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Nepal Labour Act 2017: a walkthrough for founders and HR

Q: Can we be a fully remote employer in Nepal?

Yes; the Labour Act applies regardless of physical office. You still need a registered business entity in Nepal to be a legal employer; alternatives include an Employer of Record (EOR).

Q: Are stock options legal in Nepal?

Equity grants to Nepalese employees of foreign-incorporated companies are legal but operationally complex due to Nepal Rastra Bank foreign exchange rules. See the 'Remitting equity to South Asian employees' article in this series.

Q: What's the minimum wage?

Rs. 19,550/month total (Rs. 12,170 basic + Rs. 7,380 dearness allowance), effective 1 Shrawan 2082 / 17 July 2025, up from Rs. 17,300. Revised roughly every two years — verify the current gazette figure before contract execution.

Q: How do bonuses work?

The Bonus Act requires distribution of 10% of net profit to employees, capped at varying amounts by category. In practice, most small private companies pay festival bonuses (Dashain) and discretionary annual bonuses rather than formal Bonus Act distributions; transition becomes important post-profitability.

Q: What about labour inspections?

The Labour Office can inspect on complaint or randomly. Common triggers: SSF non-payment, terminated employee complaints, harassment cases. Maintain registers, contracts, and SSF receipts; produce on request.

The full operating guide to Nepal's Labour Act 2074 (2017) — categories of employment, probation, working hours, leave, gratuity, social security (SSF)…

38 min read

On this page▾

The three laws you must know
Categories of employment
Probation and confirmation
Hours, overtime, and leave
Leave entitlements in detail
Salary components and payslip basics
SSF, provident fund, and gratuity
Gratuity & severance math (worked)
Termination, notice, and severance
Termination checklist & due process
Harassment, grievance, and discipline
The realistic compliance bar at 20 people
Common mistakes
FAQ

Short answer

What does the Nepal Labour Act 2017 require of employers?

The Labour Act 2074 (2017) requires a written contract for every employee, caps work at 8 hours a day and 48 a week with overtime at 1.5x, sets paid leave entitlements (home leave of one day per twenty worked, 12 days sick, 13 public holidays, 14 weeks maternity), mandates Social Security Fund enrolment, and allows termination only on defined grounds with notice and a documented process. Gratuity and provident fund now run through SSF contributions rather than employer-held funds.

60-Second Summary

Nepal's Labour Act 2074 (2017) plus the Labour Rules 2075 (2018) and the Contribution Based Social Security Act 2074 (2017) form the operating triangle. Every employer with 10+ employees must comply with all three.
Five employment categories: regular, work-based, time-bound, casual, and part-time. Misclassifying a regular employee as 'consultant' to avoid SSF contributions is the #1 enforcement target — and increasingly costly post-2024 inspections.
Statutory minimum is 8 hours/day, 48 hours/week, weekly rest of one day. Annual leave: 1 day per 20 worked (~13/year), sick leave 12 days/year, festival leave + Dashain bonus equal to one month's basic salary.
SSF contribution rates (verified against ssf.gov.np and the Social Security Regulations 2075): employee 11% of basic + employer 20% of basic = 31% total. This covers medical/maternity, accident/disability, dependents, and old-age pension (which absorbs the legacy gratuity and PF obligations for SSF-enrolled employees).
Termination requires a written notice period (1 month for regular employees post-probation), valid grounds, and severance equal to ½ month per year of service if terminated for reasons not attributable to the employee.

The Act is short and readable; the expensive part is the gap between what it says and how it is administered — SSF registration mechanics, what counts as basic salary, how notice interacts with probation, and which termination grounds survive a Labour Office challenge. This walkthrough goes section by section in plain English, flags the six clauses founders most often get wrong, and sets out the compliance bar a 20-person Kathmandu team actually has to clear.

Not legal advice

Nepal labour law is interpreted by the Labour Office, the Labour Court, and increasingly the Social Security Fund's enforcement arm. Always get a Nepal-licensed labour lawyer to review your handbook, employment contracts, and termination decisions. This article documents the framework; counsel applies it to your facts.

