Fixed-Term Employment Under Labour Codes: 2026 Guide

Last verified: 2026-07-14

Fixed-term employment under the labour codes is a direct hire on a written contract for a fixed period, and the codes attach three firm rules to it: equal pay with permanent staff doing similar work, no retrenchment compensation when the term simply expires, and gratuity on a pro-rata basis once a year of service is put in. The Industrial Relations Code, 2020 defines the arrangement and sets the parity rule. The Code on Social Security, 2020 is what removes the old five-year wait for gratuity. Read together, they turn what used to be a thin, deniable status into one with real entitlements.

This article sets out how fixed-term employment now works under the labour codes: the equal-pay parity rule, what happens on notice and non-renewal, and how pro-rata gratuity is earned.

Fixed-term employment isn’t new. It was opened up to all sectors by a Standing Orders amendment on 16 March 2018, before which it was allowed only in apparel manufacturing. What the codes did was lift it out of subordinate rules and write it into primary legislation, with the parity and gratuity promises stated in the statute itself.

The four codes came into force on 21 November 2025, consolidating 29 central labour laws into four. The fixed-term rules now sit across two of them, so an employee or an employer checking their position reads the Industrial Relations Code and the Code on Social Security together, not one in isolation.

Fixed-term employment under the labour codes

Fixed-term employment under the labour codes is the engagement of a worker on a written contract for a fixed period, with the employer as the direct employer and no contractor sitting in between. Section 2(o) of the Industrial Relations Code, 2020 sets the definition, and the Code on Social Security, 2020 mirrors it in its own Section 2(34). The two elements that make it “fixed-term” are simple: the contract is in writing, and it names an end, either a date or the completion of a defined project.

That direct relationship is the part people miss. A fixed-term employee is your employee, not a contractor’s. The tenure is capped, but for the length of the contract the person sits inside your workforce with the entitlements of an employee, which is exactly why the codes bolt parity and gratuity onto the status.

The statutory definition

The definition lives in one place and does a lot of work. Section 2(o) describes fixed-term employment as engagement on a written contract for a fixed period, and it carries a proviso that immediately attaches the parity and benefit rules (more on those in the next section). So the definition isn’t just a label. It’s the hook that the substantive protections hang from.

Why does the “written contract” wording matter so much? Because without a written instrument fixing the term, an employee is presumed permanent, and the whole fixed-term treatment falls away. An oral understanding that “this is only for a year” won’t hold. The document has to state the term, and the term has to be genuine.

The Social Security Code’s Section 2(34) uses the same construction for its own purposes, chiefly gratuity. Having the same definition in both codes is deliberate: it stops an employer from being “fixed-term” for industrial-relations purposes but something else for social-security purposes.

Why it exists and who uses it

Fixed-term employment answers a real need: work that has a natural end. Think of a two-year infrastructure project, a seasonal spike, a defined product build, or a role funded by a grant that runs out. For these, permanent hiring is a poor fit and pure contract labour brings its own compliance and misclassification risk.

Employers reach for it because it offers a clean, lawful way to hire directly for a defined stretch without triggering the retrenchment machinery at the end. Workers, in turn, get employee status and its statutory benefits rather than the weaker footing of contract labour. It’s meant to be the middle path, and when it’s documented properly, it is.

Here’s the catch, though. The status only works if the term is real and the contract is honest. Rolling the same person through back-to-back short contracts to keep them permanently “temporary” is exactly the abuse the gratuity change (which we get to) was written to defeat.

The three promises the codes attach

Once a hire qualifies as fixed-term, three promises follow, and the rest of this article is really about these three. First, parity: the same wages, allowances and benefits as a permanent worker doing similar work. Second, a clean exit at the end of the term, with no retrenchment compensation payable when the contract simply expires. Third, gratuity on a pro-rata basis, without the five-year qualifying period that used to lock most fixed-term staff out.

Put those together and you get the bargain the codes struck. Employers get flexibility and a predictable, penalty-free exit at term-end. Workers get equal treatment during the term and a gratuity path they never had before. This is part of the wider shift you can read across India’s move from 29 labour laws to four codes, where scattered protections were pulled into a single, stated framework.

