Termination of employment signifies the formal conclusion of the employer–employee relationship. It may arise from various circumstances, including voluntary resignation, retirement, mutual separation, dismissal for cause, or redundancy due to organizational changes. Given the potential legal and ethical implications, most jurisdictions Nepal included have established comprehensive legal frameworks to regulate the process. These provisions are intended to ensure procedural fairness, protect employee rights, and support organizational accountability.
In Nepal, the termination of employment is primarily regulated by the Labor Act, 2074 (2017), which outlines the rights and responsibilities of both employers and employees in such matters. The Act provides specific provisions regarding notice periods, grounds for dismissal, compensation, severance, and protection against unlawful termination. These legal safeguards are designed to promote procedural fairness, uphold labor rights, and ensure balanced industrial relations.
Types of termination of employment
- Termination of time-based and work-based employment
- Employment may be terminated voluntarily
- Employment may be terminated on the ground of incompetence
- Employment may be terminated on the ground of health
A ) Termination of time-based and work-based employment (section140)
The Labor Act, 2074 (2017) of Nepal provides specific guidelines for terminating employment in cases where workers are hired on a time-bound or task-specific contract. From a contractual viewpoint, such employment is based on a written agreement that clearly outlines the duration of employment or the specific task to be completed. The employment relationship ends automatically once the contract period expires or the assigned task is completed. In such cases, the termination is not considered a dismissal but a natural conclusion of the contract. This approach ensures clarity, legal certainty, and fairness in project-based or temporary work arrangements. However, both the employer and employee must adhere to the terms and conditions mentioned in the contract. If the contract is ended before completion without valid reason, such as misconduct, poor performance, or mutual agreement there may be legal consequences or a need for compensation. The Act also protects the worker’s right to wages, safety, and other basic conditions during the contract period. To prevent misuse, the law discourages repeatedly renewing fixed-term contracts without proper justification. Therefore, clear documentation, legal compliance, and mutual understanding are essential when entering into and terminating such employment contracts.
- Time-Based Employment
Employment that is contracted for a fixed period shall automatically end upon the 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 the work, the employment will continue until the extended period is completed. - Work-Based Employment
For workers hired to complete a specific task or job, the employment relationship ends once the assigned work is finished.
Nevertheless, if the nature or scope of the project expands or is extended, the employment will remain valid until the additional work is completed. - Casual Employment
In the case of casual or day-based employment (where there is no fixed term or specific task), either the employer or the worker may choose to terminate the employment at will, without needing to fulfill additional conditions.
This section ensures that employment terms for non-permanent staff are predictable and legally grounded, particularly in industries that rely on short-term or project-based labor.
B) Employment may be terminated voluntarily (section 141)
The Labour Act, 2017 recognizes the right of workers to leave their job voluntarily through a formal resignation process. To ensure transparency and fairness, the law has outlined specific procedures:
- Submission of Resignation: An employee who wishes to terminate their employment must provide a written resignation to the employer.
- Employer’s Response Timeline: The employer is legally required to acknowledge and accept the resignation within 15 days of its submission. If no response is given within this period, the resignation is considered automatically accepted from the next day.
- Possibility of Withdrawal: A resignation can be withdrawn, but only if both the employer and the employee agree to cancel it before it takes effect.
- Continuation of Work After Resignation: If the employee continues to work in the same role after the resignation has taken effect, it is presumed that the resignation has been nullified, and the employment remains valid.
C) Employment may be terminated on the ground of incompetence (section 142)
Employers in Nepal have the legal right to dismiss an employee if their work performance consistently falls below acceptable standards. However, the Labour Act, 2017 ensures that such actions are not taken arbitrarily and must follow a structured process.
If an employee’s performance is found to be unsatisfactory for three consecutive years or more, the employer may initiate termination proceedings. This assessment must be based on formal evaluations carried out as per the procedures outlined in the Act and associated regulations or internal bylaws.
Before finalizing any termination on these grounds, enterprises that employ ten or more workers are required to give the concerned employee at least seven days to provide an explanation or defend their performance. This step safeguards the employee’s right to respond and ensures due process.
In essence, while poor performance may be a legitimate reason for termination, the law mandates that such decisions be based on documented evidence and fair evaluation practices.
D) Employment may be terminated on the ground of health (section143)
The Labour Act, 2074 (2017) permits employers to terminate employment when an employee is unable to perform their duties due to serious physical or mental health issues. Termination in such cases must be supported by a medical doctor’s recommendation confirming the employee’s incapacity or prolonged need for medical treatment.
However, the law provides important protections for workers during periods of illness or injury:
- Employment cannot be terminated while the employee is receiving hospital treatment for work-related accidents or occupational diseases. Additionally, if the employee is undergoing home treatment, termination is barred for up to one year from the start of such treatment. During this period, the employer is obligated to pay full wages unless the employee is receiving benefits from the Social Security Fund.
- In situations where the medical treatment is unrelated to work injuries, the employee’s employment cannot be ended for at least six months. This period may be shortened only if a medical professional certifies that the employee is permanently unable to return to work.
