Employee Termination and Severance Rights Under Nepal Labor Law: Comprehensive Guide to Legal Procedures, Compensation, and Remedies

Introduction: Employee Termination and Severance Rights Under Nepal Labor Law

Employee termination represents one of the most significant employment transitions, involving the formal conclusion of the employer-employee relationship. Whether termination results from voluntary resignation, performance issues, health concerns, misconduct, or organizational restructuring, the process carries substantial legal implications for both employers and employees. For labor lawyers, HR consultants, employers, and workers, comprehensive understanding of termination procedures, notice requirements, severance calculations, and legal remedies is essential.

The Labor Act 2074 BS (2017 AD) and Labor Rules 2075 BS (2018 AD) establish Nepal's comprehensive legal framework governing employment termination. The framework reflects balanced protection for worker interests and employer operational flexibility. The Act provides detailed provisions regarding valid termination grounds, mandatory notice periods, severance compensation calculations, remedies for wrongful termination, and post-termination employer obligations.

Nepal's termination framework recognizes that employment relationships must end for various legitimate reasons: voluntary employee resignation, genuine performance deficiencies, health incapacity, serious misconduct, organizational restructuring, and mandatory retirement. However, the framework also establishes rigorous protections against arbitrary or wrongful termination, ensuring that employers cannot terminate employment without proper grounds, adequate notice, and fair compensation.

This comprehensive guide addresses all dimensions of employee termination and severance rights: types of termination and their legal requirements; notice period calculations based on service duration; valid grounds for termination including voluntary resignation, incompetence, health issues, and misconduct; retrenchment procedures; severance compensation calculations and entitlements; remedies for wrongful termination; post-termination employer obligations; final settlement calculations; and practical guidance for legal professionals representing employers and employees.

Section 1: The Legal Framework for Employment Termination

1.1 Statutory Basis for Termination Provisions

The Labor Act 2074 BS Framework: The Labor Act 2074 BS (2017 AD), which came into effect on August 17, 2074 BS (2017 AD), represents Nepal's modern employment law governing all employment relationships regardless of employer size. Sections 140-149 of the Act address employment termination comprehensively.

Purpose of Termination Regulations: The statutory framework serves multiple purposes: (a) establishing legitimate grounds for termination to prevent arbitrary dismissal; (b) requiring notice periods enabling employees to prepare for employment transition; (c) mandating severance compensation recognizing employees' service and facilitating post-employment financial security; (d) establishing procedures protecting both employer and employee interests; and (e) providing remedies for wrongfully terminated employees.

Applicability to All Employment: Unlike the previous Labor Act 2048 BS (1991 AD) which applied only to entities with ten or more employees, the Labor Act 2074 BS applies to all employers regardless of size. This universal applicability means that all workers—regardless of employer size—are protected by comprehensive termination provisions.

Constitutional Basis: The termination provisions derive constitutional authority from Article 296(1) of the Constitution of Nepal 2072 BS (2015 AD), which grants parliament authority to enact laws regulating labor and employment. The provisions also implement constitutional protections including the right to work, fair treatment, and social security.

1.2 Types of Employment and Termination Applicability

The Labor Act recognizes multiple employment types, with termination provisions varying based on employment type:

Regular Employment: Regular employment is indefinite duration employment, typically for full-time positions. Regular employees are entitled to full termination protections including notice periods, severance compensation, and access to all legal remedies.

Work-Based Employment: Work-based employment involves hiring for specific projects or work with defined scope. Upon work completion, employment automatically terminates. Work-based employees receive notice and severance proportionate to their service.

Time-Bound Employment: Time-bound employment involves hiring for specified periods (6 months, 1 year, etc.). Upon contract expiration, employment ends. Time-bound employees receive proportionate severance and notice based on their service period.

Casual Employment: Casual employment involves hiring up to 7 days per month. Casual employees may be terminated without formal notice, though they must receive final wage settlement and proportionate benefits.

Part-Time Employment: Part-time employment involves working fewer than 35 hours weekly. Part-time employees are entitled to notice and proportionate severance based on their service.

Each employment type has distinct termination implications, affecting notice periods, severance eligibility, and remedies available.

Section 2: Types of Employment Termination and Legal Grounds

2.1 Voluntary Resignation by Employee

Employee Right to Resign: The Labor Act recognizes employees' fundamental right to resign and end their employment voluntarily. Resignation represents the employee's decision to terminate employment and differs from employer-initiated dismissal.

