Termination of Employment Under Labour Law of Nepal

Termination of employment signifies the formal conclusion of the employer-employee relationship. It may arise from various circumstances including voluntary resignation, retirement, dismissal for cause, incompetence, health reasons, or retrenchment due to organizational changes. Given the potential legal and ethical implications, Nepal has established a comprehensive legal framework to regulate the process. Understanding termination of employment under labour law of Nepal is essential for employers and employees to ensure procedural fairness, protect rights, and maintain compliance with legal requirements. This guide covers the legal framework, grounds for termination, notice periods, retrenchment procedures, post-termination obligations, and remedies available under Nepali labour law.

Legal Framework

The termination of employment in Nepal is primarily regulated by the Labour Act 2074 (2017), which outlines the rights and responsibilities of both employers and employees. The Act provides specific provisions regarding notice periods, grounds for dismissal, compensation, severance, and protection against unlawful termination.

Types of Employment Termination

Under the Labour Act 2074, employment can be terminated on various grounds depending on the nature of employment and circumstances.

Termination by Employment Type

The Labour Act provides specific provisions for termination based on the nature of employment contract.

Time-Based Employment (Section 140)

Employment contracted for a fixed period automatically ends upon expiry of the agreed timeframe. However, if the employee is engaged in a project-based role and the project is extended due to the nature of work, the employment continues until the extended period is completed.

Work-Based Employment (Section 140)

For workers hired to complete a specific task or job, the employment relationship ends once the assigned work is finished. If the nature or scope of the project expands or is extended, the employment remains valid until the additional work is completed.

Casual Employment (Section 140)

In case of casual or day-based employment where there is no fixed term or specific task, either the employer or the worker may terminate employment at will without needing to fulfill additional conditions.

Voluntary Resignation (Section 141)

The Labour Act recognizes the right of workers to leave their job voluntarily through a formal resignation process.

Resignation Procedure

• Written Submission: Employee must provide written resignation to the employer
• Employer Response: Employer must acknowledge and accept resignation within 15 days
• Deemed Acceptance: If no response within 15 days, resignation is automatically accepted from the next day
• Withdrawal: Resignation can be withdrawn only if both employer and employee agree
• Continuation of Work: If employee continues working after resignation is accepted, it is deemed cancelled

Termination for Incompetence (Section 142)

Employers have the legal right to dismiss an employee if their work performance consistently falls below acceptable standards, subject to a structured process.

Requirements for Termination

• Work performance must be unsatisfactory for three or more consecutive years of performance evaluation
• Assessment must be based on formal evaluations as per the Act, regulations, or internal bylaws
• For enterprises employing 10 or more employees, at least 7 days must be given for the employee to provide clarification
• Decisions must be based on documented evidence and fair evaluation practices

Termination for Misconduct (Section 139)

The employer can terminate employment if an employee engages in serious misconduct. The Labour Act specifies the following grounds:

Termination for Health Reasons (Section 143)

The Labour Act permits employers to terminate employment when an employee is unable to perform duties due to serious physical or mental health issues. Termination must be supported by a medical doctor's recommendation confirming incapacity or prolonged need for medical treatment.

Protections During Illness

Remuneration During Treatment

Employees are entitled to full remuneration during the protected treatment period unless the employee receives remuneration from the Social Security Fund for such period.

Alternative Employment

If an employee suffers physical disability or serious injury but is capable of performing alternative work suited to their health condition, the employer must provide suitable employment options rather than terminating.

Termination During Probation Period

The Labour Act allows for termination after the expiry of the probation period if the employer is unsatisfied with the employee's work during probation.

Probation Period Provisions

• Duration: Probation period of up to 6 months
• Evaluation: Employer assesses employee's suitability during this period
• Termination: Employment can be terminated upon being unsatisfied with work
• Confirmation: If not terminated, employee becomes regular upon probation completion

Notice Period for Termination (Section 144)

Prior to termination for any reason other than misconduct, both employer and employee must provide prior written notice to the other party.

Consequences of Non-Compliance

• Employer fails to give notice: Must pay remuneration equivalent to the notice period
• Employee fails to give notice: Employer can deduct equivalent amount from employee's pay

Retrenchment (Section 145)

Retrenchment refers to reducing the workforce due to financial difficulties, organizational restructuring, or changes in business needs. The Labour Act outlines specific procedures that employers must follow.

Grounds for Retrenchment

• Enterprise faces financial problems in its operation
• Number of employees increases due to merger of enterprises
• Enterprise needs to be closed partially or completely

Retrenchment Procedure

Order of Retrenchment

Retrenchment should generally be conducted in the following order of priority:

1. Foreign workers
2. Workers with a history of disciplinary actions
3. Workers with poor work performance
4. Those most recently hired

Severance Compensation

Re-employment Preference

If the enterprise resumes operation within 2 years of retrenchment or needs additional employees, preference must be given to the retrenched employees for re-employment.

Exemption

Retrenchment provisions do not apply to enterprises employing 10 or fewer employees. Additionally, retrenchment is not applicable when closure is ordered by the Government of Nepal or Labour Court.

Compulsory Retirement (Section 147)

Employees in regular employment are subject to compulsory retirement upon reaching the prescribed age.

Post-Termination Obligations of Employer (Section 148)

Upon termination of employment for any reason, the employer has specific obligations to fulfill.

Payment of Dues

• Pay all outstanding remuneration, benefits, and entitlements within 15 days of termination
• If payment cannot be made within stipulated time, continue paying employee's remuneration until all dues are settled
• Assist employees in claiming benefits from Social Security Fund or insurance providers
• If employee is unavailable, transfer payment to bank account or deposit with Labour Office

Work Experience Certificate (Section 150)

The employer must provide a certificate of work experience to terminated employees stating:

• Period of service
• Job title/position held
• Nature of work performed

Priority of Labour Claims (Section 149)

If an enterprise is closed or goes through liquidation, outstanding wages and benefits owed to workers must be given first priority over all other financial obligations. This ensures employees are not left uncompensated when a company shuts down or becomes insolvent.

Social Security Fund Implications

Termination of employment has implications for Social Security Fund contributions and benefits:

• Unemployment Allowance: Eligible employees may receive unemployment benefits under the Social Security Act
• Remuneration During Treatment: Employees receiving SSF benefits during illness are not entitled to employer remuneration for the same period
• Retrenchment Compensation: Employees receiving unemployment allowance are not entitled to separate retrenchment compensation
• Contribution Transfer: SSF contributions can be transferred when changing employment

Remedies for Wrongful Termination

If an employee is not satisfied with the employer's decision regarding termination, legal remedies are available.

Labour Court Appeal

Under the Labour Act, employees can file an appeal in the Labour Court against termination decisions. The Labour Court has jurisdiction over employment disputes and can provide the following remedies:

• Reinstatement to position
• Compensation for wrongful termination
• Payment of back wages
• Damages for breach of employment contract
• Order for payment of outstanding dues

Labour Office Complaint

Employees may also file complaints with the Labour Office regarding termination disputes. The Labour Office can facilitate mediation and conciliation between parties before formal litigation.

Trade Union Protections

The Trade Union Act 2049 and Labour Act 2074 provide special protections for trade union members and leaders:

• Trade union leaders must be retrenched last in any workforce reduction
• Termination of union officials requires consultation with the union
• Collective bargaining committee members have special protection
• Discrimination against union members is prohibited