EOR Services in Nepal Risks & Opportunities

Global digital workforce and multijurisdictional complexities

As the global labour market steps into 2025, navigating multijurisdictional compliance continues to remain as one of the top challenges for global employers. Various jurisdictions continue to enact new laws and regulations on emerging employment issues like enhanced protections for platform-based gig workers, expanded employee benefits, strengthened workplace health and safety measures, safeguards against various forms of harassment and discrimination, and the nascent recognition of employees' right to disconnect.

Global employers as well as emerging businesses looking to expand into foreign markets may often be daunted by the complexities of an ever-evolving labour and employment landscape, and its interface with local tax and social security laws. Likewise, the rise of the global digital workforce spurred by technological advancement and the Covid 19 pandemic has brought about as many legal challenges as business opportunities.

Before the pandemic, even the occasional ‘Work from Home’ (WFH) days within the same city as one’s employer was often viewed as a perk. But the pandemic demonstrated the viability of international remote work across industries like technology, healthcare, business and finance, signalling its potential for exponential growth ahead.

The modern employment sector is rapidly shifting from WFH to ‘Working from Anywhere’ (WFA), with WFA projected to emerge as a key driver of future trends. Several jurisdictions are expanding their regulations for WFH and WFA, including setting baseline standards for telework, defining remote worker rights, and outlining the necessary terms for WFH contracts.

The Promise of EOR

Employer of Record (EOR) services offer solutions to employers grappling with the above complexities. EORs are third-party entities that manage all employment-related tasks, costs and legal liabilities for foreign client companies. Typically used when a business wants to hire employees in a jurisdiction where it lacks a formal legal presence, EORs serve as the legal intermediary, allowing companies to avoid the need for local registration.

While the employees are functionally part of the client entity, they are legally employed by the EOR. Thus, unlike a Professional Employer Organisation (PEO), EORs do not require, and instead negate the need for the client to already have a legal entity in the target country/market. EORs handle all aspects of the local employment, immigration and tax laws, covering recruitment, contract management, visa and work permit applications, onboarding, payroll processing, tax filing, and interfacing between employees and local regulatory authorities. They also handle and manage risks regarding sensitive employment matters such as notice periods, termination rules, and severance.

Legal and business advantages of EOR

EOR services offer significant advantages for companies expanding into foreign markets. By handling all legal responsibilities under local employment, social security, tax and immigration laws, EORs enable businesses to hire local employees, contractors or consultants for scaling operations.

Additionally, EORs eliminate the need for costly investments in office space, making expansion more cost and time effective. EORs also offer critical local expertise in labour market trends, salary benchmarks and cultural nuances. Ultimately, the value of EOR services lies in their promise of a streamlined, cost-effective and compliant solution for talent retention and management of a global workforce.

Market for EORs in Nepal

EORs are expanding their popularity world over. While the demand for EOR services is highest in China, Hong Kong, India and Southeast Asia in the Asia Pacific region, and in industries such as technology, administration, support services and healthcare, the need for EOR is also growing in Nepal. Companies are increasingly looking to tap into Nepal’s skilled digital workforce and favourable income tax environment, while Nepali workers seek opportunities in the broader, more competitive, and lucrative global remote work market.

Legal Implications

There is often a dearth of legal regulations governing EORs in various jurisdictions. In some countries, EORs are outright prohibited or subjected to restrictions of time limits or approvals. Additionally, several jurisdictions restrict companies with an existing legal entity in a foreign market from using EORs or PEOs to hire local employees, mandating that employees engaged in core business activities must be hired through the company’s own entity.

EOR is not expressly addressed by Nepal’s Labour Act, 2017 (Labour Act). Thus, while some EORs are operating in Nepal, the legality of such arrangements remains uncertain as the question has not been tested in courts or by regulatory authorities.

Differences between Outsourcing, Consultants and EORs

The Labour Act has made outsourcing arrangement (labour supply) permissible for limited works. Employers can engage outsourced labourers in the following kinds of work, other than the core work of the entity: (i) security services, (ii) facilitation services, (iii) business support services (such as driving, loading and unloading of goods, plumber, electrician, providing consultancy, technical assistance, etc.) and (iv) domestic help services.

Unlike with EOR arrangements, the outsourced workforce is physically hosted at and provide direct service at the client company’s workplace, and the outsourcing agency must also be licensed by the Labour Office in Nepal, with their licence renewed annually.  The Labour Act holds the client company responsible for any labour supplied through an unlicensed or non-compliant outsourcing agency, whereby, the outsourced labour is considered directly employed by the client company.

Similarly, another alternative to EOR services practiced in the industry is a foreign company directly hiring independent contractors or consultants in the new market. In case of such an arrangement in Nepal, income taxes will apply only to those individual consultants who qualify as residents. While this approach eliminates major risk regarding application of local employment law, it carries moderate risks regarding misclassification of workers.

Legal Risks

The major risk with an EOR arrangement depends on the nature of the activities performed in Nepal by the human resources engaged through an EOR, either as employees or consultants. If their work can be solely characterised as exporting services to the foreign company, there is no risk. However, if their activities can be viewed as income-generating for the foreign company in Nepal, it could trigger corporate registration requirements under the Companies Act, 2006 (2063) and create a permanent establishment under the Income Tax Act, 2002 (2058) for the foreign entity.

Additionally, while the concept of EOR model enshrines the foreign company remaining the ‘managing employer’ (i.e., exercising visible control over work performance, compensation, workload and other key aspects), such control could pose moderate risks in Nepal. It may lead to the arrangement being mischaracterised as outsourcing for non-permissible activities or may result in claims of misclassification, where employees or consultants may argue they are directly employed by the foreign company.

Conclusion

Given such potential risks, it is imperative that clear regulations on the legality of the EOR arrangement in Nepal is established. For this, additional clarity is needed in Nepal’s employment law, company law and tax laws. Such development would enable Nepal to effectively capitalise on the growing interest of global businesses in international remote hiring from Nepal, particularly within the IT sector. It is crucial that the practice of EOR services be regularised to ensure legal certainty for all parties involved