Resignation Procedure: Section 141 establishes the formal resignation procedure:

• Written Notice: An employee must submit written resignation to the employer, providing clear notification of intent to end employment.

• Employer Acknowledgment: The employer must acknowledge receipt of resignation and provide notice of acceptance or communication regarding the resignation within 15 days of receiving it.

• Automatic Acceptance: If the employer fails to respond within 15 days, the resignation is deemed automatically accepted effective the next day following the 15-day period.

• Notice Period During Resignation: During the notice period between resignation submission and resignation effectiveness, the employee must continue to work and the employer must continue to pay wages unless other arrangements are agreed.

Resignation Withdrawal: Before a resignation becomes effective, an employee may withdraw the resignation only through mutual consent between the employee and employer. If an employee continues to work after resignation has been accepted, the continuation is presumed to nullify the resignation unless the employer explicitly refuses.

Notice Period for Resignation: When resigning, employees must provide notice periods:

• Up to 4 weeks employment: 1 day notice
• 4 weeks to 1 year employment: 7 days notice
• Exceeding 1 year employment: 30 days notice

Failure to provide required notice results in potential wage deduction from final salary equivalent to the notice period that should have been provided.

2.2 Termination Due to Expiry of Employment Term

Time-Bound and Work-Based Employment Expiry: For time-bound employment contracts with specified durations and work-based employment for specific projects, employment automatically terminates upon contract expiry or project completion.

Termination Process: Section 140(1) establishes that employment of time-based and work-based workers may terminate only after:

• The specified employment period expires, OR
• The project or work for which employment was contracted is completed

No additional cause or notice is required for such termination, as termination occurs automatically upon contract expiry.

Notice Regarding Expiry: While automatic termination occurs, employers should provide notice to employees regarding the impending expiry to enable employees to prepare for employment transition.

Severance Entitlements: Employees whose time-bound or work-based employment expires are entitled to severance compensation proportionate to their service period.

2.3 Termination on Ground of Incompetence or Poor Performance

Performance-Based Termination Grounds: Section 142 permits employers to terminate employees based on performance incompetence. However, the Act establishes rigorous procedures protecting employees from arbitrary performance-based termination.

Performance Standard: The Act establishes that performance-based termination is permissible only if:

• The employee's performance is found to be unsatisfactory for three or more consecutive years, based on formal performance evaluations

• The employer has conducted formal performance evaluations following procedures outlined in the Act, regulations, or internal bylaws

• The performance deficiency is documented and measurable

Due Process Requirement: Before terminating for performance reasons, employers must:

• Conduct formal performance evaluations documenting the performance deficiency

• Provide the employee with written notification of performance concerns

• Provide the employee at least 7 days to submit written explanation or defense regarding their performance

• Consider the employee's explanation in deciding whether to proceed with termination

Severe Performance Standards: The three-year standard reflects that genuinely poor performance must be persistent and documented. Isolated performance issues or temporary downturns do not justify termination.

Appeal Opportunity: Employees terminated for performance may appeal to the Labor Court, which will review whether performance was truly unsatisfactory for three consecutive years and whether fair procedures were followed.

2.4 Termination on Ground of Health or Medical Inability

Medical Incapacity as Termination Ground: Section 143 permits termination when an employee is unable to perform their job duties due to serious physical or mental health issues. This provision recognizes that serious health conditions may make continued employment impossible or unfair to both parties.

Medical Certification Requirement: Termination on health grounds requires documented medical evidence:

• Medical doctor's certification confirming the employee's incapacity or prolonged medical need

• Medical evidence that the condition prevents the employee from performing essential job functions

• Assessment that the incapacity is likely to be permanent or long-term

Treatment Continuation Protection: Even where health issues exist, the Act provides strong protection for employees receiving medical treatment:

• Continued Payment: Employers must continue paying employees full remuneration during medical treatment periods

• Treatment Duration: For home-based treatment, employment cannot be terminated for one year from treatment commencement

• Work Provision: Employers must attempt to provide suitable work for injured or disabled employees rather than terminating

No Termination During Treatment: Employers cannot terminate employees during active medical treatment unless the incapacity is determined to be permanent and the employer provides substantial notice and severance.

2.5 Termination on Ground of Serious Misconduct

Misconduct Defined: Section 146 permits immediate termination for serious misconduct. Unlike performance-based termination requiring substantial service period, misconduct-based termination may occur immediately (after providing explanation opportunity).

