In short: Under the new fixed term employment India labour codes framework — fully activated from 21 November 2025 — contract workers hired for a fixed period must receive wages, allowances, and benefits on par with permanent employees, and qualify for gratuity after just one year of service. However, the codes place no cap on how many times a contract may be renewed.
Key points
- All four Labour Codes came into force on 21 November 2025, consolidating 29 legacy laws. The Central Rules for all four codes were notified on 8 May 2026.
- Fixed-term employment is defined under the Industrial Relations Code, 2020 as an engagement based on a written contract for a fixed period — it is now recognised across all sectors, not just specific industries.
- Fixed-term workers are entitled to wages, allowances, and statutory benefits on par with permanent workers performing the same or similar work.
- Gratuity eligibility kicks in after just one year of continuous service for fixed-term employees — compared to the standard five-year threshold that applies to permanent employees.
- The end of a fixed-term contract is not treated as retrenchment, so no retrenchment notice or compensation is payable on natural expiry — but early termination may be treated as retrenchment.
- The codes set no statutory limit on the number of times a fixed-term contract may be renewed, creating a risk of indefinite contract employment without permanent status.
What are the new Labour Codes and why do they matter for fixed-term employment?
India’s government announced on 21 November 2025 that all four national Labour Codes had been activated, bringing 29 older laws under a single consolidated framework.
The four codes are: the Code on Wages, 2019; the Industrial Relations Code, 2020 (IR Code); the Code on Social Security, 2020 (SS Code); and the Occupational Safety, Health and Working Conditions Code, 2020 (OSH Code). The final Central Rules for all four were notified on 8 May 2026.
Together, they introduce fixed-term employment as a formally recognised, sector-neutral category for the first time — with statutory protections built directly into the legislation.
How does the Industrial Relations Code define fixed-term employment?
Section 2(o) of the Industrial Relations Code, 2020 defines “fixed-term employment” as the engagement of a worker on the basis of a written contract of employment for a fixed period.
The same provision sets out the conditions under which such employment is permitted. Critically, the contract must be a direct arrangement between employer and employee — it is not routed through a contractor or staffing agency.
This is a meaningful distinction: it means the employer, not an intermediary, bears the statutory obligations that come with the arrangement.
What rights does a fixed-term employee have under the Labour Codes?
The IR Code mandates parity of service conditions. A fixed-term worker must receive wages, allowances, and benefits at par with a permanent employee doing the same or similar work. This obligation is not discretionary.
Beyond wages, fixed-term workers are entitled to all statutory benefits proportionately, according to the period of service they have actually rendered — even if that period falls short of the qualifying threshold that would ordinarily apply to permanent employees.
For a practical overview of how these protections sit within the broader employment law landscape, see the Law for You guides on The Courtroom — a growing library of plain-language explainers on Indian employment and labour law.
The gratuity rule that every employer must budget for
This is the change that most directly affects payroll planning. Under the Code on Social Security, 2020, a fixed-term employee qualifies for gratuity after one year of continuous service — not five years.
The five-year threshold remains in place for regular permanent employees. Only fixed-term workers benefit from the reduced one-year rule.
Gratuity for fixed-term employees is calculated on a pro-rata basis using the following formula:
(15/26) × Eligible Salary (at least 50% of CTC) × Years of Service
Employers who renew short fixed-term contracts repeatedly without accounting for this obligation may find themselves facing unexpected gratuity liabilities. This should be reflected in employment contracts and payroll cost planning from the outset.
| Feature | Fixed-Term Employee | Permanent Employee |
|---|---|---|
| Basis of engagement | Written contract for a fixed period | Ongoing employment relationship |
| Wages & allowances parity | Yes — on par with permanent workers in same role | As per terms of employment |
| Gratuity eligibility threshold | 1 year of continuous service | 5 years of continuous service |
| Gratuity calculation | Pro-rata: (15/26) × Eligible Salary × Years of Service | Standard formula under applicable law |
| End of contract treated as retrenchment? | No — natural expiry is excluded from retrenchment | Retrenchment provisions apply |
| Early termination treated as retrenchment? | Yes — potentially | Yes — retrenchment provisions apply |
| Cap on renewals | None under the current codes | Not applicable |
What happens when a fixed-term contract ends or is renewed?
