Table of Contents
1. Introduction to Employee Termination Law in Nepal
Employee termination in Nepal constitutes the lawful cessation of employment relationships between an employer and employee under statutory frameworks. The Labour Act, 2074 (2017) establishes that termination is lawful only when conducted in accordance with prescribed grounds, procedures, and notice requirements. Procedural compliance remains critical for employers to avoid claims of wrongful dismissal, reinstatement orders, and financial penalties.
Non-compliance with termination procedures exposes employers to significant financial and legal risks:
- Orders for reinstatement of terminated employees with back wages
- Compensation awards equivalent to six months’ salary or more
- Penalties for failure to provide statutory notice or severance payments
- Reputational damage and litigation costs in Labour Court proceedings
- Regulatory sanctions from the Department of Labour and Employment
2. TL;DR – Employee Termination Law Nepal
- Termination is lawful only on specific statutory grounds including misconduct, retrenchment, poor performance, or mutual agreement under the Labour Act, 2074
- Notice periods vary by tenure: 1 day (up to 4 weeks), 7 days (4 weeks to 1 year), and 30 days (exceeding 1 year)
- Severance pay equals one month’s basic salary for each completed year of service, payable to employees with minimum one year of continuous service
- Retrenchment requires 30 days’ prior notice to trade unions or Labour Relation Committees, with foreign workers and recent hires selected first
- Wrongful dismissal remedies include reinstatement, compensation up to ten months’ remuneration, and payment of all terminal benefits
- Employees must file disputes within 45 days of termination to the Labour Office or Labour Court
3. Legal Framework Governing Termination
The termination of employment in Nepal operates within a structured legislative framework designed to balance employer operational needs with employee job security.
| Law | Relevant Section | Key Provision on Termination |
|---|---|---|
| Labour Act, 2074 (2017) | Section 140 | Governs termination of time-based and work-based employment upon contract expiry or work completion |
| Labour Act, 2074 (2017) | Section 141 | Regulates voluntary termination through employee resignation |
| Labour Act, 2074 (2017) | Section 142 | Provides termination grounds for unsatisfactory performance after three consecutive poor appraisals |
| Labour Act, 2074 (2017) | Section 143 | Permits termination on health grounds upon medical practitioner recommendation |
| Labour Act, 2074 (2017) | Section 144 | Establishes notice period requirements based on employment duration |
| Labour Act, 2074 (2017) | Section 145 | Governs retrenchment procedures, compensation, and selection order |
| Labour Act, 2074 (2017) | Section 147 | Mandates compulsory retirement at age 58 |
| Labour Rules, 2075 | Various Rules | Prescribes procedural details for domestic inquiry, disciplinary actions, and retrenchment notifications |
4. What Constitutes Lawful Termination Under Nepalese Law?
Lawful termination requires adherence to substantive grounds and procedural fairness established under Chapter 21 of the Labour Act, 2074. The legislation mandates that employment security constitutes a fundamental right, and termination is permitted only under specific statutory exceptions.
The employer retains the right to terminate employment for valid reasons including misconduct, operational requirements, or performance deficiencies. However, this right remains circumscribed by procedural safeguards protecting employees from arbitrary dismissal.
Foundational legal principles governing termination include:
- Principle of Legality: Termination must occur exclusively on grounds recognized by the Labour Act, 2074
- Principle of Proportionality: The sanction must correspond to the severity of the employee’s conduct or performance failure
- Principle of Due Process: Employers must provide show-cause notices, opportunity for explanation, and fair hearings before termination
- Principle of Documentation: All termination decisions require written communication with specific reasons stated explicitly
- Principle of Non-Discrimination: Selection for retrenchment or termination must not discriminate based on race, gender, religion, or union affiliation
5. Grounds for Termination by Employer
Nepalese labour law recognizes distinct categories of termination initiated by employers, each requiring specific evidentiary standards and procedural compliance.
| Grounds for Termination | Definition | Legal Test |
|---|---|---|
| Termination for Cause (Misconduct) | Dismissal due to violation of workplace rules, dishonesty, insubordination, or criminal conduct | Employer must prove misconduct through documented evidence and domestic inquiry |
| Termination for Poor Performance | Dismissal due to consistent failure to meet job standards despite warnings | Requires three consecutive years of unsatisfactory performance appraisals |
| Termination Due to Ill Health | Dismissal when employee is physically or mentally unable to perform duties | Requires medical practitioner certification of long-term incapacity |
| Retrenchment/Redundancy | Workforce reduction due to economic conditions, restructuring, or automation | Employer must demonstrate genuine operational necessity and follow consultation procedures |
| Probationary Termination | Dismissal during or immediately following probationary period | Permitted if performance remains unsatisfactory after six-month probation |
| Compulsory Retirement | Mandatory cessation at statutory retirement age | Automatic upon employee reaching 58 years of age |
6. Termination Procedure: A Step-by-Step Guide
Lawful termination requires strict adherence to procedural requirements to withstand legal scrutiny in Labour Court proceedings.