Specified Misconduct Categories: The Act specifies serious misconduct grounds:

• Physical Assault or Harm: Engaging in physical assault or causing physical harm to any person associated with employer, clients, or workplace

• Weapons or Vandalism: Using weapons or committing vandalism within workplace premises

• Bribery: Receiving or offering bribes to employer, clients, or coworkers

• Theft: Committing theft against persons or employer within workplace

• Unauthorized Absence: Remaining absent for more than 30 consecutive days without approved leave

• Property Damage: Intentionally damaging employer's property

• Financial Fraud: Embezzling employer's finances or money

• Confidentiality Breach: Breaching confidentiality regarding employer's trade secrets, formulae, technology, or business information

• Competing Business: Engaging in competing business or disclosing confidential information to competitors

• Fraudulent Documents: Submitting fraudulent educational credentials, professional documents, or qualifications

• Substance Abuse: Consuming narcotics or alcohol during working hours or in workplace

• Criminal Conviction: Being convicted of crime involving moral turpitude affecting workplace fitness

• Pattern of Misconduct: Committing acts of misconduct resulting in disciplinary action more than twice within three years

Explanation Opportunity: Even for misconduct termination, employers must provide employees at least 7 days to submit written explanation regarding the alleged misconduct before finalizing termination.

Immediate Termination: Upon confirming serious misconduct, employers may terminate immediately without providing advance notice (though the 7-day explanation opportunity is required before termination decision).

2.6 Termination on Ground of Retirement

Mandatory Retirement Age: Section 147 establishes that regular employees must retire upon reaching age 60. Retirement represents automatic termination based on age rather than employer or employee choice.

Flexible Retirement Provisions: For specific types of work, employers may establish different retirement ages through enterprise bylaws, subject to approval from the Central Labor Advisory Council. This flexibility recognizes that certain positions require retirement at different ages.

Retirement Benefits: Upon retirement, employees are entitled to all accrued severance, gratuity, provident fund, and other benefits.

Voluntary Early Retirement: Employees may request early retirement with employer consent, in which case they receive accrued benefits calculated to the early retirement date.

Section 3: Notice Period Requirements and Calculations

3.1 Notice Period Provisions Under Section 144

General Notice Requirement: Section 144 establishes that both employers and employees must provide notice before terminating employment, except in cases of serious misconduct termination.

Notice Period Based on Service Duration: The Act specifies notice periods based on the employee's service duration:

Notice Period Commencement: The notice period commences on the day following the day the notice is submitted or delivered.

Continuous Service Calculation: Service duration includes all periods of continuous service. Short absences (leaves), holidays, and temporary work stoppages do not break continuous service. Continuous service is broken only by substantial breaks (typically exceeding 3 months).

3.2 Notice Content Requirements

Notice Must Include: The termination notice should include:

• Clear statement that employment is being terminated

• Effective date of termination (giving required notice period)

• Reason for termination (except for resignation, where reasons may be omitted)

• Reference to applicable legal provision

• Notification of employee's rights regarding final settlement and severance

Written Form Requirement: Notice must be in written form, preferably with receipt confirmation. This creates clear evidence of the notice date for calculating notice period expiration.

Language Requirement: Notice should be in language the employee understands, ensuring employee comprehension of termination and rights.

3.3 Pay in Lieu of Notice

Substitution for Notice Period: Employers may substitute payment for the notice period rather than requiring the employee to continue working during notice. This is called "pay in lieu of notice."

Calculation: Pay in lieu of notice is calculated as:

• Computation: (Daily Rate) × (Number of Days in Notice Period)

• Daily Rate: Basic Daily Remuneration = (Monthly Basic Salary) ÷ (26 days) [assuming 26 working days per month]

Example Calculation:

• Employee with 3 years service, basic salary 30,000 NPR
• Notice period required: 30 days
• Daily rate: 30,000 ÷ 26 = 1,153.85 NPR
• Pay in lieu: 1,153.85 × 30 = 34,615.38 NPR

Employee Continuation During Notice: If pay in lieu is not provided, the employee must continue to work during the notice period and the employer must pay regular wages.

3.4 Exceptions to Notice Requirement

Serious Misconduct Exception: No advance notice is required for termination due to serious misconduct. The employer may terminate immediately upon confirming misconduct (after providing the 7-day explanation opportunity).

Casual Employment Exception: Casual employees (working up to 7 days per month) may be terminated without formal notice, though they must receive final wage settlement.

Time-Bound/Work-Based Employment: These automatically terminate upon contract expiry or project completion without requiring separate notice.

