Apr 30, 2010

Labor, Social Security and State in Nepal

Deepak Gajurel

1. Introduction

Social security is primarily a social insurance program providing social protection, or protection against socially recognized conditions, including poverty, old age, disability, unemployment and others. Social security may refer to:

Social insurance, where people receive benefits or services in recognition of contributions to an insurance scheme. These services typically include provision for retirement pensions, disability insurance, survivor benefits and unemployment insurance.

Income maintenance—mainly the distribution of cash in the event of interruption of employment, including retirement, disability and unemployment

In different countries social security may include medical care, aspects of social work and even industrial relations.

More rarely, the term is also used to refer to basic security, a term roughly equivalent to access to basic necessities - things such as food, clothing, shelter, education, money, and medical care.

Social Security is a public provision for the economic security and social welfare of individuals and their families, especially in the case of income losses due to unemployment, work injury, maternity, sickness, old age, and death. The term social security encompasses not only social insurance but also health and welfare services and various income maintenance programs designed to improve the recipient's welfare through public services.

Some of the first organized cooperative efforts to provide for the economic security of individuals were instituted by workingmen's associations, mutual-benefit societies, and labor unions; social security was not widely established by law until the 19th and 20th centuries, with the first modern program appearing in Germany in 1883. Almost all developed nations now have social security programs that provide benefits or services through several major approaches such as social insurance and social assistance, a needs-based program that pays benefits only to the poor.

2. Forms of Social Security

The following forms of social security are in common practice, especially in developed countries:

 2.1 Social insurance
Social insurance is a government-sponsored insurance program that is defined by statute, serves a defined population, and is funded through premiums or taxes paid by or on behalf of participants. Participation is either compulsory or the program is subsidized heavily enough that most eligible individuals choose to participate. Medicare, retirement program, unemployment insurance programs and others are the examples of social insurance.

2.2 Income maintenance (Unemployment benefits)
Income maintenance or unemployment benefits policy is usually applied through various programs designed to provide a population with income at times when they are unable to care for themselves. Income maintenance is based in a combination of five main types of program:

Means-tested benefits. Means-tested benefits is financial assistance provided for those who are unable to cover basic needs, such as food, clothing and housing, due to poverty or lack of income because of unemployment, sickness, disability, or caring for children. While assistance is often in the form of financial payments, those eligible for social welfare can usually access health and educational services free of charge.

Non-contributory benefits. Several countries have special schemes, administered with no requirement for contributions and no means test, for people in certain categories of need - for example, veterans of armed forces, people with disabilities and very old people.

Discretionary benefits. Some schemes are based on the discretion of an official, such as a social worker.

Universal or categorical benefits, also known as demogrants. These are non-contributory benefits given for whole sections of the population without a test of means or need, such as family allowances or the public pension in New Zealand (known as New Zealand Superannuation).

2.3 Social protection
Social protection refers to a set of benefits available (or not available) from the state, market, civil society and households, or through a combination of these agencies, to the individual/households to reduce multi-dimensional deprivation. This multi-dimensional deprivation could be affecting less active poor persons (e.g. the elderly, disabled) and active poor persons (e.g. unemployed). This broad framework makes this concept more acceptable in developing countries than the concept of social security. Social security is more applicable in the conditions, where large numbers of citizens depend on the formal economy for their livelihood. Through a defined contribution, this social security may be managed.

However, in the context of widespread informal economy, formal social security arrangements are almost absent for the vast majority of the working population. In addition, in developing countries, the state's capacity to reach the vast majority of the poor people may be limited because of its limited resources. In such a context, multiple agencies, that could provide for social protection is important for policy consideration. The framework of social protection is thus capable of holding the state responsible to provide for the poorest sections by regulating non-state agencies.

3. The History of Social Security

Germany is the first to introduce social security programs. This country adopted social security program in the 1880s, when Chancellor Otto von Bismarck advocated social legislation not only in order to benefit the workers but also to forestall the program of the socialists and gain the support of the workers for his own party. Legislation setting up compulsory sickness insurance, for which the worker paid two thirds of the cost and the employer one third, was promulgated in Germany in 1883. Compulsory old-age insurance (pension), the cost of which the employee, employer, and government shared, was adopted in 1889; unemployment insurance legislation in Germany was promulgated in 1927.

As economic insecurity among workers in the highly industrialized countries spread, an increasing number of social security programs were enacted. In The United Kingdom, the National Insurance Act, devised by David Lloyd George, was promulgated in 1911, and a compulsory unemployment insurance program as well as old-age insurance and sickness insurance programs was established. The unemployment insurance system excluded many workers, notably government employees, nurses, casual workers, and those who earned over £250 per annum. A survivor's insurance program was adopted (1925); in 1942, Parliament was presented with a plan, by Sir William Henry Beveridge, for a more expanded social security program, much of which was enacted after World War II.

