In a landmark restructuring of India’s labour regulatory framework, the Union government has announced that fixed-term employees will now become eligible for gratuity after just one year of service, instead of the earlier requirement of completing five consecutive years. The reform is part of the implementation of four new labour codes, which consolidate 29 existing labour laws into a simplified and unified system.
The Ministry of Labour and Employment said the objective of the overhaul is to ensure better wages, stronger social security, and improved workplace protections for workers across both organised and unorganised sectors. The move is expected to have far-reaching implications for workforce mobility, employer hiring practices, and employee financial security.
What Changes Under the New Gratuity Rules
Under the previous provisions of the Payment of Gratuity Act, employees — including fixed-term workers — were entitled to gratuity only after completing five years of continuous service with an establishment.
With the new framework:
✅ Fixed-term employees qualify after 1 year
✅ Eligibility no longer linked to long-term tenure
✅ Benefits aligned with permanent staff
✅ Broader coverage across industries
The government clarified that the revision is intended to place fixed-term employees on equal footing with permanent workers, ensuring that organisations do not bypass long-term commitments by relying heavily on contractual staffing.
Who Counts as a Fixed-Term Employee?
A fixed-term employee is defined as:
- a worker engaged on a contract
- with a predetermined end date, or
- linked to completion of a particular assignment or project
This category has expanded rapidly in recent years across:
- IT and technology services
- manufacturing and assembly lines
- retail and logistics
- media and communication
- seasonal and project-based industries
The revised rules mean millions of such workers will now gain earlier access to gratuity benefits.
Why the Government Changed the Gratuity Norm
According to the Labour Ministry, the reform is designed to:
✅ reduce exploitation via rotating short-term contracts
✅ encourage companies to hire directly instead of through staffing agencies
✅ provide employees better financial cushioning
✅ expand social protection systems
The ministry also noted that fixed-term employees will now receive:
- similar salary structures
- equal medical benefits
- leave entitlements
- social security coverage
This aligns with broader labour code goals, including universal wage protection and safer working environments.
What is Gratuity and Why It Matters
Gratuity is a lump-sum monetary benefit paid by employers to employees as a gesture of appreciation for continued service. It typically becomes payable when an employee:
- resigns
- retires
- is laid off
- or otherwise exits service
While gratuity has traditionally rewarded long-term employment stability, the revised criteria acknowledge today’s dynamic job markets, where frequent transitions are common.
The Act applies to a broad range of establishments, including:
- factories
- mines
- oil fields
- railways
- ports
- companies with 10 or more employees
Earlier discussions had speculated that eligibility might drop to three years — but the final decision to reduce it to one year for fixed-term employees marks a far more significant shift.
How Gratuity Is Calculated
The standard gratuity formula remains unchanged:
Last Drawn Salary × (15/26) × Years of Service
Where salary refers to:
✅ Basic Pay + Dearness Allowance
Example Calculation:
If an employee worked 5 years and their last basic-plus-DA salary was ₹50,000, gratuity would be:
50,000 × (15/26) × 5 = ₹1,44,230
The revised eligibility will allow employees to benefit sooner, providing stronger financial support during career transitions or periods of unemployment.
Expected Impact on India’s Workforce
Industry observers predict:
✅ stronger employee retention
✅ decline in casual contractual hiring
✅ improved job security sentiment
✅ wider compliance with labour welfare norms
Experts also believe the reform could reduce disputes over tenure calculations, an issue long debated in industrial relations.
Employers, however, may face:
- increased financial liability
- higher HR compliance requirements
- restructuring of hiring models
Despite this, analysts say the long-term effect will likely improve productivity, morale, and organisation reputation.
What Comes Next
The government is expected to:
- issue operational guidelines
- define compliance timelines
- clarify applicability across mixed employment models
- address grey areas around gig workers
Labour unions have cautiously welcomed the move but continue to demand:
✅ universal gratuity coverage
✅ portable social security accounts
✅ protection for platform economy workers
As India’s labour ecosystem evolves, the gratuity reform represents a shift toward fairer employment standards, particularly for younger workers and mobile professionals.
