Fixed Term Employment Under Labour Codes: Rules and Pro-Rata Gratuity

Fixed term employment under Labour Codes means hiring a worker on a written contract for a fixed period, under section 2(o) of the Industrial Relations Code, 2020. The worker must get hours, wages, allowances and benefits no less than a permanent worker doing the same or similar work, all statutory benefits in proportion to service, and gratuity after one year of service. When the contract simply expires and is not renewed, that is not retrenchment.

How fixed term employment under Labour Codes works

The IR Code puts fixed-term employment in the statute itself and attaches three conditions in section 2(o):

1. Parity: hours of work, wages, allowances and other benefits must not be less than those of a permanent worker doing the same or similar work.
2. Proportionate statutory benefits: the fixed-term worker gets every statutory benefit a permanent worker gets, in proportion to the period of service, even if that period is shorter than the usual qualifying period.
3. Gratuity: payable on rendering service of one year under the contract.

The Model Standing Orders, 2026, issued with the Central Rules on 8 May 2026, repeat these points for establishments that adopt them: parity with permanent workers, gratuity at one year, and expiry of the contract not being retrenchment.

Pro-rata gratuity and other benefits

For fixed term employment under Labour Codes, gratuity follows the usual formula: last drawn wages × 15 ÷ 26 × years of service. Rule 33 of the Social Security (Central) Rules, 2026 treats service of at least one year plus a further period of more than six months as an additional full year.

Example: Arjun completes a fixed-term contract of 1 year and 8 months with a Pune warehouse, on last wages of ₹26,000. Eight months is more than six, so he counts 2 years: ₹26,000 × 15 ÷ 26 × 2 = ₹30,000. Under the five-year rule for regular employees he would have got nothing.

Other benefits run in the same way: EPF and ESI from day one where the establishment is covered, annual leave and statutory bonus on the usual conditions, and maternity benefit where the woman has worked 80 days in the preceding twelve months. The Supreme Court has held that maternity benefit can extend beyond the end of a contractual term (Dr. Kavita Yadav v. Secretary, Ministry of Health and Family Welfare, 2023). Wages for gratuity follow the Code definition, including the 50 percent wage rule.

Where fixed-term hiring fits, and where it backfires

Good fits for fixed term employment under Labour Codes: a plant commissioning or ERP rollout with a real end date, a seasonal peak where the term matches the season, a replacement for an employee on long leave, or a time-bound client contract.

Risky uses:

• Moving permanent staff onto fixed-term contracts to cut cost or sidestep retrenchment rules. This invites challenge as an attempt to defeat the Code.
• Endless renewals with artificial breaks. The IR Code’s list of unfair labour practices includes keeping workers as temporaries for years to deny them permanent status, and courts look at the reality.
• Lower allowances for fixed-term staff doing the same job. Parity is a statutory condition, not a policy choice.
• Ending the contract early to save money. That is not an “expiry” and can be treated as retrenchment, with notice and compensation under section 70.

Fixed-term contract checklist for employers

1. Written contract signed before joining, with exact start and end dates.
2. A one-line reason why the role is time-bound (project, season, leave cover).
3. A pay table showing parity with the comparable permanent role.
4. Statutory benefits listed: PF, ESI, leave, bonus, maternity, pro-rata gratuity.
5. An early-termination clause that respects retrenchment rules.
6. A written renewal decision before expiry, with reasons.
7. Include fixed-term staff in headcount for thresholds, and diarise gratuity accrual at month 12.

Example: Medisphere Hospitals in Indore hires 25 nursing assistants on 18-month contracts for a new wing. HR matches their pay to permanent assistants, accrues gratuity from month 12, and when the wing becomes permanent, offers permanent posts instead of renewing contracts in a loop. For the employer’s gratuity process generally, see gratuity rules for employers; for the employee’s view, gratuity eligibility and calculation.

Frequently asked questions

What is fixed term employment under Labour Codes?

It is engagement of a worker on a written contract for a fixed period under section 2(o) of the Industrial Relations Code, 2020. The worker must get the same hours, wages and benefits as a comparable permanent worker, proportionate statutory benefits and gratuity after one year.

Is a fixed-term employee entitled to gratuity after one year?

Yes. A fixed-term employee becomes eligible for pro-rata gratuity on completing one year of service under the contract. Rule 33 of the Social Security (Central) Rules, 2026 rounds a further period above six months up to a full year.

Can fixed-term employees be paid less than permanent employees?

No, not for the same or similar work. Section 2(o) of the IR Code requires hours, wages, allowances and other benefits no less than those of a permanent worker doing the same or similar work.

Is non-renewal of a fixed-term contract retrenchment?

No. Section 2(zh) of the IR Code excludes termination by non-renewal on expiry of a fixed-term contract from retrenchment. Ending the contract before its term for reasons other than punishment may be treated as retrenchment.

Quick quiz

Contract templates and parity tables for fixed term employment under Labour Codes are covered in Labour Codes for HR Managers (₹599), a Lexfolio certificate of completion, not a professional qualification.

Sources

• Industrial Relations Code, 2020: ss.2(o), 2(zh), 70
• Code on Social Security, 2020: Chapter V (gratuity) and Chapter VI (maternity benefit); Social Security (Central) Rules, 2026, Rule 33
• Model Standing Orders, 2026 (8 May 2026)
• Dr. Kavita Yadav v. Secretary, Ministry of Health and Family Welfare (Supreme Court, 2023)

This page is for education and general information, not legal advice for a specific case. Law as on 31 October 2026.