This paper examines the structure of employment in Bangladesh’s rural non-farm (RNF) sector and its potential to generate sustainable employment, especially when compared with employment opportunities in agriculture. It also considers the role of labour policies, if any, in facilitating sustainable growth of productive employment in the rural areas. The paper concludes that the RNF sector in Bangladesh has grown in importance during the late 1980s. It has been contributing a rising share of employment and value added. While the rural non-farm sector is less productive than its urban counterpart, it generates full-time, sustainable employment in small-scale industry. Productivity of a number of activities is higher than the going agricultural wage rate. The household component of the RNF sector still largely consists of low-productive activities, and continues to employ a third of the rural labour force engaged in the sector. The RNF sector has barely begun the process of generating wage employment; future potential for wage employment will depend largely on the expansion of rural industries. Labour market policies have had very little impact on the RNF sector so far, since a large part of the sector consists of household activities, which remain a part of the informal economy. The introduction of a national minimum wage may, however, adversely affect the sector by increasing the size of its informal component. With increased casualisation of the labour force, Government attempts to improve the rural roads network would improve the efficiency of sub-contracting, which would benefit the sector.