Fixed-Term Employment After India’s Labour Codes: A 2026 Compliance Checklist for Employers

India’s Labour Codes have made fixed-term employment (FTE) an important consideration for employers reviewing their workforce structures, employment contracts and statutory benefit obligations. Fixed-term employment allows an employer to engage an employee directly for a specified period, but the arrangement does not remove the employee’s statutory protections or make fixed-term hiring a lower-cost substitute for permanent employment.

With the four Labour Codes brought into force on 21 November 2025, employers should review existing fixed-term contracts and payroll processes against the applicable requirements of the Industrial Relations Code, 2020 (IR Code), the Code on Social Security, 2020 (SS Code) and the other relevant labour legislation. Particular attention is required for equal treatment, gratuity eligibility, the statutory definition of wages, contract renewals and the process followed when employment expires.

For businesses using fixed-term appointments for project delivery, seasonal requirements, temporary capacity or other defined workforce needs, the priority is to ensure that the employment arrangement is properly documented and that its financial and compliance implications are assessed from the outset.

1. Fixed-term employment: What employers must establish

Section 2(o) of the IR Code defines fixed-term employment as the engagement of a worker under a written employment contract for a fixed period. The arrangement involves direct employment by the employer and is distinct from contract labour supplied through a contractor.

The distinction is important because the statutory responsibilities, employment documentation and benefit obligations may differ depending on the actual engagement structure. A worker does not become a fixed-term employee merely because a contractor’s deployment agreement or project assignment has an end date.

Before introducing or renewing a fixed-term appointment, employers should establish:

• Whether the individual will be employed directly or supplied through a contractor.
• Whether the employment contract specifies a definite duration.
• Whether the employee’s role, remuneration and applicable benefits are clearly documented.
• Whether the terms comply with the statutory parity requirements applicable to fixed-term employment.
• Whether the expected contract duration creates gratuity or other statutory benefit obligations.
• Whether the proposed arrangement is consistent with the actual employment relationship and applicable law.

Fixed-term employment is a recognised form of employment under the Labour Codes. However, the legal consequences of the arrangement depend on compliance with the relevant statutory provisions, not simply the designation used in the appointment letter.

2. Employer compliance checklist for fixed-term employment

The following checklist can help HR, legal, payroll and finance teams review fixed-term employment arrangements before commencement, during employment and at separation.

A. Before issuing the contract

• Confirm the employment structure: Determine whether the individual is a direct fixed-term employee or contract labour engaged through a contractor. Record the basis for the classification.
• Specify the contract period: Clearly state the commencement date and fixed duration of employment, together with the role, reporting arrangements and principal responsibilities.
• Document remuneration and benefits: Identify wages, allowances, applicable benefits and the terms governing payment and deductions, in accordance with law.
• Review parity with comparable employees: Identify permanent employees performing the same work or work of a similar nature and assess the relevant statutory requirements concerning working hours, wages, allowances and benefits.
• Estimate statutory costs. Assess potential gratuity liability and other applicable benefit costs before finalising the employment budget. The assessment should use the applicable statutory definition of wages rather than relying solely on the salary structure’s labels.
• Include appropriate separation terms. Distinguish expiry at the end of the agreed term from early termination and set out the applicable contractual process, subject to statutory requirements.

B. During the contract

• Maintain accurate employment records: Track the contract start date, amendments, extensions, remuneration changes, attendance and other records required under applicable law.
• Monitor statutory benefits: Review eligibility for applicable social-security benefits, leave, welfare and other statutory entitlements. Fixed-term status should not be treated as a blanket exclusion from statutory protections.
• Track gratuity eligibility: Maintain a record of service and identify when an employee approaches the one-year threshold applicable to fixed-term employee gratuity.
• Reconcile payroll and statutory wages: Ensure that the remuneration components used for statutory calculations are consistent with the applicable legal definition of wages.
• Review extensions before approval: Confirm the continuing business requirement, the proposed duration and any changes to duties or benefits before renewing or extending the contract.