In 1905, France adopted a program of voluntary unemployment insurance and in 1928 made insurance plans for old age and sickness mandatory. During this period, diverse social security programs were adopted throughout Europe, differing from country to country as to the kinds of insurance instituted, the categories of workers eligible for the program, the proportions paid by employee, employer, and government, the conditions for receipt of benefits, the amounts of the benefits, and finally in the overall effects of the programs. In 1922, the Soviet Union adopted comprehensive social security plans as part of their socialist economy. Chile became (1924) the first Latin American country to adopt a social security program.

The United States was rather late to introduce social security programs. It did not have social security on a national level until 1935, when the Social Security Act was passed by the Congress as part of President Franklin Delano Roosevelt's New Deal program. The act established two social insurance programs: a federal-state program of unemployment compensation and a federal program of old-age retirement insurance. It also provided for federal grants to assist the states with programs for the disabled, the aged, child welfare services, public health services, and vocational rehabilitation.

In 1965, US Congress enacted the Medicare program, providing medical benefits for persons over the age of 65, and an accompanying Medicaid program for the needy persons regardless of age. A 1972 amendment tied increases in social security retirement benefits to increases in the Consumer Price Index. In 1974, Social Security insurance was taken over by the Social Security Administration.

4. Overview of social security in Nepal

Social security is very limited in Nepal. In labor markets, the formal sector employment is almost stagnant, and the growing labor force is mainly joining the informal sector. While it is difficult to determine the size of the informal sector - due to its nature, being unorganized and unregulated - it is estimated that more than 60 percent of employed workers are in the informal sector. The informal sector is characterized by variation in wage rates, conditions of employment, and discrimination based on gender and age.

Labor Act, which applies to all enterprises with more than ten employees and those in industrial districts, provides for some basic protection, such as, number of monthly payments, severance pay, and protection against layoffs.

In spite of the basic character of these protection arrangements, they still lead to increased employer preference to employ on a non-formal basis, that is, without contract. There is, therefore, a need to for a flexible legislation in line with the introduction of better basic social security arrangements that consider vulnerable populations’ ability to cope with threats to income and livelihood.

Currently, the formal social security systems (provident fund and citizen’s investment fund) cover mainly civil servants, army, police, and teachers. The government is the single largest employer in Nepal. Any private enterprise with more than 10 employees can join the provident fund on a voluntary basis, while all enterprises can join the retirement plan under the citizen’s investment fund. However, there is no mandatory social insurance provision for the private sector. Aside from the formal sector social security provisions, there are various informal, partly traditional, community-based insurance arrangements (micro-insurance).

A social protection study was carried out in 2003 that assisted in developing a comprehensive national social protection strategy. The strategy was expected to help reduce the vulnerability of the neediest and disadvantaged sections of society, ensure adequate coverage for most of the population, and contribute toward translating the government’s policy objective of poverty reduction into effective programs. The strategy suggested for the establishment of a national employment program; establishment of District Welfare Funds in all 75 districts; development and implementation of a training and awareness program, among others.

The Labor Act, 1992 lays down the legal framework and the basis for the rules, regulations and guidance on the proper management of any establishment. It deals with matters relating to employment and security of employment, working hours, minimum wages, welfare of employees, employer-employee relations and the settlement of labor disputes. Labor Regulation, 1993 complements the Labor Act with further clarification in issues such as security of profession and service, remuneration and welfare provision, health, cleanliness and safety, etc.

The Bonus Act of 1974 provides a legal basis for the payment of bonus to the workers and employees of factories and commercial establishments.

5. Social security system in Nepal

Wage structure in Nepal, in comparison to developed countries, is weak and limited. Limited incentive earnings are in place for workers. Enterprises, both state owned and privately run, provide meager benefits to workers in terms of residence facility or allowance, medicare, educational facilities for the children, transportation, ration, child care, entertainment, life insurance, credit facilities and others.

Provisions of social security benefits have been included in the Labor Act. The Act provides grounds for benefits such as, sick leave, maternity leave, workers compensation, provident fund and gratuity as the old age benefit. Besides, the law also has the provisions for canteen at the premises of enterprises. Placement of a welfare officer, for taking care of the welfare of the workers, is another mandatory provision.

Both the Labor Act and Labor Rules are applicable to those organizations established as per Nepali laws where more than ten workers are employed. This law is not applicable to those companies with less than ten workers. In addition, it is not applicable to the entire informal sector. Social security applies only to workers with permanent status, in organized sectors.

Social security benefits: There is no comprehensive social security system under the Nepali labor law. Employees are entitled to receive following benefits as part of social security under the Labor Act and Rules:

• Provident fund: Provident fund is a contributory old age benefit under the labor law. According to the provision, the employer should deduct 10 percent of basic salary of the employees and add 10 percent to it, and deposit the amount in any commercial banks or Karmachari Sanchaya Kosh, the autonomous provident fund authority in Nepal.