The three laws you must know

Nepal's HR legal triangle

1
Labour Act 2074 (2017)
The primary statute. Covers employment categories, working hours, leave, termination, occupational safety, collective bargaining, and labour court procedure. Replaced the Labour Act 1992 and is significantly more employee-protective.
2
Labour Rules 2075 (2018)
The implementing regulations. Specifies forms, registers, calculation methods, and procedural detail the Act references but doesn't spell out. You can't operate the Act without the Rules.
3
Contribution Based Social Security Act 2074 (2017)
Established the Social Security Fund (SSF). All employers with 10+ employees must register and contribute. For SSF-enrolled employees, the SSF replaces the legacy separate gratuity and PF requirements with a unified contribution scheme.

There's also the Bonus Act 2030 (1974), the Sexual Harassment at Workplace (Prevention) Act 2071 (2015), and various sector-specific rules (banking, hospitality, IT/BPO labour permits). For a typical Kathmandu tech startup, the triangle above plus the Harassment Act covers ~90% of compliance load.

Categories of employment

Category	Definition	Typical use	Key obligations
Regular (नियमित)	Permanent employment with no fixed end date	Most full-time roles after probation	Full Act applies — gratuity, leave, severance, all benefits
Work-based (कामअनुसार)	Tied to a specific deliverable; ends when the work ends	Project-scoped specialists	Most Act provisions apply pro-rata
Time-bound (समयबद्ध)	Fixed-term contract with start and end dates	Maternity covers, defined consulting engagements	Cannot exceed 6 months unless renewed; chained renewals can be deemed regular
Casual (कामचलाउ)	Less than 7 days of work in a month	Event staff, one-off help	Limited Act coverage; cannot be used to disguise regular work
Part-time (अंशकालीन)	Less than 35 hours per week	Pro-rated benefits	Pro-rata leave, gratuity, SSF if covered

The contractor trap

Hiring someone as a 'consultant' on a service agreement to avoid SSF, PF, and termination protections is the #1 enforcement issue. If the person works set hours, takes direction, uses your equipment, and works only for you, they're functionally an employee regardless of the contract title. The Labour Office and SSF use a 'substance over form' test. Back-pay of contributions plus penalties of up to 100% of unpaid amounts is the typical outcome.

Probation and confirmation

Probation period for regular employees is up to 6 months under the Act (Section 12). During probation, either party can terminate with shorter notice (typically 15 days, set in the contract). After probation, the employee is automatically confirmed unless a written extension is communicated before the period ends.

Communicate confirmation in writing — silence after 6 months = automatic confirmation.
Probation extension is rare in practice and must be justified; courts dislike open-ended probationary status.
Confirmation triggers full Act protection including the 1-month termination notice requirement.

Hours, overtime, and leave

Item	Statutory minimum	Common practice (Kathmandu tech)
Working hours	8 hours/day, 48 hours/week	8h × 5 days (Sun–Thu OR Mon–Fri); Saturday off
Weekly rest	1 day (typically Saturday in Nepal)	Saturday off; some firms also Friday afternoon
Overtime cap	4 hours/day, 24 hours/week	Rarely tracked formally at tech startups — risk area
Overtime rate	1.5× regular wages	Often paid as flat bonus, technically out of compliance
Annual leave (paid)	1 day per 20 days worked (~13 days/year)	Most tech firms offer 15–25 days
Sick leave (paid)	12 days/year (half-pay after exhaustion of full-pay)	Most firms match statutory
Festival leave	Varies; typically 6+ public holidays + Dashain	10–15 public holidays plus Dashain bonus
Maternity leave	98 days fully paid (post-2017 amendment); funded partly by SSF for enrolled	Most firms match statutory; some add unpaid extension
Paternity leave	15 days paid (Labour Act § 47)	Increasingly offered; was added in 2017 amendment
Mourning leave	13 days for immediate family death	Statutory
Bereavement (Kriya leave)	Up to 15 days for religious mourning obligations	Common, often unpaid beyond statutory

Leave entitlements in detail

The table above is the summary; this is what each entitlement actually means when an employee asks, because the edge cases are where policies fall apart.