Section 4: Retrenchment Procedures and Requirements

4.1 Definition and Grounds for Retrenchment

Retrenchment Defined: Retrenchment involves the employer-initiated termination of employees' employment for business reasons beyond the employee's control, such as:

• Economic downturn requiring workforce reduction

• Technological changes eliminating job roles

• Business relocation or restructuring

• Organizational closure or consolidation

• Economic necessity or financial constraints

Distinction from Misconduct or Performance Termination: Unlike misconduct or performance termination, retrenchment is not based on employee fault or deficiency. Rather, retrenchment occurs due to business circumstances making the position unnecessary.

Legal Requirement for Retrenchment: The Act requires that retrenchment be based on genuine business need, not used as pretext for arbitrary termination. Courts review retrenchment claims to ensure legitimacy.

4.2 Retrenchment Procedural Requirements

Notice to Labor Office and Unions: Section 146(1) requires employers to:

• Provide written notice to the Labor Office at least 30 days before initiating retrenchment

• Provide notice to authorized trade unions or labor relations committees

• Include in notice: reasons for retrenchment, expected date, estimated number of employees affected

Consultation Requirement: Employers must:

• Engage in negotiations and discussions with the union or labor relations committee

• Explore alternatives to retrenchment (reducing hours, temporary layoffs, etc.)

• Seek agreement on fair criteria for selecting employees for retrenchment

Agreed Criteria: Through negotiation, employers and unions should agree on selection criteria, such as:

• Last In First Out (LIFO) principle

• Performance rating

• Skills and qualifications

• Seniority considerations

• Other mutually agreed criteria

Refusal or Dispute: If unions refuse to participate in discussions or no agreement is reached, employers may proceed with retrenchment after informing the Labor Office of the dispute.

4.3 Retrenchment Severance and Compensation

Severance Compensation: Section 146(4) requires that:

• Employees with at least one year continuous service receive severance of one month's basic salary per year of service

• Employees with less than one year service receive proportionate severance

• Severance is calculated based on basic salary only, not including allowances

Retrenchment Bonus: In addition to severance, employees may receive retrenchment bonus as negotiated or prescribed by collective bargaining agreement.

Example Severance Calculation:

• Employee with 8 years service, basic salary 25,000 NPR
• Severance = 1 month × 8 years = 8 months salary
• Severance payment = 25,000 × 8 = 2,00,000 NPR

4.4 Re-Employment Priority

Priority for Re-Employment: Section 146(5) establishes that:

• If the enterprise resumes operations or requires additional manpower within 2 years of retrenchment

• Retrenched employees must be given priority for re-employment in comparable positions

• This provision encourages enterprises to recall retrenched workers when business conditions improve

Small Enterprise Exception: This provision does not apply to enterprises employing 10 or fewer employees (at the time of retrenchment).

Section 5: Severance Compensation and Calculations

5.1 Eligibility for Severance

Service Duration Requirement: Under Section 145, employees are entitled to severance compensation if they have completed at least one year of continuous service at the time of termination.

Eligibility Scenarios:

• Regular termination: Employees with 1+ year service receive severance regardless of termination reason (except misconduct)

• Retrenchment: Employees with 1+ year service receive severance

• Health termination: Employees with 1+ year service receive severance

• Performance termination: Employees with 1+ year service receive severance

• Misconduct termination: Employees may NOT receive severance if terminated for serious misconduct (though gratuity and provident fund may still apply)

• Voluntary resignation: Employees with 1+ year service receive severance upon resignation

Continuous Service Calculation: Service includes all periods worked continuously. Breaks exceeding 3 months typically interrupt continuity.

5.2 Severance Calculation Methodology

Calculation Formula: Section 145 establishes the severance calculation formula:

Severance = (1 month's basic salary) × (Number of complete years of service) + Proportionate severance for partial years

Step-by-Step Calculation Process:

Step 1 - Determine Basic Salary: Basic salary is the fundamental compensation component, excluding allowances. If the employee received multiple salary levels during service, typically the final salary is used.

Step 2 - Calculate Complete Years: Count complete years of continuous service. For example, 3 years 8 months service = 3 complete years with 8 months partial service.