- Furthermore, 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.
Notice Period Requirements for Termination of Employment (section144)
According to Section 144 of the Labour Act, 2017, both employers and employees are required to provide prior notice before terminating an employment contract, except in cases where termination is due to misconduct.
The notice period depends on the duration of the employee’s service as follows:
- For employment lasting up to 4 weeks: At least 1 day notice must be given.
- For employment lasting between 4 weeks and 1 year: At least 7 days’ notice is required.
- For employment exceeding 1 year: At least 30 days’ notice must be provided.
If the employer terminates the employment without providing the mandated notice, they are obligated to pay the employee compensation equivalent to the wages for the notice period. Similarly, if an employee resigns without giving the required notice, the employer may deduct the corresponding amount from the employee’s final salary.
Retrenchment Procedures for termination of employment (section 145)
Retrenchment, commonly referred to as layoffs, occurs when an employer needs to reduce the workforce due to financial difficulties, enterprise mergers, or partial or complete closure of operations. Section 145 of the Labour Act, 2017, outlines the procedures and rules that employers must follow when carrying out retrenchment:
- Advance Notice:
Employers are required to provide at least 30 days’ prior notice to the Labour Office and the authorized trade unions or labor relations committees. This notice must include the reasons for retrenchment, the expected date of retrenchment, and the estimated number of employees affected. - Consultation with Trade Unions:
Following the notice, employers must engage in discussions with the trade union or labor relations committee. The purpose of these consultations is to explore alternatives to retrenchment and to agree on fair criteria for selecting employees for retrenchment. If the union or committee refuses to hold discussions or no agreement is reached, the employer may proceed with retrenchment after informing the Labour Office. - Order of Retrenchment:
Retrenchment should generally be conducted based on the following order of priority:- First, foreign workers;
- Next, workers with a history of disciplinary actions;
- Then, workers with poor work performance;
- Lastly, those most recently hired.
However, exceptions can be made if the employer provides valid reasons for a different order. Notably, office bearers or leaders of recognized trade unions are to be retrenched last, ensuring protection of union representatives.
- Severance Compensation:
Employees who have completed at least one year of continuous service are entitled to severance pay. The compensation is calculated at the rate of one month’s basic salary for each year of service. For employees with less than one year of service, severance is paid proportionately. - Exemptions:
The retrenchment rules under Section 145 do not apply to enterprises employing ten or fewer workers. Additionally, retrenchment is not applicable in cases where an enterprise is ordered to close fully or partially by the Government of Nepal or the Labour Court.
Compulsory Retirement Age of labour (section 147)
According to Section 147 of the Labour Act, 2017, all regular employees are required to retire compulsorily once they reach the age of 60 years. This provision aims to ensure a clear and uniform retirement age across workplaces, facilitating workforce planning and opportunities for new employment.
However, the law allows for exceptions where compulsory retirement may occur before the age of 60, but only for specific types of work that may demand earlier retirement due to the nature or conditions of the job. Such exceptions must be formally approved by the relevant Council as prescribed under the Act.
This regulation helps maintain a balance between protecting workers’ rights to stable employment and addressing the practical needs of certain industries that require adjustments to retirement age based on job requirements.
Payment of Benefits Upon Termination of employment (section148)
Under Section 148 of the Labour Act, 2017, employers are obligated to pay all outstanding wages and benefits to an employee within 15 days of termination, regardless of the cause of termination. This ensures that employees receive their rightful compensation promptly after the end of their employment.
Employers must also assist employees in claiming any entitled benefits from sources such as the Social Security Fund or insurance providers.
If the employer fails to make the payment within the stipulated timeframe, they are required to continue paying the employee’s wages as if the employee were still working until the full amount is settled.
In cases where the employee is not available to receive the payment directly, the employer may transfer the payment to the employee’s bank account or deposit it with the labor office to safeguard the employee’s rights.
Priority of Labour Claims in Enterprise Closure (section 149)
According to Section 149 of the Labour Act, 2017, if an enterprise is closed or goes through liquidation, the outstanding wages and benefits owed to workers must be given first priority over all other financial obligations. This legal provision ensures that employees are not left uncompensated when a company shuts down or becomes insolvent. However, in cases where insolvency laws are specifically applicable, the matter will be dealt with as per those laws.
Certificate of Work Experience (section 150)
As per Section 150 of the Labour Act, 2017, any employee whose employment has been terminated has the right to request a certificate of work experience from the employer. The employer must provide this certificate, which should include key details such as the duration of service, job title, and nature of work performed. This provision helps support the employee’s future job prospects by offering formal documentation of their professional experience.
Conclusion
The Labour Act, 2017 of Nepal provides a comprehensive legal framework to govern the termination of employment, ensuring fairness, transparency, and protection of workers’ rights. Whether the termination arises from resignation, poor performance, health issues, retrenchment, or retirement, the Act outlines clear procedures and safeguards for both employers and employees. By adhering to these provisions, organizations can promote responsible employment practices while fostering industrial harmony and legal compliance in the workplace.