Equal pay and benefit parity for fixed-term employees

Equal pay for fixed-term employees means their wages, allowances and benefits must be at par with a permanent worker doing the same work or work of a similar nature. This isn’t an optional clause an employer can negotiate away. It sits inside the definition itself, in the proviso to Section 2(o) of the Industrial Relations Code, 2020, so a hire either meets the parity standard or it isn’t lawfully fixed-term at all.

The design here is neat. By writing parity into the definition rather than leaving it to a separate, skippable provision, the code makes equal treatment the price of using the status. You want the flexibility of a fixed term? Then you pay the parity.

The parity rule in the definition

The parity rule covers four things by name: hours of work, wages, allowances, and other benefits. On each, the benchmark is a permanent worker doing the same or similar work. So a fixed-term data analyst on a one-year contract is measured against a permanent data analyst in the same team, not against some lower notional “temp” rate.

Can an employer pay a fixed-term hire less because the contract is short? No. The short answer is that duration is not a lawful reason to pay less for the same work. The parity standard is about the nature of the work, not the length of the engagement, which is precisely what stops fixed-term from becoming a discount label.

There’s a sensible limit to how far “similar work” stretches, of course. Parity compares like with like. A fixed-term junior isn’t entitled to a senior’s pay just because they share a department. The comparison is role and work, honestly assessed, and that assessment is where disputes will land.

Proportionate statutory benefits

Beyond pay, a fixed-term employee is entitled to all statutory benefits available to a permanent worker, proportionate to the period of service. That word, proportionate, is the key. Benefits that accrue with time are earned pro-rata for the length of the term, not denied because the term is finite.

In practice this pulls in the familiar statutory set. Provident Fund and ESI contributions apply just as they would for a permanent employee (a fixed-term hire is an employee, so the social-security codes reach them). Earned leave accrues on the same one-day-per-twenty-days basis covered in our guide to working hours, overtime and leave under the codes. Statutory bonus, where the eligibility conditions are met, applies too.

What proportion looks like is straightforward for most of these. Leave accrues per day worked. PF and ESI track monthly wages. The one benefit that used to sit outside a fixed-term worker’s reach entirely was gratuity, and that’s the one the Social Security Code rewrote, so it gets its own section below.

What parity does not guarantee

Parity is not permanency, and that distinction matters. Equal pay and proportionate benefits during the term don’t convert into a right to be kept on after it. When the contract ends by its own terms, it ends, and we’ll see in the next section why that exit carries no retrenchment payout. Parity governs how you’re treated while employed, not whether the employment continues.

Nor does parity capture every discretionary perk. Benefits genuinely tied to confirmed, permanent status (say, a long-term retention bonus that vests over five years, or a permanent-only stock plan) sit outside the parity comparison where they’re honestly structured around tenure rather than used as a device to underpay. The line, frankly, gets tested when an employer dresses up ordinary pay as a “permanent-only” perk to dodge parity. That won’t survive scrutiny.

For the wider set of workplace facilities and safety entitlements an employer owes every worker on the rolls, the same non-discrimination logic runs through the employer’s workplace-safety and POSH obligations, which apply to fixed-term staff no differently than to permanent staff. The iPleaders explainer on the law governing fixed-term employment contracts is a useful companion read on how these parity obligations developed from the 2018 Standing Orders position into the codes.

Notice, non-renewal and early termination

Notice for a fixed-term employee turns entirely on one question: does the contract end by expiry, or is it cut short early? Get that distinction right and the rest follows cleanly. Miss it, and an employer can walk straight into a retrenchment claim it thought it had avoided.

The codes treat the two situations very differently. Natural expiry is a non-event in law. Early termination by the employer, on the other hand, can pull the full retrenchment machinery back into play. So the exit route decides the exit cost.

Natural expiry is not retrenchment

When a fixed-term contract runs its course and simply isn’t renewed, that is not retrenchment. The Industrial Relations Code, 2020 says so directly: the proviso to the definition of “retrenchment” in Section 2(zh) carves out non-renewal of a fixed-term contract on expiry of its term. No retrenchment notice is required, and no retrenchment compensation is payable.

