Non-Applicability of Labour Act on BFIs: Supreme Court’s Landmark Ruling

The applicability of the Labour Act 2017 (2074) to the banking and financial sector of Nepal has long been a matter of legal uncertainty and marked by conflicting judicial interpretations. In 2018, a division bench of the Supreme Court in the Prime Bank case delivered a judgement that said the Labour Act extended to banks and financial institutions (BFIs). However, the Supreme Court of Nepal in its recent judgement has provided a definitive ruling on the jurisdiction of Labour Act in the banking sector and has fundamentally redefined the regulatory landscape for BFIs in Nepal. The ruling by the extended full bench has finally put an end to the protracted legal ambiguity and provided much-needed clarity in this matter.

Scope or jurisdiction of the Labour Court in employment appeals

The case of Swabalamban Bikas Bank Limited had seven former employees seeking reinstatement and employment benefits in accordance with the provisions of the Labour Act. The dispute emerged when both the Labour Court and the Labour and Employment Office in Teku ruled in favour of the former employees and directed Swabalamban Bikas Bank to adhere to the mandates of the Labour Act. In response, the bank contested this decision and argued that as a regulated financial institution, it is governed by the Banks and Financial Institutions Act 2017 (BAFIA) and not the Labour Act. Consequently, the bank filed a writ petition before the Supreme Court.

One of the primary legal challenges that needed to be addressed pertained to the interpretation of the scope or jurisdiction of the Labour Court concerning appeals under the Labour Act for disputes related to the terms and conditions of employment, as well as the job security of employees within BFIs.

Drawing the Line Between BAFIA and Labour Act

The Court emphasised the legal distinction between BAFIA and the Labour Act and said that BAFIA creates a distinct regulatory framework for BFIs. It looked at specific provisions of BAFIA that delineate the powers and responsibilities of the regulatory authorities overseeing BFIs. Notably, the Court referenced Section 131 of BAFIA which gives Nepal Rastra Bank (NRB) the authority to issue necessary directives to regulate and ensure the proper functioning of BFIs. Similarly, Section 132 of BAFIA empowers NRB to formulate and implement rules and regulations as may be necessary to effectively regulate the functioning of BFIs.

Specifically, Section 133 (1) of BAFIA grants the Board of Directors of BFIs with the authority to draft and enforce internal employment regulations on a wide range of institutional, administrative and professional matters. These include the recruitment, promotion, transfer, dismissal, salary, allowances, pensions, leave, conduct, discipline and overall terms of service of employees within the institution. The Court stressed that this provision highlights that employment related matters in BFIs are governed by internal regulations formulated under BAFIA which must be approved by NRB rather than being subject to the general provisions of the Labour Act.

Another important analysis pertains to the definition of ‘enterprise’ under Section 2 (j) of the Labour Act which encompasses any company established, registered or formed under prevailing laws. The Court took note that while BFIs are incorporated under the Companies Act 2063 (2006) as public limited companies primarily for reasons such as acquiring legal personality, limited liability, perpetual succession and to establish a framework for share transactions and governance through general meetings and boards of directors, they are ultimately governed through special laws and regulatory oversight which makes them different from general companies.

The Court also examined Section 129 of BAFIA, which clearly stipulates that matters governed by BAFIA and its regulations must be addressed in accordance with its provisions, while any remaining matters will fall under the jurisdiction of the Nepal Rastra Bank Act 2002 and other applicable laws. The Court found that this reinforces that BAFIA takes precedence over general laws such as the Labour Act and the exclusion of BFIs from the scope of Labour Court.

The Court referred to global banking practices and came to an understanding that employees within the banking sector are typically governed by specialised legal frameworks rather than general labour laws due to their unique characteristics such as concerns over financial stability, professional standards, fiduciary duties, risk management, regulatory compliance and public interest, all of which necessitate uninterrupted operations. The Court also reaffirmed that the nature of banking operations demands a high level of discipline, professionalism and adherence to international benchmarks such as those established by the Basel Committee on Banking Supervision (BCBS) which sets the sector apart from other industries. The same has been recognised under Section 133(1) of the Labour Act which states that if a regulatory body governing BFIs among other sectors has prescribed specific punishment for misconduct, such punishments can be incorporated into their internal regulations.

The Court found that this reinforces the idea that labour offices and other labour related bodies do not serve as regulatory authorities for BFIs. Moreover, Section 180 of the Labour Act outlines the matters that are exempt from its application. Specifically, under Section 180 (2) of the Labour Act, services that are established under special laws and in special economic zones are governed according to the prevailing laws applicable to them. The Court held that a harmonious interpretation of these provisions supports the conclusion that while BFIs are incorporated under the Companies Act, their operational framework is primarily governed by BAFIA and regulated by NRB rather than being subject to the general labour laws.

This judgement has underscored the long-established principle in legal interpretation that special laws take precedence over general laws. In addition, it is also notable to mention that the Court turned to the Administration of Justice Act, 2073 (2016) which provides a legal framework for handling appeals related to disciplinary actions, transfers and promotions in government-owned or majority government-owned BFIs.

Conclusion

The Court held that the Labour Act does not govern employment disputes within the banking and financial sector and the Labour Court lacks jurisdiction over appeals concerning terms and conditions of employment and employee security in BFIs. Instead, such disputes are governed by the appellate mechanisms prescribed under BAFIA and the internal regulations approved by NRB.

This ruling may also have implications to other sectors where the scope of the Labour Act’s applicability remains uncertain. Furthermore, the decision may have implications for question of the applicability of Contribution Based Social Security Act, 2074 (2017) to BFIs since the decision regarding whether BFIs are required to be enlisted in the Social Security Fund is a matter that is pending before the Supreme Court.