Step 3 - Calculate Complete Year Severance: 1 month salary × number of complete years = severance for complete years

Step 4 - Calculate Partial Year Severance: For remaining months, calculate proportionate severance:

• (1 month salary) × (Remaining months ÷ 12 months)

Step 5 - Total Severance: Add severance for complete years plus partial year severance

5.3 Detailed Severance Calculation Examples

Example 1: 5 Years Exact Service

• Basic Monthly Salary: 40,000 NPR
• Service Duration: 5 years exactly
• Complete Years: 5
• Partial Months: 0
• Calculation:
  • Complete years severance: 40,000 × 5 = 2,00,000 NPR
  • Partial months severance: 0 (no partial months)
  • Total Severance: 2,00,000 NPR

Example 2: 7 Years 6 Months Service

• Basic Monthly Salary: 35,000 NPR
• Service Duration: 7 years 6 months
• Complete Years: 7
• Partial Months: 6
• Calculation:
  • Complete years severance: 35,000 × 7 = 2,45,000 NPR
  • Partial months severance: (35,000 × 6) ÷ 12 = 17,500 NPR
  • Total Severance: 2,45,000 + 17,500 = 2,62,500 NPR

Example 3: 2 Years 3 Months Service

• Basic Monthly Salary: 25,000 NPR
• Service Duration: 2 years 3 months
• Complete Years: 2
• Partial Months: 3
• Calculation:
  • Complete years severance: 25,000 × 2 = 50,000 NPR
  • Partial months severance: (25,000 × 3) ÷ 12 = 6,250 NPR
  • Total Severance: 50,000 + 6,250 = 56,250 NPR

Example 4: Less Than 1 Year Service (11 Months)

• Basic Monthly Salary: 30,000 NPR
• Service Duration: 11 months
• Complete Years: 0
• Partial Months: 11
• Calculation:
  • Complete years severance: 0 (no complete years)
  • Partial months severance: (30,000 × 11) ÷ 12 = 27,500 NPR
  • Total Severance: 27,500 NPR

5.4 Exclusions and Exceptions from Severance

Unemployment Allowance Exception: Section 145(2) provides that employees who are entitled to unemployment allowance under Social Security laws are not entitled to severance compensation. They receive unemployment allowance instead of severance.

Misconduct Exception: Employees terminated for serious misconduct may not receive severance, though they retain rights to accrued gratuity and provident fund (subject to verification that misconduct does not warrant forfeiture).

Voluntary Resignation: Voluntarily resigning employees are entitled to severance if they have completed one year service and provide required notice.

Section 6: Wrongful Termination and Remedies

6.1 Definition of Wrongful Termination

Wrongful Termination Defined: Wrongful termination occurs when an employer terminates employment in violation of the Labor Act, including:

• Termination without valid legal grounds

• Termination without providing required notice (except for misconduct)

• Termination based on discriminatory reasons

• Termination in retaliation for asserting legal rights

• Termination not following required procedures

• Termination of employees with protected status (pregnant workers, union members, injured workers)

Burden of Proof: Upon claim of wrongful termination, the Labor Court will examine whether the employer had valid grounds and followed proper procedures. The employer bears burden of proving that termination was lawful.

6.2 Grounds for Wrongful Termination Claims

Discriminatory Termination: Termination based on protected characteristics is unlawful, including termination based on:

• Caste, religion, ethnicity, or gender

• Political affiliation or opinion

• Union membership or participation in union activities

• Pregnancy or maternity status

• Disability or medical condition

• Age

Retaliation Termination: Termination in retaliation for:

• Filing labor complaint

• Participating in strike or union activity

• Complaining about safety conditions

• Asserting legal rights

• Reporting labor law violations

Procedural Violations: Termination that fails to follow required procedures:

• No valid grounds identified or proven

• Required notice not provided (except for misconduct)

• No explanation opportunity provided for performance or health termination

• Retrenchment procedures not followed

Protected Employee Status: Termination of employees with protected status:

• Pregnant workers (cannot be terminated)

• Workers receiving medical treatment (protection during treatment period)

• Injured workers during injury recovery period

• Union leaders and representatives (enhanced protection)

6.3 Remedies for Wrongful Termination

Reinstatement: The primary remedy for wrongful termination is reinstatement—ordering the employer to restore the employee to their position or a comparable position.

Reinstatement Considerations: Courts consider multiple factors in deciding whether to order reinstatement:

• Employee's wishes regarding reinstatement

• Practicability of reinstatement (whether the position still exists, whether working relationship is salvageable)

• Damage to working relationship from litigation

• Financial compensation adequacy

• Employee's likelihood of securing alternative employment

Back Wages: If reinstatement is ordered, the employee receives back wages—all remuneration and benefits that would have been earned from wrongful termination date to reinstatement date.