This is the employer’s side of the fixed-term bargain, and it’s a real benefit. Under the old regime, ending a long-running arrangement could trigger notice, compensation, and in larger establishments even prior government permission. For a genuine fixed-term contract that reaches its end date, none of that applies. The term ends, the dues are settled, and the relationship closes.

Does the employer have to give any notice at all, then? Not for the expiry itself, because the end date was known and agreed from day one, that being the whole point of a fixed term. The contract’s own end is the notice. What the employer must still do is settle final dues, including any earned-leave encashment and any gratuity owed, which we come to next.

Early termination can be retrenchment

Cut the contract short, and the picture changes. If an employer ends a fixed-term contract before its stated term, for a reason other than disciplinary punishment, that early termination can amount to retrenchment, and then the protections of Section 70 of the Industrial Relations Code, 2020 apply in full.

Section 70 is specific about the cost. A worker in continuous service of not less than one year cannot be retrenched without one month’s written notice stating the reasons (or wages in lieu of that notice), plus compensation equal to fifteen days’ average pay for every completed year of continuous service, with any part beyond six months counting as a full year. Continuous service itself is worked out under Section 66, which counts days actually worked along with leave and certain lawful absences. There’s also a re-skilling-fund contribution of fifteen days’ wages that the employer owes on top.

So the number that decides everything is one year of continuous service. Below it, the Section 70 retrenchment protections don’t bite. At or above it, an early, non-disciplinary termination is expensive in a way that a term-end expiry never is. The practical reality is that employers who terminate early to “save” the tail of a contract often trigger a larger liability than if they’d let the term run out.

The consent, records and appointment-letter trail

Every fixed-term hire needs a written appointment letter and a contract that states the term plainly. That sounds obvious, but a loose or missing document is where most fixed-term disputes start, because the burden of proving a genuine fixed term sits with the employer. If the paperwork doesn’t clearly fix the end, the default presumption is permanency, and the clean-expiry exit disappears.

The records duty runs through the whole engagement, not just the start. Wages at parity, leave accrued, PF and ESI contributions, and the final settlement all have to be evidenced. A full new labour code compliance checklist is the practical way to make sure none of these registers is missed, particularly the ones that prove parity was actually paid.

Worth flagging one timing rule that catches employers out. Final wages on exit, fixed-term expiry included, must be settled quickly under the Code on Wages, 2019, so the leave-encashment and gratuity math needs to be ready at term-end, not reconstructed weeks later. An employer that treats the known end date as a surprise is the one that ends up in default.

Pro-rata gratuity after one year

Pro-rata gratuity means a fixed-term employee earns gratuity for the period actually worked, without the old requirement of five continuous years. Section 53 of the Code on Social Security, 2020 is the provision that does it, and it’s the single biggest change the codes made for fixed-term staff. For years, gratuity was the benefit that fixed-term workers structurally couldn’t reach. Now they can.

The mechanism is elegant in its simplicity. Section 53 lists the situations where the five-year qualifying period is switched off, and it adds fixed-term expiry to that list alongside death and disablement.

The five-year rule is switched off for fixed-term

Section 53 sets the general rule that gratuity is payable to an employee on the completion of continuous service of not less than five years. Then it names the exceptions. In the words of the provision, the completion of five years “shall not be necessary where the termination of the employment of any employee is due to death or disablement or expiration of fixed term employment.” And it goes further for fixed-term specifically: “in the case of an employee employed on fixed term employment … the employer shall pay gratuity on pro rata basis.”

Read that carefully, because two things are happening at once. The five-year gate is removed for fixed-term expiry, putting it in the same protected category as death and disablement. And the calculation is expressly pro-rata, tied to the actual period served rather than to a five-year milestone that a fixed-term worker would rarely reach.

Why does this matter so much in practice? Because the old five-year threshold is exactly what employers exploited. Back-to-back eleven-month contracts, or two-year stints deliberately kept under five, were a standard way to keep gratuity liability off the books. Section 53 closes that door. A genuine fixed-term worker now accrues gratuity for their time, full stop.