• Gratuity: Gratuity is also part of an old age benefit. It is also known as a severance pay. As per the provision of the Labor Rules, the employees serving for three years or more and retiring from the service are entitled to get gratuity.

• Treatment Expenses: Under the provision of Labor Rules, the employer has to bear entire treatment expenses to an employee who suffers physical injury while on duty.

• Salary during treatment: During the period of treatment, employer should pay full salary for the period of their stay in hospital or half of their salary if they have undergone treatment at home. However, if the period of such treatment exceeds a year, the employer is not obliged to pay the salary after one year.

• Disability compensation: If an employee is physically disabled as a result of an accident while on duty, the employer must pay a lump sum amount equivalent to the salary of five years of the last drawn salary in case of complete disability. In case of partial disability, the amount of compensation shall be calculated according to the percentage of disability.

• Compensation in case of death: In case of death of an employee instantly or in the course of treatment as a result of an accident while on duty, the employer should pay an amount equivalent to three years' salary calculated at the last drawn salary rate to the nearest heir as compensation. However, in case an employee dies or becomes physically disabled as a result of a natural calamity, the employee or his/her legal heir shall not be entitled to any compensation.

• Insurance and compensation: If an employee is entitled to receive compensation, he/she is entitled to compensation as mentioned above or the compensation under the insurance whichever is higher.

• Termination on health ground: In case any employee sustains physical injuries while on duty and does not recover even after a year-long treatment or becomes physically disabled, he/she may be terminated from the service provided that a physician recognized by the government certifies that he/she is incapable of working. In such a case, the employer should pay gratuity and treatment compensation before such termination.

• Housing Fund: Under the Labor Act, 5 percent of the gross annual profit of an enterprise should be deposited as a housing fund and operated by a joint committee called Labor Relations Committee. However, this provision is almost non-existent in practice.

• Welfare Fund: As per the Bonus Act, 1974, 10 percent of net profit should be deposited for bonus distribution to workers. The Act stipulates the maximum upper limit of bonuses to be paid. The amount that is left after bonus distribution will be deposited by the enterprise in the Welfare Fund. Of the amount deposited in the Welfare Fund, 70 percent goes into Local Welfare Fund and 30 percent into National Welfare Fund.

• Pension: Pension is limited to government employees in civil services, police and armed forces, including some of public corporations, university and school teachers/employees.

• Retrenchment: If the employer desires to close the whole or part of an organization, he/she should obtain approval from the government before the retrenchment of the employees. In such a case, the employer should provide one-month notice with reasons for retrenchment or pay the salary of one month in lieu of such a notice. Similarly, the employer should pay retrenchment compensation in lump sum equivalent to the amount of thirty days multiplied by the total number of years in service.

• Sick Leaves: All workers or employees who have completed one year of continuous service in the establishment shall be granted a sick leave with half-pay for not more than 15 days in a year.

• Maternity Leaves: Pregnant women workers or employees are granted a maternity leave with full pay for 52 days before or after delivery. Such a leave may be obtained not more than twice during the entire period of service. However, in the event of the death of two children of a woman employee, who has already utilized the maternity leave twice, she may be entitled to a maternity leave for two more times.

6. Social security in the informal sector

There is no notable social security arrangement for the informal sectors in Nepal. Some of the workers in the informal sectors are covered partly by the legislation. The Vehicle and Transportation Management Act provides accidental compensation to workers under a compulsory insurance provision. As per this provision, the vehicle owner should have accidental insurance coverage for the driver and helper.

Similarly, the workers in the trekking and mountaineering sectors should also have their accidental insurances covered. Likewise, employer should have a group insurance policy for accidental injuries for construction workers.

There is no provision for specific social security benefits for workers in the informal sector, including agricultural sector. They are treated as a general citizen and are provided with some sort of relief on an ad-hoc basis, such as the senior citizen allowance provided to persons above 70 years of age and to widow and helpless women above 65, maternity protection allowances and so on.

7. Conclusions

Nepal is yet to go for a wide range of social security system. Though non-governmental sector is increasingly making bigger place as employer, state is still the major provider of employments to its citizens in Nepal. Legal frameworks for guaranteed social security are inadequate. The Labor Act is the main legal framework that provides ground for various types of social security to workers. However, these cover only government employees, including Army, Policy and Civil servants. Workers in informal sector are largely deprived of these social protection benefits.

Unemployment benefits are yet to be considered in Nepal. For a better security of the workers, there is a need of a flexible legislation in line with the introduction of better basic social security arrangements that consider vulnerable populations’ ability to cope with threats to income and livelihood.


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  1. nice and brief article for social security in nepal for nepalese workers was helpful for my assignment ,
    madhukar shrestha

  2. nice one thanks author....... it would be good if you have mention about old age people security rights, its growing rapidly in Nepal, number of old people are left in orphan age these day thoe nice article it helped