Mandatory procedural steps for employer-initiated termination include:
- Review Employment Records: Verify employee tenure, contract type, past disciplinary history, and performance evaluations
- Establish Valid Grounds: Document specific reasons for termination with supporting evidence
- Issue Show-Cause Notice: Provide written notice specifying allegations and requiring employee explanation within reasonable time (typically 7 days)
- Conduct Domestic Inquiry: For misconduct cases, constitute inquiry committee, examine witnesses, and record findings
- Provide Opportunity for Defense: Allow employee to present explanations personally or through representative
- Determine Proportionate Action: Decide between warning, suspension, demotion, or termination based on gravity of offense
- Calculate Terminal Benefits: Compute notice period pay, severance, gratuity, provident fund, and leave encashment
- Issue Termination Letter: Provide written termination notice with effective date, reasons, and settlement details
- Settle Final Payments: Disburse all dues within statutory timeframes (typically within 15 days)
- Issue Experience Certificate: Provide service certificate as mandated under Section 38 of Labour Act, 2074
7. Notice Period and Payment in Lieu
The Labour Act, 2074 establishes tiered notice requirements based on employment duration, ensuring proportionate protection for employees with longer service.
| Employee Tenure | Required Notice Period | Payment in Lieu |
|---|---|---|
| Up to 4 weeks | 1 day | 1 day’s basic remuneration |
| 4 weeks to 1 year | 7 days | 7 days’ basic remuneration |
| Exceeding 1 year | 30 days | 30 days’ basic remuneration |
Payment in lieu of notice represents an employer’s option to terminate employment immediately by compensating the employee for the notice period equivalent. This provision applies equally to employer and employee-initiated terminations. Failure to provide notice or payment in lieu constitutes procedural irregularity exposing employers to wrongful dismissal claims.
8. Severance Pay and Terminal Benefits
Terminal benefits represent statutory entitlements payable upon cessation of employment, varying based on termination grounds and employee tenure.
| Benefit | Calculation Basis | Legal Authority |
|---|---|---|
| Severance Pay | One month’s basic salary × completed years of service (prorated for partial years) | Section 145, Labour Act 2074 |
| Gratuity | 8.33% of basic remuneration monthly, payable for all service periods | Section 52, Labour Act 2074 |
| Provident Fund | Employee contribution (10%) + Employer contribution (10%) + interest | Section 52, Labour Act 2074 |
| Leave Encashment | Up to 90 days accumulated annual leave + up to 45 days sick leave at daily wage rate | Section 49, Labour Act 2074 |
| Festival Expenses | Proportionate amount if employment terminates before annual payment | Section 37, Labour Act 2074 |
Severance pay eligibility requires minimum one year of continuous service. Employees receiving unemployment allowance under the Social Security Act, 2074 are excluded from severance compensation. All terminal benefits must be paid as lump sums within the final settlement period to avoid penalty interest.
9. Termination by Employee (Resignation)
Employees possess the statutory right to terminate employment voluntarily through resignation under Section 141 of the Labour Act, 2074. The resignation process requires adherence to specific procedural and temporal requirements.
Employee obligations when resigning include:
- Submitting written resignation to employer with clear effective date
- Serving the applicable notice period (1 day, 7 days, or 30 days based on tenure)
- Handing over company property, documents, and confidential materials
- Completing pending assignments and facilitating knowledge transfer
- Obtaining clearance from all departments including finance and administration
Employers must accept resignations within 15 days of submission; failure to respond results in deemed acceptance. Employees absconding without serving notice periods forfeit terminal benefits and may face liability for damages caused by abrupt departure.