Leave type	Entitlement	Carry-forward	Paid at
Annual (home) leave	1 day per 20 days worked — about 13 days a year	Accumulates up to 90 days; balance above that is encashed	Full basic + allowances
Sick leave	12 days a year at full pay	Accumulates up to 45 days	Full pay, then half pay once exhausted
Public / festival holidays	13 days a year (public holidays), 14 for women employees	No carry-forward	Paid
Dashain / festival bonus	One month's basic salary, paid annually before the employee's main festival	N/A — an allowance, not leave	One month basic
Maternity leave	98 days, at least 60 of them fully paid; partly funded by SSF for enrolled employees	N/A	Full pay for the paid portion
Paternity leave	15 days paid	N/A	Full pay
Mourning (Kriya) leave	13 days on the death of an immediate family member	N/A	Paid
Compensatory / substitute leave	One day off for each weekly rest day worked	Take within the same month where possible	Paid

Annual leave accrues from day one, including during probation — you cannot make a new joiner wait six months for their first day off.
Encashment on exit is mandatory for unused annual leave; sick leave is not encashed.
Overtime is capped at 4 hours a day and 24 hours a week, and paid at 1.5× wages. Paying an unmeasured 'flat overtime bonus' is the most common quiet non-compliance in Kathmandu tech.
Keep a leave register. The Labour Rules require it, and it is the only defence when an employee claims un-encashed balance at exit.

Write the generous version down

If you offer 20 days of annual leave against a 13-day statutory floor, say so in the handbook and apply it consistently. Undocumented generosity becomes a dispute the moment a manager applies it unevenly — and the Labour Office reads consistent past practice as an implied term.

Salary components and payslip basics

Nepalese payslips typically split salary into Basic + Allowances. This split matters because gratuity, SSF, and PF contributions are calculated on Basic only — not total CTC. The legal minimum proportion of basic is generally 60% of total wages (Labour Rules § 21).

Standard Nepalese payslip components

1
Basic salary
Foundation for all statutory calculations. Must be at least 60% of gross. Above the national minimum wage (Rs. 19,550/month — basic Rs. 12,170 + dearness allowance Rs. 7,380 — effective 17 July 2025; verify the current gazette rate).
2
Dearness allowance (DA)
Cost-of-living adjustment, typically the remaining ~40% of gross. Together with Basic forms 'Basic + DA' which some statutory calculations reference.
3
Other allowances
Transport, communication, food, festival allowance (Dashain bonus). Festival allowance is one month's basic, paid annually.
4
Statutory deductions
TDS (income tax), SSF employee contribution (11% of basic), provident fund (if not on SSF, 10% of basic).
5
Employer contributions (shown but not deducted)
SSF employer (20% of basic), gratuity provision, festival bonus accrual.

SSF, provident fund, and gratuity

The Social Security Fund (SSF, established 2018, operationalized late 2019) is the unified social-security scheme. Employers with 10+ employees MUST enroll. Once enrolled, the SSF replaces the separate legacy gratuity, PF, and accident insurance obligations with a unified contribution scheme covering medical, maternity, disability, dependent, and old-age pension.

Verified against ssf.gov.np and the Social Security Regulations 2075 (2018). The 20% employer share absorbs the legacy gratuity (8.33%) and provident fund (10%) obligations for SSF-enrolled employees. For sub-10-employee firms on the legacy regime, calculate gratuity and PF separately.