The one-year threshold and how the calculation works

The Industrial Relations Code’s definition ties gratuity eligibility for a fixed-term worker to one year of service. So the working rule most employers are applying is this: complete a year on a fixed-term contract, and gratuity is due on a pro-rata basis for the period served.

The calculation itself follows the long-standing formula. Gratuity is fifteen days’ wages for every completed year of service, with the daily figure taken as the last-drawn monthly wage divided by 26. In formula terms, that’s (15 ÷ 26) × last-drawn monthly wages × number of years. A part-year beyond six months rounds up to a full year under the standard rule.

Here’s what that actually looks like. Take a fixed-term employee who serves two years on a last-drawn monthly wage of Rs. 30,000. The daily wage is 30,000 ÷ 26, which is about Rs. 1,154. Fifteen days of that is roughly Rs. 17,308. Multiply by two years, and the gratuity comes to about Rs. 34,615. The same person, under the old five-year rule, would have walked away with nothing.

The unsettled question: from day one, or after a year?

Now, here’s where it gets genuinely unsettled, and any honest guide has to say so. The two codes don’t line up perfectly on the threshold. The Industrial Relations Code’s definition speaks of gratuity eligibility after one year of service. Section 53 of the Social Security Code, on the other hand, switches off the five-year rule for fixed-term expiry and mandates pro-rata payment, without restating a one-year floor in that provision.

That gap has produced two readings. On the first, the one-year eligibility in the Industrial Relations Code governs, and a fixed-term worker who leaves before completing a year gets no gratuity. On the second, Section 53’s unqualified pro-rata language means gratuity accrues proportionately for whatever period is served, even under a year. Commentators are divided, and there’s no apex-court ruling settling it yet.

Our recommendation, until the position is clarified, is conservative on the employer side and alert on the employee side. Employers should provision for fixed-term gratuity from the start of each contract rather than assume the one-year gate protects them, because the pro-rata language cuts the other way. Employees completing at least a year are on firm ground; those exiting earlier should ask, because the answer isn’t settled against them. The way tenure and gratuity clauses are written into the contract itself, covered in our guide to drafting an employment agreement in India, is often what decides these edge cases in practice.

Fixed-term versus permanent, and versus contract labour

A fixed-term employee sits between a permanent employee and a contract worker, sharing the employee status of the first and the finite tenure of the second. Understanding where it lands on each side is what stops the two most common mistakes: treating a fixed-term hire as disposable, or misclassifying what’s really contract labour as fixed-term.

The status is genuinely a hybrid, and that’s by design. It gives an employer defined-tenure flexibility while keeping the worker inside the employee tent for pay, benefits and now gratuity.

Fixed-term against permanent

Against a permanent employee, the difference is tenure and exit, not day-to-day treatment. During the contract, a fixed-term worker gets parity on wages, allowances and benefits, and accrues statutory entitlements proportionately. What they don’t get is indefinite continuation: the job ends when the term ends.

On exit, the routes differ sharply. A permanent worker removed from service may attract retrenchment protections (notice and compensation) depending on the circumstances. A fixed-term worker whose contract simply expires attracts none, because expiry isn’t retrenchment. But cut that fixed-term contract short early, and the retrenchment protections can reappear, as the notice section above set out. So the exit cost depends on the route, and the route depends on whether the term was allowed to run.

Can a fixed-term employee become permanent? There’s no automatic conversion in the codes. Renewal is a fresh contractual decision each time. In practice, repeated renewals for work that is plainly permanent in character invite the argument that the fixed term is a sham, which is a risk an employer carries, not the worker.

Fixed-term against contract labour

Against contract labour, the defining difference is who employs the worker. A fixed-term employee is engaged directly by the principal employer. A contract worker is engaged by a contractor and supplied to the principal, with the contractor as the legal employer for most purposes. That single fact changes parity, gratuity and liability.

Because the fixed-term worker is a direct employee, the parity and pro-rata-gratuity rules reach them cleanly. Contract labour sits under a separate framework, with its own registration and welfare obligations, and gratuity generally runs through the contractor. Employers sometimes prefer fixed-term precisely to keep the relationship direct and avoid contractor-chain complications.

