Record-Keeping: Large foreign companies should develop a comprehensive employee handbook or HR policy manual that reflects Nepali labour law provisions. This ensures that managers and employees are aware of rules regarding working hours, leave entitlements, code of conduct, and benefits. Key policies (such as anti-harassment, workplace safety, and disciplinary procedures) should be clearly communicated. Maintain meticulous records of each employee’s employment contract, personal details, attendance, leave taken, salary payments, and contribution deposits (e.g. SSF receipts). Nepal’s labour inspectors have the authority to review company records to verify compliance, so having organized documentation will be invaluable during any audits or inspections.

Regular Compliance Audits: It’s recommended to periodically conduct an internal HR compliance audit. Check that all employees have valid contracts on file, that wages paid meet at least the minimum wage and include the festival bonus, that contributions to SSF or provident fund are up to date, and that leave balances and overtime records are managed according to law. Identify any gaps and address them proactively. If you have an in-house legal team or local labour law consultant, have them review your practices annually, because regulations can be updated through government notifications (for example, changes in minimum wage or social security rules).

Employee Training and Communication: Ensure your management team in Nepal is well-versed in local labour laws. This may involve training HR personnel on legal requirements and cultural expectations. Clearly inform employees of their rights and responsibilities – for instance, provide orientation on workplace safety measures, leave application procedures, and how to report grievances. When employees know that the company respects labour laws and their welfare, it fosters a positive workplace culture and reduces the likelihood of disputes or compliance complaints.

Stay Updated on Legal Changes: Labour laws are dynamic. Nepal’s Ministry of Labour, Employment and Social Security may introduce amendments or new regulations – for instance, new types of leave, adjustments to contribution rates, or changes in working hour policies. As of 2025, significant changes like mandatory SSF enrollment and increased enforcement have come into effect. Keep an eye on official announcements for any legal changes beyond 2025. Being ahead of new compliance requirements will save your company from last-minute scrambles and potential penalties.

Conclusion: Operating in Nepal offers many opportunities for foreign companies, thanks to its growing market and workforce. However, respecting the local labour laws is not only a legal obligation but also good business practice. By diligently implementing the considerations outlined above – from proper contracts and fair wages to social security contributions and safe working conditions – foreign investors can build a productive team and secure their reputation as compliant and ethical employers in Nepal. Ultimately, understanding and adhering to Nepal’s labour law after incorporating your company will pave the way for sustainable success and minimize legal risks in your Nepali operations.