Fixed-term employment has long carried an obvious unfairness. An employee on a series of one-year contracts, renewed four times, doing the same work in the same seat as a permanent colleague, reached the end of the fourth year and received no gratuity — because the Payment of Gratuity Act 1972 requires five years of continuous service under Section 4(1), and the contract had been structured so that the threshold was never comfortably crossed.
The Code on Social Security 2020 addresses this directly.
What changes
The Code recognises fixed term employment as a defined category — an employee engaged on the basis of a written contract for a fixed period — and provides that a fixed-term employee is entitled to gratuity on a pro rata basis, with the five-year continuous service condition not applying to them.
Read plainly, that means a fixed-term employee who completes one year, or two, or three, is entitled to gratuity for that period, computed proportionately, rather than to nothing at all. The qualifying threshold that governs permanent employment does not stand in the way.
Alongside this, the Industrial Relations Code 2020 requires that a fixed-term employee receive hours of work, wages, allowances and other benefits not less than those of a permanent employee doing the same or similar work, and be eligible for all statutory benefits available to a permanent employee proportionately to the period of service, even if the period does not extend to the qualifying period otherwise required.
Together these two provisions are the substantive change: fixed-term employment stops being a way to obtain permanent-equivalent labour at less than permanent-equivalent cost.
Who this actually covers
The category turns on there being a written contract for a fixed period. That is narrower than it sounds, and it excludes several arrangements people assume are covered.
- A contract-labour arrangement, where you are employed by a contractor and deployed to a principal employer, is a different thing. Your employer is the contractor, and the analysis runs through the contract-labour provisions rather than through fixed-term employment.
- Consultants engaged on a professional-services basis are not employees at all, and nothing in this applies. Whether an engagement is genuinely consultancy or employment mislabelled is a question of substance — control, integration, exclusivity, the way tax and PF were handled — and it is worth examining before accepting the label.
- Probationers on an open-ended contract are not fixed-term employees. Their position is dealt with in the probation guide.
Conversion and renewal
Two questions recur and neither has a clean answer.
Does non-renewal count as retrenchment? Generally the expiry of a fixed-term contract on its own terms is not treated as retrenchment, and the definition of retrenchment carves out termination as a result of the non-renewal of a contract of employment on its expiry. That carve-out is why fixed-term structuring is attractive to employers in the first place. Where the "fixed term" is a sham — a rolling series of contracts covering work that is permanent in nature, renewed without interruption — the position is arguable, and courts have looked at substance.
Does a series of fixed terms aggregate? For pro rata gratuity the question is what period of service the employee actually completed. Where renewals were continuous and the employment unbroken, an argument that the periods run together is a natural one. Where there were genuine breaks, it is harder. This is the point on which most fixed-term gratuity disputes will turn, and it is not settled.
What has not changed
The formula is the same. Gratuity remains fifteen days' wages for each year of service, computed on last drawn wages at 15/26 of the monthly figure for a monthly-rated employee, and wages for this purpose remain basic plus dearness allowance rather than gross or CTC. Pro rata means the period is proportionate; it does not mean a different rate.
The ceiling continues to apply.
The forum is broadly analogous. Under the pre-code position the route is the Controlling Authority under the Payment of Gratuity Act 1972, described in the Controlling Authority guide. Under the Code on Social Security the corresponding authority and procedure apply.
And the employer's instinct has not changed at all. A fixed-term employee asking for gratuity after two years will, in most establishments, be told that gratuity requires five years. That answer reflects the Payment of Gratuity Act, not the Code, and where the Code governs it is wrong.
What to do
- Find the contract and confirm it is a written contract for a fixed period, not a consultancy agreement or a contractor deployment.
- Reconstruct the full engagement — every renewal, every start and end date, every gap. This decides the pro rata period and it is the fact most often lost.
- Confirm commencement for the establishment and State. Without the Code in force, the five-year requirement under Section 4(1) of the 1972 Act still governs and the claim is much weaker.
- Compute the figure before asking, on Basic + DA rather than gross.
- Expect the five-year answer and be ready to point to the provision, in writing.
Common questions
Do fixed-term employees get gratuity in India?
Under the Code on Social Security 2020, a fixed-term employee is entitled to gratuity on a pro rata basis and the five-year continuous service condition does not apply to them. Whether that governs a particular employment depends on the commencement position for the establishment and State; under the Payment of Gratuity Act 1972 the five-year requirement continues to apply.
How is pro rata gratuity calculated for a fixed-term employee?
The formula is unchanged: fifteen days' wages for each year of service, computed at 15/26 of last drawn monthly wages, where wages mean basic plus dearness allowance. Pro rata affects the period counted, not the rate at which it is computed.
Is the expiry of a fixed-term contract a retrenchment?
Generally not. The definition of retrenchment carves out termination resulting from the non-renewal of a contract of employment on its expiry. Where the fixed term is a sham covering work that is permanent in nature, renewed continuously, the position is arguable on the substance.
Do multiple renewals of a fixed-term contract count together?
For pro rata gratuity the question is the period of service actually completed. Where renewals were continuous and the employment unbroken, an argument that the periods aggregate is a natural one; genuine breaks make it harder. This is unsettled and is where most such disputes will turn.
Does this apply to contract labour and consultants?
No. Fixed-term employment requires a written contract for a fixed period with the employer. Contract labour is employed by a contractor and analysed under the contract-labour provisions, and a genuine consultant is not an employee at all — though whether an engagement is genuinely consultancy is a question of substance rather than label.
Pro rata gratuity still has to be computed on the right base and the right period. The F&F Settlement Calculator applies the 15/26 formula on your dates and Basic + DA, so you can see the figure before you ask for it.