Where employers get into trouble is blurring the two. Labelling a direct hire “contract labour” to sidestep parity, or running contract labour as if it were fixed-term without the written individual contracts, invites misclassification findings. The safe path is to match the label to the reality: direct hire for defined tenure is fixed-term, work supplied through a genuine contractor is contract labour, and the paperwork should say which.

Employer compliance and employee checklist

Employers using fixed-term contracts have to put the parity, records and gratuity duties in place before the first contract is signed, not scramble to prove them at exit. The obligations aren’t onerous, but they’re specific, and the burden of showing a genuine fixed term rests on the employer throughout.

The mindset shift is from informal to evidenced. A fixed term you can’t prove is, in law, no fixed term at all, and every entitlement then defaults to the permanency baseline.

What the employer must do

Start with the contract. It has to be in writing, name the term, and set wages and benefits at parity with comparable permanent staff. Pair it with a formal appointment letter. From there, the running duties are: pay at parity and keep proof of it; remit PF and ESI as for any employee; track leave accrual; and provision for gratuity from day one rather than assuming a threshold will save the cost.

The exit is where discipline pays off. On term expiry, settle final dues, including leave encashment and pro-rata gratuity, promptly under the Code on Wages timeline. On any early termination, run the retrenchment test first: is the worker at a year of continuous service, and is the reason non-disciplinary? If yes to both, budget for Section 70 notice and compensation before acting, not after the claim lands.

What’s the single most common employer miss here? Assuming the fixed-term label alone does the work. It doesn’t. The label plus the parity paper trail plus the correct exit treatment is what makes the status hold, and skipping the middle piece is what converts a planned, penalty-free exit into a contested one.

What a fixed-term employee should check

If you’re the one signing a fixed-term contract, four checks cover most of the ground. First, parity: does your pay and benefit package match what a permanent colleague doing similar work gets? If it’s visibly lower for the same role, that’s a red flag worth raising before you sign, not after.

Second, the gratuity math: if your term is a year or more, you’re on solid ground for pro-rata gratuity, so know roughly what it should come to using the fifteen-days-per-year formula. Third, the exit terms: confirm what happens on expiry versus early termination, and that final dues (leave encashment included) will be settled on time. Fourth, if your contract is ended early, ask whether it’s really retrenchment, because if you’ve crossed a year of continuous service and the reason isn’t disciplinary, Section 70 may owe you notice and compensation.

The through-line for both sides is the same. Fixed-term employment is now a status with real, statute-backed entitlements, not a way to hold someone at arm’s length. Treat the contract as the genuine, documented, parity-respecting instrument the codes require, and it does exactly what it’s meant to for employer and worker alike.

Frequently asked questions

1. What is fixed-term employment under the labour codes? It’s the direct engagement of a worker on a written contract for a fixed period, defined in Section 2(o) of the Industrial Relations Code, 2020 and mirrored in Section 2(34) of the Code on Social Security, 2020. The worker is a direct employee of the establishment for the length of the term, not a contractor’s worker.

2. Which codes govern fixed-term employment? Two. The Industrial Relations Code, 2020 defines it and sets the parity rule and the exit treatment, and the Code on Social Security, 2020 governs gratuity, including the pro-rata rule for fixed-term staff.

3. Do fixed-term employees get equal pay? Yes. Their hours, wages, allowances and other benefits must be at par with a permanent worker doing the same or similar work. The parity rule is written into the definition itself in Section 2(o) of the Industrial Relations Code, 2020, so it can’t be contracted away.

4. Can an employer pay a fixed-term worker less because the contract is short? No. Duration is not a lawful reason to pay less for the same or similar work. Parity is measured by the nature of the work, not the length of the engagement.

5. Are fixed-term employees covered by PF and ESI? Yes. A fixed-term worker is an employee, so Provident Fund and ESI contributions apply just as they would for a permanent employee, and other statutory benefits accrue proportionately to the period of service.

6. Is notice required to end a fixed-term contract? Not for the term’s natural expiry, because the end date was fixed and agreed at the start. The employer must still settle final dues on time, but no separate retrenchment notice is needed when a genuine fixed-term contract simply runs out.

