The new labor act 2074 came into effect on 04 September, 2017 after revoking the Labor Act 2048, Industrial Trainee Training Act 2039 and Retirement Fund Act 2049. Some of the key changes observed in the new labor law are given in Table 1.
Table 1: Key changes observed in the Labor Act Nepal 2074
|Topics||Labor Act 2048||Labor Act 2074|
|Act Applicability||Entities with 10 or more employees||Any entity regardless of employee headcount|
|Hiring Modes||Not much flexibility||Entity can hire people for different terms as per their need; formally recognized the role of interns and trainees|
|Hiring Foreign Nationals||Managers are obliged to make arrangements for training Nepalese citizen for work and gradually replace foreign nationals
Hire foreign nationals after announcing vacancy in national newspaper only if Nepalese citizen is not available for work
|Managers are not required to take extra steps to replace foreign nationals
The prohibition on hiring foreign nationals continues but work permit for employees working in entity with foreign investment/aid can simply be provided by recording them at the Labor Department
The foreign nationals can repatriate their income in convertible foreign currency
|Outsourcing||No provision for outsourcing of work and services||Recognized outsourcing such that manpower supplier can supply labor after being registered and licensed for supply.
*Labor supplier is responsible for providing remuneration and the main employer is responsible for ensuring that the employee is paid well
|Probation Period||1 year||6 months|
|Working Hours||8 hours a day, 6 days a week
Overtime limit 20 hours
Women and minors can be engaged from 6 in the morning to 6 at night unless prescribed
|Regular work hour continues to be the same
Overtime limit increased to 24 hours
Women can be engaged in work at any hour of the day but should be provided transportation if work starts or ends before sunrise or after sunset
|Leave & Holidays||52 days of maternity leave||Increased maternity leave to 98 days; introduced paternity leave of 15 days|
|Retirement Age||Compulsory retirement at 55 years||Compulsory retirement at 58 years|
|Terminal Benefits||Gratuity eligible after completion of 3 years of service||Gratuity eligible since the first day of employment|
|Disciplinary Action||Suspension in cases like bribery and alcohol consumption||Deduction in remuneration or delayed promotion in lieu of suspension for minor breaches
*Bribery and alcohol consumption results in dismissal
The minimum wage was also revised on July of 2018. The new minimum wage increased from NPR 9,700 (USD 97) per month to NPR 13,450 (USD 134.5) per month. The revision in the wage hike is also something that will significantly influence every sector of Nepal. Between 2016 and June 2018, the wage hiked by over 38% while the annual inflation rate in 2017 was just 4.5% and projected inflation rate by Asian Development Bank in 2018 is 5.5%. This huge discrepancy between inflation rate and wage hike rate might hurt profitability of entities in general.
Losers and Winners
The new labor law is sensitive to both the employers and employees.
- Flexibility in hiring. Employers can flexibly hire people who can cater their needs. With clear provisions on working hours and roles for each classification, it will also be convenient for employers to rightfully execute their direction and supervision.
- Flexibility in outsourcing. Employers will also benefit from formal recognition of outsourcing. An entity in need of special skill set or additional worker can use expertise of employees in other companies. According to Forbes, outsourcing provides entity access to larger talent pool, avoid hassle of hiring extra employees.
- Clarity in collaboration for hiring. In times of collaboration between entities, they can divide their labor efficiently to achieve desired goal. Besides, the new labor law of Nepal has also clearly indicated the role of labor supplier and the main employer in terms of remuneration and other facilities for employees. This will help two entities have clear understanding of each other’s obligation during the process.
- Enhanced rights and safety of employees. For employees, the new labor act and regulations have attempted to strengthen their rights and safety in the workplace.
- Availability of paid and longer maternity and paternity leaves, compulsory insurance, better terminal benefits will aid employees maintain work life balance and possibly better health. Research has shown that non-monetary incentives can bring “good work motivation” in employees which will likely increase work productivity.
- Another important and noteworthy shift of the new regulation is the provision for protection against sexual harassment. Labor act 2074 has made provisions for termination based on seriousness of offence in cases of sexual harassment. While the provisions made are not outright specific, they are, indeed, an important and commendable step taken to make workplace safe and inclusive.
- Sectoral Impact. The Labor Act 2074 will likely affect Nepal’s service sector the most. The service sector comprises 51% of the formal economy and accounts for 20% of the total labor force of the country. According to the report by the World Bank, the average years of education of employees in finance, commerce and public administration were higher than in agriculture and manufacturing in Nepal in 2008. The report concluded that “Industry and services rely on workers who are considerably more educated than workers in agriculture.” Because of higher presence of informed manpower, it might be harder for service sector to go against the law. That being said, industries with strong labor unions, like manufacturing, might also be affected much as the entities in those industry will be highly scrutinized and forced to strictly abide by laws pertaining worker’s remuneration, health and safety.
- Impact on informal economy. It is important to note that the informal economies, which comprise 70% of active population according to International Labor Organization, may not be as impacted, because, labors involved are usually uninformed and their activities remain unrecorded. Hence, the labor involved in subsistence agriculture, and any other sorts of informal activities might not be able to reap the benefits of the new regulation put in place.
Amendments in the labor law and its impact on doing business in Nepal
Currently, Nepal ranks 105 (59.95 distance to frontier) in doing business indicator measured by the World Bank. In terms of distance to frontier, Nepal leads the average of South Asia by slightly over 6 points. However, there is still a lot of room for improvement. Openness to hiring foreign nationals, better work hours, attractive remuneration and other facilities, and open foreign investment policies could make Nepal a possible portfolio option for global investors.
Table 2: Nepal in the global labor market
|Indicators (2017)||Nepal||World Average|
|Labor Force Total||17.05 million||3.453 billion|
|Labor Force Participation Rate, male (15+)||86||75.196|
|Labor Force Participation Rate, female (15+)||83||48.687|
|Unemployment (% of total labor force)||2.7||5.52|
With the introduction of new labor act, the country has attempted to strike balance between rigidity and flexibility. New regulations like varied hiring modes and outsourcing is meant to discourage informality while better leaves and shorter probation period is meant to improve working condition for the workers. In regard to fixed-term contracts, Organisation for Economic Co-operation and Development (OECD) has claimed that low-income economies are likely to limit such contracts but those contracts have the “potential of increasing employability of first time labor market entrants” and can “better respond to seasonal fluctuations in demand.” The provision for fixed-term contracts through flexible hiring mode in the Labor Act 2074 indicates the possibility of higher employment opportunities and improved productivity in Nepal in coming years.
Similarly, the new act has continued severance pay of 30 days per year if an employee is not entitled to unemployment allowance under Social Security Act. This is much less than the days in other countries assessed by OECD. The lower severance pay will allow low-funded enterprises to better restructure their composition in times of struggle.
The Labor Act 2074 has taken a great stride in making workplace more safe and inclusive. Introduction of paternity leave, increased days of maternity leave, provision of medical and accident insurances will all contribute in creating a favorable working condition. However, gender pay gap, though restricted by law, is an immense problem. Likewise, there is a lot of room for improvement on introducing harassment awareness and prevention training to employees and creating inclusive workplace to non-binary gender identities as well.