Contribution	% of basic salary	Who pays
Social Security Fund — employee	11%	Employee (deducted at source)
Social Security Fund — employer	20%	Employer
Total SSF contribution	31% of basic	Combined

If you have <10 employees

SSF enrollment becomes voluntary. Most early-stage Kathmandu startups remain on the legacy regime: 10% employer PF + 8.33% gratuity provisioned on exit + private medical insurance. Migrate to SSF when you cross 10 employees OR when employees ask for portable pension benefits (increasingly common with educated mid-career hires).

Gratuity & severance math (worked)

Two different numbers get confused constantly. Gratuity is deferred compensation for service — it is owed on exit regardless of who ended the relationship. Severance is compensation for a no-fault termination the employer initiated. On the legacy regime you may owe both.

Payment	Formula	When it is owed	Under SSF
Gratuity (legacy regime)	8.33% of basic × months of service (≈ ½ month basic per year)	On any exit — resignation, redundancy, or dismissal	Absorbed into the employer's 20% SSF contribution; settled through the Fund, not by you
Severance (no-fault)	½ month basic × completed years of service	Redundancy, restructuring, disability, business closure	Still owed by the employer — SSF does not cover severance
Notice pay in lieu	1 month basic (regular employee post-probation)	When you end employment without serving the 30-day notice	Still owed by the employer
Leave encashment	Unused annual leave days × daily basic	Every exit	Still owed by the employer

Worked example — redundancy at 4 years

Employee on NPR 100,000 gross, 60% basic = NPR 60,000 basic, 4 completed years, legacy regime, made redundant with no notice served. Gratuity: 8.33% × 60,000 × 48 months ≈ NPR 239,900. Severance: ½ × 60,000 × 4 = NPR 120,000. Notice in lieu: NPR 60,000. Unused leave 8 days: 8 × (60,000 ÷ 30) = NPR 16,000. Total exit cost ≈ NPR 435,900 plus outstanding wages — payable within 7 days. On SSF, drop the gratuity line (the Fund settles it) and the remaining employer cost is ≈ NPR 196,000.

Provision for this monthly

Founders routinely discover exit liability at the moment they can least afford it. Accrue 8.33% of basic payroll monthly for gratuity (or the SSF equivalent) and hold a redundancy reserve. Nepal exit costs are predictable — cash-flow surprises are a bookkeeping failure, not a legal one.

Termination, notice, and severance

Termination of a regular employee post-probation requires three things: (1) valid grounds, (2) due process, and (3) correct notice and severance. Skipping any of these creates Labour Court exposure that can run 18–24 months and end in reinstatement plus back-wages.

Valid termination grounds (Labour Act § 145–148)

1
Misconduct (with due process)
Theft, fraud, repeated insubordination, abuse, etc. Requires written charge sheet, employee response opportunity (typically 7 days), an inquiry, and a written decision.
2
Poor performance (with PIP)
Requires documented performance issues, a written performance improvement plan, time to improve, and ongoing review documentation.
3
Redundancy / restructuring
Genuine business reason, no replacement hire for the same role, severance equal to ½ month basic per year of service.
4
Continued absence
30+ consecutive days unauthorized absence with no response to notice.
5
Inability to work due to permanent disability
Subject to disability law and medical certification; severance applies.

Item	Regular employee post-probation
Notice period (employer)	30 days written notice OR 30 days pay in lieu
Notice period (employee)	30 days written notice
Severance (no-fault termination)	½ month basic salary × years of service
Gratuity at exit	Settled via SSF (if enrolled) or calculated and paid separately (legacy)
Unused annual leave	Cashed out at exit
Outstanding wages	Within 7 days of last working day
Experience letter	Must be provided on request (Labour Act § 158)

Termination checklist & due process

Most Nepal terminations that end up in Labour Court are lost on process, not on grounds. The employer had a real reason and no paper trail. Run this sequence and keep every document.

