Labour Supply and Outsourcing in Nepal

Outsourcing vs Labour Supply

Not every outsourced service is necessarily a labour-supply arrangement.

Genuine outsourced service

A contractor delivers an independent result using its own management/resources.

Labour supply

A supplier provides workers who perform labour for the principal employer/customer.

The real commercial arrangement matters.

Calling an agreement:

“Service Contract”

does not automatically prevent the Labour Act labour-supply provisions from applying.

Labour Supplier Must Be Licensed

Section 59 requires a company supplying workers to obtain a:

Labour Supplier Licence

A labour supplier must hold a licence under section 59. The licence identifies the authorised work or service and the permitted territory. Section 59(4) limits a company to no more than two kinds of work or service.

For a single Labour Office jurisdiction, apply to that Office. An application covering more than one Office jurisdiction goes to the Department. Check the issued licence and renewal record before workers start.

Application

Rule 27 requires the company seeking a licence to apply in the prescribed Schedule 7 form.

Supporting documents include the company-registration certificate and other prescribed information.

Where the supplier seeks to operate:

• within one Labour Office jurisdiction; or

• across more than one jurisdiction,

the competent licensing authority can differ under the Rules.

Licence Fee and Security

The Labour Rules' Schedule 8 currently provides:

Application/licence through Department

Licence fee: NPR 20,000

Application/licence through Labour Office

Licence fee: NPR 10,000

Security / bank guarantee

NPR 1,500,000 for the prescribed base licence.

Where labour is supplied across additional jurisdictions, the Rules provide an additional: NPR 500,000 security/bank guarantee per additional work area under the applicable conditions.

The current fee/security should be rechecked before filing because Rules may be amended.

Licence Renewal

Rule 30 currently requires a licensed labour supplier to apply for renewal each year by:

Ashoj end

Under Rule 30, apply for renewal each year by the end of Asoj with the prescribed tax-return or tax-clearance evidence, annual reporting evidence and renewed bank guarantee where applicable. Schedule 8 provides renewal fees of NPR 10,000 for a Department licence and NPR 5,000 for an Office licence.

Renewal and annual reporting are separate obligations: section 60 requires the prescribed supplier details by the end of Poush. Rule 29 requires a bank guarantee to remain valid for at least three months beyond the licence period.

Core Business Work Generally Cannot Be Outsourced as Labour Supply

This is the most important rule for the client receiving supplied workers.

Section 58 requires supplied workers generally to be engaged in work other than the principal/core work of the client's business/service.

The Ministry/Department identifies the categories of work for which labour supply is permitted.

Example

A manufacturing company may potentially use licensed outsourced workers for permitted support functions.

But outsourcing the company's actual principal manufacturing workforce merely to avoid employment obligations can create legal risk.

The permitted-work list should be checked against the current Department notice before contracting.

Use Only Licensed Supplier

Before engaging an outsourced labour provider, the principal establishment should verify:

• licence number;

• issuing authority;

• permitted work category;

• territorial scope;

• licence expiry;

• renewal status.

Do not rely only on:

• company-registration certificate; or

• PAN.

A registered company is not automatically a licensed labour supplier.

Employment Relationship

The labour supplier is responsible for employing supplied workers according to the Labour Act.

Workers should receive appropriate:

• employment agreement;

• minimum remuneration;

• leave;

• overtime;

• social security;

• other statutory benefits.

Outsourcing should not be used to reduce the worker below statutory employment standards.

Principal Employer Responsibility

The principal establishment should not assume:

“They are supplier's workers, therefore we have no responsibility.”

The Labour Act contains responsibilities affecting both:

• labour supplier; and

• principal employer.

Where the supplier fails to provide statutory remuneration/benefits, the principal employer can face compliance exposure under the labour-supply framework.

The principal employer should therefore monitor supplier compliance rather than merely pay a monthly invoice.

Commercial Agreement

A labour-supply agreement should address:

• exact permitted service/work;

• number/category of workers;

• work location;

• supplier licence details;

• remuneration;

• SSF contribution;

• overtime;

• leave;

• uniforms/PPE;

• supervision;

• substitution;

• invoicing;

• tax/VAT/TDS;

• indemnity;

• labour-law compliance;

• records;

• audit rights;

• termination.

Payroll Evidence

The principal company should periodically obtain evidence such as:

• worker list;

• salary-payment evidence;

• SSF contribution statement;

• attendance;

• overtime;

• insurance/benefit evidence;

• supplier licence;

• Labour Audit evidence where relevant.

This reduces the risk of unpaid-worker claims arising after the supplier has disappeared or defaulted.

VAT and TDS

The commercial invoice from the labour supplier also requires tax analysis.

Depending on the supplier/transaction:

• VAT may apply;

• service/contract TDS may apply;

• PAN/VAT invoice should be verified.

Tax classification should be based on the contractual arrangement rather than treating the worker salaries as though they are direct payroll of the principal company.

Unlicensed Labour Supply

The Labour Act allows penalties against:

• a person supplying workers without the required licence; and

• a person engaging workers supplied through such an unlicensed supplier.

The statutory enforcement framework permits a fine up to: NPR 200,000 for unlicensed labour supply/employment through such supplier, subject to the precise contravention.

Labour Audit

Labour Audit should review:

• whether outsourced workers are used;

• supplier licence;

• work category;

• remuneration;

• SSF;

• statutory compliance.

The Department continues to issue current notices regarding both labour suppliers and Labour Audit.

Principal Employer Checklist

• Identify work to outsource

• Determine whether labour supply is legally permitted

• Confirm work is not prohibited core work

• Obtain supplier licence

• Verify licence expiry

• Verify geographic/work scope

• Execute written agreement

• Obtain worker list

• Check employment agreements

• Check minimum remuneration

• Check SSF

• Check overtime/leave

• Check PPE/safety

• Verify invoices

• Apply VAT/TDS correctly

• Monitor supplier compliance

• Include in Labour Audit

Labour Supplier Checklist

• Company properly registered

• Obtain Section 59 licence

• Maintain required security

• Supply only permitted categories

• Use correct territorial scope

• Renew by Ashoj end

• Execute employment agreements

• Pay minimum remuneration

• Pay overtime/leave

• Enrol/pay SSF

• Maintain worker records

• Complete Labour Audit

• Maintain customer contracts

• Renew licence/security

Common Errors

Hiring workers through a company that has no labour-supplier licence

Assuming outsourcing can be used for any core business function

Checking supplier licence only when the contract is signed and never again

Principal employer ignoring unpaid salary/SSF

Calling labour supply a consultancy contract to avoid labour law

Ignoring VAT/TDS on supplier invoices

Further guidance and practical checks

Labour outsourcing transfers certain administrative functions, but it does not remove labour-law risk. The principal employer should verify the supplier's licence and ongoing statutory compliance throughout the contract.