Compensation for Damages: If reinstatement is not ordered or is deemed impractical, the employee receives:

• Back wages from termination date to final resolution date

• Severance compensation (as if properly terminated)

• Compensation for emotional distress and damage

• Other consequential losses

Attorney Fees and Costs: Courts may order employers to pay the employee's attorney fees and legal costs associated with pursuing the wrongful termination claim.

Interim Reinstatement: Pending full trial, the Labor Court may order interim (temporary) reinstatement, permitting the employee to return to work while the wrongful termination case is litigated.

Section 7: Post-Termination Employer Obligations

7.1 Final Settlement Requirements

Timeline for Settlement: Section 148 requires that employers settle all outstanding remuneration and benefits within 15 days of employment termination.

Remuneration Included: Final settlement includes:

• Accrued but unpaid wages

• Accrued annual leave (encashment of unused annual leave, up to 90 days maximum)

• Accrued sick leave (if encashment is permitted under policy)

• Accrued sick leave payment

• Severance compensation (if applicable)

• Gratuity entitlement (8.33% monthly basic × months of service)

• Accrued provident fund contributions

• Any other benefits owed

7.2 Wage Continuation if Settlement Delayed

Continued Payment Obligation: If the employer fails to pay all settlement amounts within 15 days of termination, the employer must continue paying the employee's wages as if the employee were still working.

Wage Continuation Period: This wage continuation obligation continues until all outstanding amounts are paid. This strong provision incentivizes employers to make timely final settlements.

Damages for Delay: Beyond continued wages, the employer may be liable for:

• Interest on delayed amounts

• Penalties for wage law violations

• Attorney fees and legal costs

7.3 Final Settlement Documentation

Certificate of Work Experience: Upon termination, employers must provide employees with a certificate of work experience specifying:

• Dates of employment (start and end dates)

• Position(s) held

• Duration of service

• Work performance (optional but recommended)

• Reason for termination (optional)

This certificate assists the employee in seeking future employment.

Settlement Statement: Employers should provide itemized settlement statement showing:

• Final salary payment

• Leave encashment

• Severance compensation

• Gratuity

• Provident fund

• Other benefits

• Total amount paid

Documentation to Employee: All documentation should be provided to the employee in writing, with copies for both the employee and employer.

7.4 Post-Termination Assistance

Social Security and Insurance Claims: Employers must:

• Assist employees in claiming provident fund withdrawals from the Social Security Fund

• Assist in claiming accident insurance and medical insurance benefits

• Provide documentation necessary for benefits claims

Forward Documentation: Upon termination, employers should forward to the Social Security Fund:

• Final salary information for benefit calculation

• Service duration verification

• Contribution records

Bank Transfer Authority: If the employee is not available to receive settlement payments directly, the employer may:

• Transfer payment to the employee's bank account

• Deposit with the Labor Office for safekeeping

• Send through certified mail

Section 8: Labor Court Procedures for Termination Disputes

8.1 Filing Wrongful Termination Claims

Claim Process: An employee dissatisfied with termination may file a claim following this procedure:

Step 1 - Employer Discussion: The employee must first attempt to resolve the termination dispute through discussion with the employer. The employer must provide notice of negotiation within 7 days of the termination claim.

Step 2 - Negotiation Period: The employer and employee (or union representative) have 15 days (extendable by mutual agreement) to negotiate resolution.

Step 3 - Labor Office Filing: If negotiation fails, the employee may file the claim with the Labor Office.

Step 4 - Labor Office Investigation: The Labor Office investigates the claim and attempts mediation between employer and employee.

Step 5 - Labor Court Appeal: If the Labor Office cannot resolve the dispute, either party may appeal to the Labor Court.

8.2 Labor Court Jurisdiction and Authority

Labor Court Authority: The Labor Court has authority to:

• Hear evidence from both employer and employee

• Examine witnesses and documents

• Determine whether termination was lawful or wrongful

• Order remedies including reinstatement, back wages, or compensation

• Award costs and attorney fees

Burden of Proof: The employer bears the burden of proving that termination was lawful and based on valid grounds.

Review Standards: The Labor Court reviews termination claims to determine:

• Whether the employer had valid grounds for termination

• Whether the employer followed required procedures

• Whether the termination violated the employee's legal rights

• What remedies are appropriate

8.3 Interim Remedies Pending Trial

Interim Reinstatement: Upon application, the Labor Court may order interim reinstatement pending full trial, permitting the employee to return to work while the case is litigated.