7. Is non-renewal of a fixed-term contract retrenchment? No. Non-renewal on expiry of the term is expressly excluded from “retrenchment” by the proviso to Section 2(zh) of the Industrial Relations Code, 2020, so no retrenchment compensation is payable on expiry.

8. What happens if a fixed-term contract is ended early? Early termination by the employer, for a reason other than disciplinary punishment, can amount to retrenchment. If the worker has at least one year of continuous service, Section 70 of the Industrial Relations Code, 2020 then requires one month’s notice or wages in lieu, plus fifteen days’ average pay for every completed year.

9. Do fixed-term employees get gratuity? Yes. Section 53 of the Code on Social Security, 2020 makes gratuity payable to fixed-term employees without the usual five continuous years, treating expiry of fixed-term employment like death or disablement for this purpose.

10. How is pro-rata gratuity calculated for a fixed-term employee? It follows the standard formula: fifteen days’ wages for every completed year of service, taking the daily wage as the last-drawn monthly wage divided by 26. So (15 ÷ 26) × last-drawn monthly wage × number of years, with a part-year beyond six months rounding up to a full year.

11. Does the five-year gratuity rule apply to fixed-term employees? No. The five-year qualifying period is switched off for fixed-term expiry under Section 53 of the Code on Social Security, 2020. Gratuity is instead paid on a pro-rata basis for the period served.

12. Is one year of service required for fixed-term gratuity? The Industrial Relations Code’s definition ties fixed-term gratuity eligibility to one year of service, so completing a year puts you on firm ground. Section 53 of the Social Security Code mandates pro-rata gratuity without restating a one-year floor, and that gap between the two codes is not yet settled by any apex-court ruling, so exits under a year are genuinely contestable.

13. Can a fixed-term employee be converted to permanent, or a permanent one to fixed-term? There’s no automatic conversion to permanent in the codes; each renewal is a fresh contract. Converting an existing permanent employee into a fixed-term worker to strip protections is not permitted and invites a sham-contract finding.

14. What is the difference between fixed-term employment and contract labour? A fixed-term employee is hired directly by the establishment, so parity and pro-rata gratuity reach them cleanly. A contract worker is employed by a contractor and supplied to the principal, and falls under a separate contract-labour framework, with gratuity generally running through the contractor.

15. When was fixed-term employment introduced in India? It was extended to all sectors by the Industrial Employment (Standing Orders) Central (Amendment) Rules on 16 March 2018, having earlier been allowed only in apparel manufacturing. The labour codes then moved it into primary legislation, with the four codes coming into force on 21 November 2025.

References

Case Law

No Supreme Court or High Court judgment has yet interpreted the fixed-term employment provisions of Section 2(o) of the Industrial Relations Code, 2020 or Section 53 of the Code on Social Security, 2020, which have been in force for under a year. The parity and pro-rata-gratuity questions, including the one-year-threshold gap between the two codes, are still to be settled judicially; this article is therefore anchored to the statutory text rather than to case law.

Statutes

1. Industrial Relations Code, 2020 (Act No. 35 of 2020). Provisions cited: Section 2(o) (definition of fixed-term employment and the parity proviso), Section 2(zh) (retrenchment, and the fixed-term-expiry carve-out), Section 66 (continuous service), Section 70 (conditions and compensation for retrenchment).
2. Code on Social Security, 2020 (Act No. 36 of 2020). Provisions cited: Section 2(34) (definition of fixed-term employment), Section 53 (payment of gratuity, the fixed-term exception to five-year service, and pro-rata gratuity).
3. Code on Wages, 2019. Governs the definition of “wages” and the timeline for settling final dues on exit.
4. Industrial Employment (Standing Orders) Central (Amendment) Rules, 2018 (G.S.R. 235(E), 16 March 2018). The subordinate rules that first extended fixed-term employment to all sectors, later subsumed into the Industrial Relations Code, 2020.

This article is for informational purposes only and does not constitute legal advice. For specific legal guidance, consult a qualified legal professional.