Natural expiry is not retrenchment
When a fixed-term contract runs its full course and is not renewed, the completion of that tenure is specifically excluded from the definition of “retrenchment” under the IR Code.
This means the employer does not owe the employee retrenchment notice or retrenchment compensation at the end of the term — though gratuity, if the employee has served one year or more, remains payable.
Early termination is a different matter
If an employer ends the contract before the agreed term expires, that early termination could be treated as retrenchment. This could trigger notice requirements and compensation obligations under the IR Code.
Employers should draft termination clauses carefully and take legal advice before acting on an early exit from a fixed-term arrangement.
Renewals — a gap in the law
Here is the most significant risk in the current framework. The Labour Codes do not impose any maximum limit on the number of times a fixed-term contract may be renewed. An employer can, in principle, keep renewing a contract indefinitely.
This means a worker could spend years in “fixed-term” employment without ever acquiring the security or full entitlements of permanent status. Critics have noted that this arrangement could effectively allow employers to maintain a permanent workforce on temporary terms.
For employees, this creates real uncertainty. For HR managers and SMEs, it raises the question of whether repeated renewals could — over time — give rise to an implied or deemed permanent employment relationship under judicial interpretation. The codes themselves do not address this directly, and the law here remains unsettled.
Practical steps for HR managers and SMEs
First, ensure every fixed-term engagement is backed by a clear, written contract that specifies the duration and conditions — this is a statutory requirement, not merely good practice.
Second, build gratuity liability into your payroll cost model from day one. A fixed-term employee who completes one year triggers a gratuity obligation, regardless of whether the contract is renewed.
Third, review your contracts before activating any early termination clause. What looks like a clean exit could be treated as retrenchment, with financial and legal consequences.
Fourth, document your renewal decisions carefully. While the codes set no renewal cap, repeated renewals without genuine fixed-term justification may attract scrutiny from labour authorities or courts in the future.
Frequently asked questions
Does a fixed-term employee get gratuity in India under the new Labour Codes?
Yes. Under the Code on Social Security, 2020, a fixed-term employee qualifies for gratuity after completing one year of continuous service — far shorter than the five-year threshold that applies to permanent employees. Gratuity is calculated on a pro-rata basis: (15/26) × Eligible Salary × Years of Service.
Is the expiry of a fixed-term contract treated as retrenchment under the Industrial Relations Code?
No. The IR Code specifically excludes the natural completion of a fixed-term contract from the definition of retrenchment. This means no retrenchment notice or compensation is payable when the contract simply runs its course. However, early termination before the agreed end date may be treated as retrenchment and could attract compensation obligations.
Can an employer keep renewing a fixed-term contract indefinitely?
The current Labour Codes impose no statutory cap on the number of renewals. An employer can, in principle, renew a fixed-term contract multiple times. Critics warn this may allow indefinite temporary employment without permanent status. Whether repeated renewals could give rise to deemed permanency through judicial interpretation remains an unsettled area of law, and employers should seek legal advice before relying on this flexibility.
Primary sources
- India Code — Ministry of Law and Justice: Full text of the Industrial Relations Code, 2020; Code on Social Security, 2020; Code on Wages, 2019; and OSH Code, 2020
- Supreme Court of India — for judgments on fixed-term employment, retrenchment, and deemed permanency
- Ministry of Labour and Employment, Government of India — official notifications and gazette updates on Labour Code commencement and Central Rules
- Press Information Bureau (PIB) — official government press releases on Labour Code activation
Written by Editorial Team, The Courtroom · Reviewed by Advocate Priya Menon · Published 2026-07-13 · Last verified 2026-07-13
This article is for general information only and is not legal advice. Laws change; verify against the primary sources cited and consult a qualified advocate for your situation.