Interim Reinstatement Requirements: Before granting interim reinstatement, the Court considers:

• Whether the employee is likely to succeed on the merits

• Whether the employee would suffer irreparable harm without reinstatement

• Whether reinstatement is practically possible

• Balance of convenience to both parties

Interim Wage Continuation: During litigation, if the Court finds that the termination appears wrongful, the Court may order the employer to continue paying wages.

8.4 Appeals from Labor Court Decisions

Appeal Rights: Parties dissatisfied with the Labor Court decision may appeal to the District Court, and from the District Court to the Supreme Court.

Appeal Timeline: Appeals must be filed within specified timeframes (typically 30-60 days from the decision date).

Appeal Grounds: Appeals typically argue that the Labor Court:

• Misinterpreted the law

• Made errors in applying law to facts

• Rendered decisions not supported by evidence

Section 9: Specific Termination Scenarios

9.1 Termination Due to Business Closure

Closure-Based Termination: When a business closes permanently, all employees are terminated. The closure constitutes business necessity for retrenchment.

Closure Procedure: Employers must:

• Provide notice to Labor Office and unions

• Provide notice to all affected employees

• Follow retrenchment procedures

• Calculate and pay severance and all benefits

Final Settlement: Employers must pay all outstanding remuneration and benefits within the statutory timeframe.

Liquidation Priorities: If the business is liquidated, employee wage claims typically have priority over other creditor claims.

9.2 Termination of Pregnant Women

Prohibition on Pregnancy Termination: Employers cannot terminate pregnant workers. Section 145 provides special protection for pregnant women.

Duration of Protection: The protection extends from the start of pregnancy through the maternity leave period (approximately 4-5 months for pregnancy and maternity leave).

Termination for Other Reasons: An employer cannot use pregnancy as reason for termination. If an employer attempts to terminate during pregnancy for stated other reasons (performance, retrenchment), the termination is presumed discriminatory and unlawful.

Remedies: Wrongfully terminated pregnant women may claim reinstatement and back wages.

9.3 Termination of Injured or Disabled Workers

Protection During Medical Treatment: Workers receiving medical treatment for workplace injuries cannot be terminated during treatment.

Duration of Protection: For workplace injury treatment at home, employment protection extends for at least one year from treatment commencement.

Alternative Duties: Employers should provide suitable alternative work for injured workers rather than terminating.

Termination After Recovery: After recovery or medical determination that injury is permanent, employers may terminate only following normal procedures with notice and severance.

9.4 Termination of Union Members and Leaders

Union Member Protection: Workers cannot be terminated based on union membership or participation in union activities.

Union Leader Protection: Union leaders and representatives receive enhanced protection against termination.

Dismissal of Union Leader: Dismissal of a union leader typically requires approval from the union, adding procedural requirements.

Retaliation Prohibition: Employers cannot terminate workers in retaliation for union organizing, strikes, or other union activities.

Section 10: Final Settlement Calculation - Comprehensive Example

10.1 Complete Final Settlement Calculation Scenario

Employee Information:

• Name: Ramesh Kumar
• Position: Senior Software Engineer
• Employment Start: Shrawan 15, 2069 BS (August 29, 2012 AD)
• Employment End: Magh 10, 2082 BS (December 25, 2025 AD)
• Reason: Retrenchment due to business restructuring
• Basic Monthly Salary: 60,000 NPR
• Dearness Allowance: 10,000 NPR
• House Rent Allowance: 15,000 NPR
• Total Monthly Compensation: 85,000 NPR

10.2 Service Duration Calculation

Service Duration Calculation:

• From: Shrawan 15, 2069 BS
• To: Magh 10, 2082 BS
• Duration: 12 years 4 months 25 days

For severance calculation purposes: 12 complete years and approximately 5 months

10.3 Components of Final Settlement

Component 1: Final Wage Payment

• Assuming payment is made on termination date with no work days remaining
• Final wage payment: 0 NPR (no partial month work)
• Note: If the employee worked partial month, payment would be proportionate

Component 2: Leave Encashment

• Annual Leave Entitlement: Typically 12 days per year worked
• For 12+ years: Assume 144 accumulated days
• Maximum encashable: 90 days (per policy limit)
• Leave Encashment: (60,000 basic salary ÷ 26 working days) × 90 days
• Calculation: 2,307.69 × 90 = 2,07,692.31 NPR
• Rounded: 2,07,692 NPR