10. Termination for Misconduct and Disciplinary Action
Misconduct represents serious violation of workplace discipline warranting termination under specific procedural safeguards. The Labour Act, 2074 distinguishes between major and minor misconduct, with corresponding disciplinary measures.
| Type of Misconduct | Examples | Possible Action | Procedure |
|---|---|---|---|
| Minor Misconduct | Negligence, minor rule violations, tardiness | Verbal warning, written warning, suspension | Document incident, issue warning, maintain records |
| Major Misconduct | Theft, fraud, assault, sexual harassment, disclosure of confidential information | Suspension pending inquiry, termination | Domestic inquiry with show-cause notice, opportunity for defense, written findings |
| Criminal Misconduct | Offenses involving moral turpitude, workplace violence | Immediate suspension, termination upon conviction | Police report, suspension without pay pending trial, termination if convicted |
The disciplinary procedure requires employers to:
- Conduct prompt and impartial investigation
- Issue specific charges in writing
- Allow reasonable time for response
- Permit representation by colleague or union representative
- Maintain detailed records of proceedings
- Communicate decision in writing with reasons
11. Termination Due to Retrenchment/Redundancy
Retrenchment permits workforce reduction for economic reasons including financial difficulties, merger consequences, or operational restructuring. Section 145 of the Labour Act, 2074 establishes strict procedural requirements for lawful retrenchment.
Legal conditions for retrenchment include:
- Genuine economic necessity demonstrated through financial documentation
- Prior consultation with authorized trade union or Labour Relation Committee
- 30 days’ advance notice specifying reasons, date, and number of affected employees
- Selection criteria prioritizing foreign workers, employees with disciplinary records, poor performers, and recent hires
- Payment of retrenchment compensation at one month’s basic salary per service year
Employer duties during retrenchment encompass:
- Exploring alternatives to retrenchment including reduced hours or temporary layoffs
- Providing re-employment priority to retrenched workers if operations resume within two years
- Notifying the Labour Office when consensus with unions cannot be reached
- Ensuring retrenchment does not disproportionately affect protected categories including pregnant employees or union office bearers
12. Wrongful Dismissal: Definition and Consequences
Wrongful dismissal occurs when employment termination violates statutory requirements, lacks valid grounds, or fails to follow prescribed procedures. The Labour Act, 2074 provides robust remedies for employees subjected to unlawful termination.
| Wrongful Dismissal Type | Description | Potential Remedy |
|---|---|---|
| Procedural Defect | Termination without show-cause notice or domestic inquiry | Reinstatement with back wages |
| Lack of Valid Grounds | Dismissal for unsubstantiated misconduct or performance issues | Compensation up to ten months’ remuneration |
| Retaliatory Termination | Dismissal for union activities or whistleblowing | Reinstatement, compensation, and punitive damages |
| Discriminatory Dismissal | Termination based on gender, pregnancy, or disability | Reinstatement, compensation, and corrective orders |
| Failure to Pay Dues | Termination without settlement of terminal benefits | Payment of all dues with interest and penalties |
Employees may challenge wrongful dismissal through complaints to the Labour Office or petitions to the Labour Court within statutory limitation periods.
13. The Termination Letter: Essential Components
The termination letter serves as the definitive legal document communicating employment cessation. Proper drafting ensures compliance and mitigates litigation risk.
Mandatory inclusions in termination letters:
- Specific reference to employee name, designation, and employee identification number
- Clear statement of termination effective date
- Detailed grounds for termination citing specific incidents or performance failures
- Reference to applicable Labour Act sections and company policy provisions
- Calculation of terminal benefits including severance, gratuity, and leave encashment
- Details of notice period served or payment in lieu thereof
- Instructions for return of company property and clearance procedures
- Contact information for human resources department for queries
Prohibited content includes:
- Defamatory statements or personal opinions about employee character
- Admissions of procedural violations or discriminatory motives
- Vague or generalized reasons without specific factual basis
- Promises of future employment or benefits not legally required
- Threats of adverse consequences for challenging the termination
14. Dispute Resolution: Labour Office and Labour Court
Nepal’s labour dispute resolution framework provides multiple forums for addressing termination-related grievances, ranging from administrative conciliation to judicial adjudication.
| Forum | Time Limit | Possible Outcome |
|---|---|---|
| Labour Office Conciliation | Within 45 days of termination | Settlement agreement, reinstatement, or compensation up to ten months’ wages |
| Labour Court | Within 45 days of termination (extendable) | Reinstatement with back wages, compensation, terminal benefits payment, or dismissal of claim |
| Supreme Court | Appeal within 35 days of Labour Court judgment | Affirmation, modification, or reversal of Labour Court orders |
The dispute resolution process commences with filing a written complaint detailing the termination circumstances and relief sought. The Labour Office attempts conciliation; failing settlement, matters proceed to Labour Court for adversarial proceedings. Courts examine procedural compliance, evidentiary support for termination grounds, and calculation accuracy of terminal benefits.
15. Case Studies and Precedents
Judicial decisions under Nepalese labour law establish important precedents regarding termination procedures and employee rights.
