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Retrenchment refers to the reduction of a workforce due to business or economic reasons, such as financial difficulties, redundancy or restructuring.
Redundancy refers to the circumstance when an employer no longer requires an employee’s role due to business or economic reasons.
Retrenchment is the actual termination of an employee’s employment, whereas redundancy is the situation that gives rise to retrenchment. Redundancy is the cause, and retrenchment is the effect.
A reserve is the temporary suspension of an employee’s work due to existence of special circumstances in the workplace, such as shortages of electricity, water, or raw materials, financial constraints, or the inability to continue work at the workplace because of events beyond the employer’s control.
During reserve, the employment relationship continues, whereas under retrenchment, the employment relationship ends permanently.
Unlike retrenchment, other kinds of termination, such as misconduct, poor performance, or bad health, arise from factors attributable to the employee.
An employer can retrench employees on the following grounds:
(a) financial hardships in the enterprise,
(b) excess supply of employees, due to mergers with one or more enterprises, or
(c) closure of operations in part or in whole, due to whatever reason.
Firstly, regulators test whether the job function was no longer required. This assessment focuses on the actual duties and functions performed, rather than the job title itself. For example, it would not suffice to say that a marketing executive or production staff member was no longer required, regulators examine whether those specific functions or duties had ceased to be required. Second, regulators test whether any reasonable alternative position was available for the employee within the enterprise.
In certain circumstances, an employer may be able to retrench employees even if the enterprise remains profitable. For example, an enterprise may be profitable overall, but if demand for a particular product line is suffering from a declining demand, the employer may decide to close the operation for that product line and retrench the impacted employees.
If an enterprise is completely shutting down its operations but the legal entity continues to exist, the employer is required to follow the prescribed retrenchment procedures.
If the legal entity is formally dissolved or liquidated under the law, the employer is not required to follow the prescribed retrenchment procedures. However, the employer must comply with all its obligations owed to employees under the insolvency law.
The decision whether to place employees on reserve or proceed with retrenchment depends on the nature and expected duration of the enterprise’s financial difficulties. If the difficulties are likely to be temporary, placing employees on reserve is appropriate to manage short-term costs while preserving the employment relationship. Conversely, if the difficulties are expected to be long-term and severe, retrenchment may be justified as a measure of last resort to protect the long-term viability of the business.
Yes. Retrenchment procedures only apply to enterprises with more than ten employees. If there are ten or fewer employees, the retrenchment procedures do not apply.
For retrenchment purposes, only employees working in the Nepal branch are counted. Employees of the foreign parent company are not included.
For retrenchment purposes, the employee headcount includes all employees working in the company’s head office as well as those at its branch offices in Nepal.
An employer intending to carry out retrenchment must comply with the following retrenchment procedures:
(a) Issue notice to the relevant labor office at least 30 days prior to date of retrenchment.
(b) Issue notice to the Trade Union or the Labor Relations Committee (LRC) at least 30 days prior to date of retrenchment.
(c) Consult with the Trade Union or the LRC.
(d) Apply selection criteria for retrenching employees.
(e) Issue notice of retrenchment to impacted employees.
(f) Pay all retrenchment compensation and terminal benefits to the impacted employees, and
(g) If the enterprise resumes operations within two years of the retrenchment, provide rehiring preference to the retrenched employees.
The notice to the Labor Office and Trade Union or LRC (Notice) must include, among other things:
(a) the reasons for retrenchment,
(b) the probable date of retrenchment, and
(c) the probable number of employees who may be impacted by retrenchment.
The ‘probable date’ can be presented as a tentative specific date, or it may be presented as a range (e.g., between X and Y) or a general period (e.g., “in the next few months” or “in this quarter”). It may change later after having consultations with the Trade Union or LRC.
The employer is required to notify both the Labor Office and the Trade Union or LRC, but consultation is required only with the Trade Union or LRC. The key differences are:
| Labor Office | Trade Union or LRC | |
| Is the employer required to notify? | Yes | Yes |
| Is the employer required to consult? | No | Yes |
| Is the employer required to obtain approval for retrenchment? | No | No |
If there is an authorized Trade Union, the employer must notify such authorized Trade Union. The employer may also choose to notify other Trade Unions in the enterprise, but this is optional.
If there is no authorized Trade Union, the employer may notify all active Trade Unions in the enterprise.
If there is no Trade Union in the enterprise, the employer must consult with the LRC regarding retrenchment. If the enterprise does not already have an LRC, the employer is required to form one to carry out the consultations.
If both the Trade Union and LRC exist in the enterprise, the employer must consult with the Trade Union. The LRC shall be consulted only if there is no Trade Union.
The employer may choose to consult both, but consulting the LRC does not replace the requirement to consult the Trade Union.
No. The law does not require an employer to notify the Department of Labor or Social Security Fund (SSF) regarding retrenchment.
During consultations with the Trade Union or LRC, the following matters must be discussed, among others:
(a) possible alternatives to retrenchment, and
(b) the selection criteria for retrenchment.
The employer can proceed with retrenchment upon notifying the Labor Office of the same.
No. However, consultations must be meaningful and thorough, and more than one meeting is recommended to ensure that all possible alternatives to retrenchment are discussed.
Yes, the general selection criteria for retrenchment are in the following sequence:
(1) Foreign nationals,
(2) Employees with more disciplinary actions for misconduct,
(3) Underperforming employees, and
(4) Employees hired most recently among employees doing similar nature of work (i.e., last in first out).