Component 3: Severance Compensation

• Calculation Formula: (1 month basic salary) × (Complete years) + Proportionate severance for partial months
• Complete Years Severance: 60,000 × 12 = 7,20,000 NPR
• Partial Months Severance: (60,000 × 5) ÷ 12 = 25,000 NPR
• Total Severance: 7,20,000 + 25,000 = 7,45,000 NPR

Component 4: Gratuity

• Gratuity Rate: 8.33% of monthly basic × months of service
• Calculation: (60,000 × 8.33% × 149 months) ÷ 12 = 6,18,075 NPR
• Alternative calculation: (60,000 × 149 months × 0.0833) ÷ 12
• Rounded: 6,18,075 NPR

Component 5: Provident Fund Withdrawal

• Employee Contribution (10% monthly): Approximately 60,000 × 12 years × 10% = 7,20,000 NPR (accumulated)
• Plus Employee Contribution on Allowances and Gratuity: Additional accumulated contributions
• Total Accumulated: Approximately 8,50,000 NPR (this would be verified by the Social Security Fund)

Component 6: Final Settlement of Accrued Benefits

• Unpaid allowances and bonuses (if any): 0 NPR
• Outstanding reimbursements (if any): 0 NPR

10.4 Total Final Settlement Calculation

*Provident Fund is withdrawn from Social Security Fund, not paid by employer

10.5 Payment Schedule and Timeline

Payment Timeline:

• Within 15 days of termination: Employer must pay severance, gratuity, leave encashment, and any other employer-paid benefits = 16,70,767 NPR

• Provident Fund Withdrawal: Employee files claim with Social Security Fund within specified timeframe; Fund processes and disburses (typically 15-30 days from claim date)

• Final Documentation: Employer provides:

  • Certificate of work experience
  • Settlement statement itemizing all components
  • Salary certificates for future employer verification

Section 11: Practical Guidance for HR Professionals and Labor Lawyers

11.1 For Employers - Termination Best Practices

Pre-Termination Preparation: Before terminating any employee:

• Document the grounds for termination comprehensively

• Conduct performance reviews if performance-based termination

• Provide warning or explanation opportunity (except clear misconduct)

• Ensure procedures comply with Labor Act requirements

• Calculate severance and final settlement amount accurately

Termination Process:

• Provide written termination notice with required notice period (except misconduct)

• If misconduct, provide 7-day explanation opportunity first

• Clearly state reason for termination and applicable legal provision

• Collect all company property and equipment

• Document the termination meeting

Post-Termination Obligations:

• Calculate final settlement accurately within 15 days

• Pay all amounts within 15 days of termination

• Provide certificate of work experience

• Assist with provident fund and insurance claims

• Forward all documentation to Social Security Fund

Documentation Retention: Maintain complete documentation of:

• Performance evaluations

• Disciplinary actions

• Termination notices

• Settlement calculations and payments

• All correspondence

11.2 For Employees - Termination Rights Awareness

Upon Receipt of Termination Notice:

• Request explanation if grounds are unclear

• Verify that proper notice period is being provided

• Understand your rights regarding severance and benefits

• Consider consulting labor lawyer if termination appears wrongful

Final Settlement Review:

• Request itemized settlement statement

• Verify severance calculation accuracy

• Ensure all accrued benefits are included

• Confirm leave encashment is calculated correctly

• Verify gratuity calculation

If Termination Is Wrongful:

• Attempt resolution with employer first

• File claim at Labor Office if employer refuses

• Consult labor lawyer regarding Labor Court appeal

• Consider interim reinstatement request

Conclusion: Comprehensive Termination and Severance Framework

The Labor Act 2074 BS and Labor Rules 2075 BS establish comprehensive legal frameworks governing employment termination and severance rights. The framework balances legitimate employer business needs with strong protection for employee interests, ensuring that termination occurs only for valid reasons, with adequate notice, and with fair severance compensation.

For labor lawyers representing employers, comprehensive understanding of termination procedures, notice requirements, severance calculations, and documentation is essential for advising clients, ensuring compliance, and managing termination risks. For lawyers representing employees, understanding wrongful termination grounds, available remedies, and legal procedures is critical for effectively advocating for wrongfully terminated clients.

The guidance provided in this comprehensive guide—addressing types of termination, notice requirements, severance calculations, wrongful termination remedies, post-termination obligations, Labor Court procedures, and practical best practices—provides legal professionals with the knowledge necessary to competently handle termination matters, ensure legal compliance, protect client interests, and facilitate fair and lawful employment transitions.