Key legal principles established through case law include:
- Due Process Requirement: Courts consistently invalidate terminations lacking show-cause notices or domestic inquiries, even where misconduct is substantiated
- Burden of Proof: Employers bear the burden of proving termination grounds through documentary evidence and witness testimony
- Proportionality Principle: Disproportionate sanctions for minor infractions result in compensation awards or reinstatement orders
- Retrenchment Consultation: Failure to consult trade unions or Labour Relation Committees renders retrenchment unlawful regardless of economic necessity
- Back Wages Calculation: Wrongfully terminated employees are entitled to wages from termination date to reinstatement date or judgment date
16. Best Practices for Employers
Implementing robust compliance protocols minimizes termination-related litigation and ensures lawful workforce management.
16.1 Compliance Checklist Before Termination
- Verify completion of probationary period (minimum 6 months for permanent status)
- Review previous disciplinary records and performance evaluations for consistency
- Ensure show-cause notice specifies charges with dates, times, and witnesses
- Confirm domestic inquiry committee comprises impartial members
- Calculate terminal benefits including social security contributions
- Check for protected status (pregnancy, union office, medical leave) prohibiting termination
- Prepare comprehensive termination file with all documentation
16.2 Documentation and Evidence Management Strategies
- Maintain contemporaneous records of performance discussions and warnings
- Preserve email communications and incident reports
- Secure witness statements promptly following misconduct incidents
- Retain inquiry committee findings and employee responses for minimum five years
- Document business justifications for retrenchment with financial statements
17. Role of a Law Firms in Termination Matters
Legal counsel provides critical guidance throughout the employment termination lifecycle, ensuring compliance with evolving statutory requirements.
Service scope for termination matters encompasses:
- Advising on lawful termination grounds and procedural requirements under Labour Act, 2074
- Drafting show-cause notices, charge sheets, and termination letters compliant with statutory standards
- Conducting legal audits of termination files to identify procedural vulnerabilities
- Representing employers in Labour Office conciliation and Labour Court litigation
- Negotiating settlement agreements and severance packages to minimize litigation exposure
- Developing employment policies and disciplinary codes aligned with current legislation
- Training human resources personnel on domestic inquiry procedures and documentation standards
18. Conclusion and Key Takeaways
Employee termination in Nepal operates within a rigorous statutory framework prioritizing job security and procedural fairness. Compliance with the Labour Act, 2074 and Labour Rules, 2075 remains essential for lawful workforce management.
Critical compliance points include:
- Termination is permissible only on statutory grounds with documented evidence
- Notice periods vary by tenure: 1 day (up to 4 weeks), 7 days (4 weeks to 1 year), 30 days (over 1 year)
- Severance pay equals one month’s basic salary per service year for employees with minimum one year of service
- Retrenchment requires 30 days’ notice to unions and Labour Office consultation
- Domestic inquiry is mandatory for misconduct-related terminations
- Terminal benefits must be settled within 15 days of termination
- Disputes must be filed within 45 days to Labour Office or Labour Court
19. Frequently Asked Questions (FAQs)
What is the notice period for termination in Nepal?
The notice period depends on employment duration: 1 day for service up to 4 weeks, 7 days for 4 weeks to 1 year, and 30 days for employment exceeding 1 year.
Can an employee be fired without notice?
Immediate termination without notice is permitted only during the probationary period or for serious misconduct following domestic inquiry. Otherwise, notice or payment in lieu is mandatory.
How is severance pay calculated in Nepal?
Severance pay equals one month’s basic salary multiplied by completed years of service. Employees with less than one year receive proportionate amounts. Those receiving unemployment benefits are excluded.
What is the time limit to challenge a termination?
Employees must file complaints within 45 days of termination date to the Labour Office or Labour Court. Delayed filings risk dismissal on limitation grounds.
Can an employer terminate during maternity leave?
No. Termination of pregnant employees or those on maternity leave (98 days) is prohibited and constitutes wrongful dismissal warranting reinstatement and damages.
Is poor performance valid grounds for termination?
Yes, but only after three consecutive years of unsatisfactory performance appraisals and following the standard notice period requirements.
What documents must accompany termination?
Employers must provide termination letter, calculation sheet of terminal benefits, experience certificate, and clearance forms. Social security contribution records must be updated.
Can terminated employees claim unemployment benefits?
Employees enrolled in the Social Security Fund may claim unemployment allowance as per the Social Security Act, 2074, but forfeit severance pay if such benefits are received.
What constitutes wrongful dismissal?
Wrongful dismissal includes termination without valid grounds, failure to provide notice or severance, lack of domestic inquiry for misconduct, or discriminatory selection for retrenchment.
Are foreign employees subject to different termination rules?
Foreign employees are subject to the same termination procedures but are prioritized for retrenchment selection. Work permit cancellation requires separate immigration procedures.