The employer may deviate from such selection criteria by specifying an appropriate justification. For example, if an employer needs to retrench employees in a specific department like finance, and the department head, who is essential for the operations of finance, is a foreign national, the employer may keep that individual and retrench other employees. The decision to deviate and the justification thereof must be documented as part of the consultation minute with the Trade Union or LRC.
The key elements that should be included in the minutes of consultation are:
(a) The date, time and place of the consultation,
(b) The names and participants from both the employer and the Trade Union or LRC,
(c) The matters discussed during the consultation, and
(d) Points where agreements were reached and not reached.
The employer should try to convince the Trade Union or LRC to sign the consultation minutes along with their notes of disagreement. If they refuse to sign at all, the employer can proceed with retrenchment upon clearly documenting the situation in the consultation minute.
Yes. The employer is required to issue notice of retrenchment to impacted employees or make payment of equivalent remuneration in lieu of notice as follows:
| Period of Employment | Notice Period |
| For up to four (4) weeks | At least One (1) day |
| For up to four (4) weeks to one (1) year | At least Seven (7) days |
| Exceeding one (1) year | At least Thirty (30) days |
In the case of retrenchment, employees must be provided with:
(a) terminal benefits, and
(b) retrenchment compensation.
Terminal benefits include: (a) any outstanding remuneration, (b) leave encashment, (c) any outstanding festival allowance, and (d) letter to SSF notifying the termination of employment relationship of the impacted employee.
Retrenchment compensation is calculated at the rate of one month’s basic remuneration for each completed year of service. In case of less than a year of service, it will be provided proportionately.
Terminal benefits are paid to employees when an employment terminates, regardless of the reasons for termination. Retrenchment compensation is only paid if the employment is terminated due to retrenchment, and it is provided in addition to the terminal benefits.
The employer shall pay terminal benefits and retrenchment compensation within 15 calendar days from the last working day of the concerned employee.
If the employer does not pay the terminal benefits and retrenchment compensation within the prescribed timeline, the employment relationship is deemed to continue. As a result, the employer must keep paying the employee’s remuneration until all outstanding payments are fully settled.
Retrenchment compensation may be paid in installments provided the full amount is settled within the prescribed timeline. If any amount remains unpaid after 15 days of retrenchment, the employment relationship is deemed to continue. As a result, the employer must keep paying the employee’s remuneration until all outstanding payments are fully settled.
An employer is not required to pay retrenchment compensation if the impacted employee is eligible to receive the unemployment allowance under the SSF laws. However, such unemployment allowance is not in place as of date. Therefore, employers must pay retrenchment compensation to impacted employees until the unemployment allowance is in place.
Yes, the employer is required to give rehiring preference to retrenched employees if it resumes its operations within two years from the date of retrenchment.
The employer should notify retrenched employees about the hiring through public notice that must be published in the following channels for fifteen days:
(a) A national newspaper,
(b) The portal of the Ministry of Labor, Employment and Social Security, and
(c) The enterprise’s website.
If no employees respond, the employer can proceed to hire new candidates.
The employer can decide not to give rehiring preference to retrenched employees if such employees:
(a) can no longer perform the job because of the introduction of new technology or the changes in the enterprise’s production process, or
(b) are unable to perform the work due to age or physical condition.
An employer may retrench only one employee if such a single employee constitutes a distinct unit or function within the enterprise. For example, if an employee is the sole watchman in an enterprise, and the employer decides to replace the gatekeeping function with a digital access system, it could be argued that the entire gatekeeping function has become redundant. In such circumstances, it may be defensible to characterize the situation as the closure of a specific department or unit, thereby necessitating retrenchment of that single employee.
No, an employer is not prohibited from retrenching an employee who is on maternity leave, as the law does not provide special protection against retrenchment for such employees.
If an employee resigns before the retrenchment process is completed, the employer can accept their resignation as usual. In this situation, the employee is not considered retrenched and therefore is not entitled to retrenchment compensation.
The employer may withdraw retrenchment at any time before it takes effect by notifying the employee in writing of the same. However, this may raise questions whether the consultation with the Trade Union or LRC was thorough.
Yes, the employer must continue making deposits to SSF until the employee’s final working day.
Yes, the law does not allow any exception to these requirements. If in person meetings or physical submissions are not possible, the employer may use alternatives such as online meetings, email, or other electronic communication for notification and consultation purposes.
The key difference between the fixed-term/project-based expiry and retrenchment is as follows:
| Fixed-Term/Project-Based Expiry | Retrenchment | |
| Grounds for termination | The employment agreement of a fixed-term or project-based employee terminates due to the expiration of the agreed period or the project specified in the employment contract respectively. | The employment of the concerned employee terminates due to the existence of the valid grounds for retrenchment. |
| Notice Period
|
Employers must comply with the prescribed notice period. | Employers must comply with the prescribed notice period along with the notification and consultation requirements. |
| Financial Entitlements | Employees are entitled to terminal benefits. | Employees are entitled to terminal benefits and retrenchment compensation. |
| Rehiring Preference | Employees are not entitled to rehiring preference once they separate due to fixed-term/project-based expiry. | Previously retrenched employees shall be entitled to rehiring preference if the enterprises resume operations within two years of retrenchment. |
Yes. The law does not differentiate between the nature of employment, such as regular, fixed-term, work-based, or part-time, for retrenchment. The employer should provide retrenchment compensation to retrenched employees regardless of the nature of employment.
Yes. An employee may file an appeal at the Labor Court within 35 days of the date of retrenchment.
The retrenchment may be regarded as wrongful termination if valid grounds or procedures are not met.
If a court determines that an employee has been wrongfully retrenched, it may order either:
(a) reinstatement to work with back wages, or
(b) compensation with back wages.