Misconduct termination — the defensible sequence

1
1. Written charge sheet
State the specific act, the date, the rule or contract clause breached, and the evidence relied on. Vague language ('unprofessional behaviour') is what gets struck down.
2
2. Response window
Give the employee a written opportunity to respond, typically 7 days. Record delivery — hand-delivered with signature, or registered post to the address on file.
3
3. Inquiry
An inquiry officer or committee reviews the response, hears the employee, and records findings. The decision-maker should not be the sole complainant.
4
4. Written decision
Set out findings, the conclusion, and the sanction. Proportionality matters — dismissal for a first minor breach rarely survives review.
5
5. Final settlement
Notice or pay in lieu where applicable, unused leave encashment, gratuity or SSF settlement, and outstanding wages within 7 days of the last working day.
6
6. Experience letter
Issue on request (Labour Act § 158). Refusing it is an easy, avoidable finding against you.

Signed employment contract on file, in Nepali (or bilingual with Nepali controlling)
Documented grounds — charge sheet for misconduct, PIP record for performance, business case for redundancy
Proof the employee was given a chance to respond, with dated delivery record
Written inquiry finding and decision letter
Severance calculated at ½ month basic × years of service for no-fault terminations, shown as a line item
Unused annual leave encashed; SSF exit marked and final pro-rata contribution paid
Full and final settlement paid within 7 days of the last working day
Experience letter drafted and ready to issue

Redundancy is not a shortcut

Labelling a performance problem as 'restructuring' to skip the PIP is the most common shortcut and the easiest to unwind: if the role is refilled within months, the redundancy was not genuine, and the Labour Court treats the whole termination as invalid. Reinstatement plus back-wages is a real outcome.

Harassment, grievance, and discipline

The Sexual Harassment at Workplace (Prevention) Act 2071 (2015) requires every workplace with any employees to: (1) have a written policy displayed prominently, (2) establish an internal complaints committee with at least one female member (chair must be senior), (3) handle complaints within 45 days, and (4) report annually to the Labour Office. Most Kathmandu startups do not comply with the committee requirement — it's the second-most-common Labour Office finding after contractor misclassification.

Written sexual harassment policy in Nepali (Devanagari) AND English, displayed in the office
Internal Complaints Committee (ICC) formed in writing, named members, chair is senior
Annual ICC training for all employees, documented
Complaint handling within 45 days of receipt
Annual report to Labour Office (typically June/July submission)

The realistic compliance bar at 20 people

Here's the honest minimum compliance kit for a 20-person Kathmandu startup, in priority order. The full Labour Act has dozens more requirements; this is the 80/20.

Employment contracts in writing for every employee, in Nepali (a bilingual version is fine, but the Nepali version controls).
SSF registration if >10 employees; legacy PF + gratuity tracking if <10. Pay monthly on time — late SSF contributions accrue interest at 10% p.a.
Payroll with proper Basic/DA split, TDS withholding, SSF/PF deductions, and monthly payslips in Nepali + English.
ICC formed and harassment policy displayed.
Leave tracking system (even a Google Sheet) with annual, sick, festival, and maternity/paternity properly categorized.
Dashain bonus (one month basic) paid before Dashain. Non-payment is a #1 employee complaint and a Labour Office trigger.
Termination process: written notice, severance calculated correctly, full and final within 7 days, experience letter on request.
Annual filings: SSF annual return, harassment committee report, labour office annual return.

Common mistakes

Mistake	Consequence	Fix
Hiring 'consultants' who function as employees	SSF back-pay + 100% penalty + reclassification	Use proper time-bound or work-based contracts for genuine project work; convert to regular for ongoing work
Basic salary <60% of gross	Statutory benefits underpaid; back-pay risk	Restructure pay components to comply
No Dashain bonus	Employee complaints; Labour Office inspection	Budget and pay one month basic before Dashain
No ICC under harassment law	Statutory penalty + reputational risk	Form ICC; document in writing; conduct annual training
Termination without notice or severance	Labour Court reinstatement + back-wages	Always: written notice, calculated severance, due process
English-only contracts	Contracts may be unenforceable in dispute	Bilingual or Nepali-controlling version

FAQ

Frequently asked questions

Can we be a fully remote employer in Nepal?