C. At expiry or separation

• Verify the contractual end date: Confirm that the proposed separation corresponds to the agreed term and that the relevant employment records are accurate.
• Review early termination separately: Do not assume that a provision dealing with expiry automatically determines the legal position where employment ends before the agreed date.
• Calculate final dues: Review unpaid wages, applicable leave encashment, gratuity where payable and other outstanding statutory or contractual amounts.
• Complete separation documentation: Retain the contract, amendments, payroll calculations, benefit records and relevant communications.
• Close the compliance record: Ensure that the employee’s status is updated in internal systems and that applicable statutory filings, payments and records are completed.

This checklist should be adapted to the establishment, category of employee, applicable Central or State rules and the specific statutory provisions governing each benefit.

3. Gratuity and payroll: The key financial implications

Gratuity is a major consideration when assessing the cost of fixed-term employment. Section 53 of the SS Code governs gratuity and provides a specific framework for fixed-term employees, including proportionate payment in the circumstances prescribed by law.

The Ministry of Labour and Employment’s additional Labour Codes FAQs dated 16 March 2026 clarify that a fixed-term employee becomes eligible for gratuity if they render service under the contract for one year, calculated from the commencement of the contract. The clarification also states that an employee engaged for 11 months would not meet that one-year threshold and that an employee leaving before completing one year would not satisfy the stated requirement.¹

For employers, the practical implications extend beyond checking whether a contract lasts for one year. The payroll process must also account for the applicable wage definition, qualifying service and the statutory calculation method.

How employers should administer fixed-term gratuity

Step 1: Record the commencement and end dates. Maintain the original contract and any extensions or amendments. Use the actual employment records to determine the relevant service period.

Step 2: Check eligibility. Determine whether the employee meets the one-year requirement under the applicable fixed-term employment provisions. Do not assume that every short-term contract creates gratuity eligibility, or that every separation before one year is subject to the same treatment regardless of the circumstances.

Step 3: Identify the applicable wage base. Section 53 of the SS Code must be read with the statutory definition of wages under the Labour Codes. Payroll should review the relevant remuneration components rather than automatically treating basic salary or total cost to company (CTC) as the calculation base.

Step 4: Apply the statutory calculation. Gratuity is generally calculated at 15 days’ wages for each completed year of service or part thereof in excess of six months, subject to the applicable provisions. Fixed-term employees are entitled to proportionate gratuity in the circumstances specified by the SS Code. The calculation should follow the applicable statutory method and wage definition.

Step 5: Process payment within the statutory period. Section 56 of the SS Code provides for payment of gratuity within 30 days from the date it becomes payable. Employers should build this deadline into their separation workflow and verify any applicable rules concerning calculation, notice, payment and disputes.

The wage definition and gratuity calculations

The Labour Codes’ revised definition of wages has implications for statutory benefit calculations, including gratuity. Employers should not interpret the commonly discussed 50% wage rule as a blanket instruction to make basic salary exactly 50% of CTC. Instead, the statutory inclusions and exclusions must be assessed component by component, including whether the excess of excluded components over the prescribed threshold must be added back to wages.

For fixed-term employees, this means gratuity exposure should be estimated using the applicable statutory wage base and not solely the employee’s contractual salary labels. Employers may need to review salary structures, payroll configurations and existing provisions for employee benefits.

Where employment spans the period before and after the Labour Codes came into force, the Ministry’s FAQs also address the treatment of service rendered before and after 21 November 2025. Employers should assess such cases under the applicable transitional framework rather than automatically applying a single calculation assumption to every period.

4. Fixed-term employees versus contract labour

Fixed-term employment and contract labour should be treated as distinct engagement models. A fixed-term employee is directly engaged by an employer through a written contract for a fixed period. Contract labour, by contrast, is engaged in connection with an establishment through a contractor, subject to the applicable statutory framework.

This distinction affects how employers document the relationship, assess statutory responsibilities and administer benefits. The Ministry’s FAQs clarify that the one-year fixed-term gratuity framework applies to employees directly engaged on fixed-term contracts. In the case of contract labour, the contractor is generally responsible for gratuity as the employer, subject to the applicable statutory provisions and facts of the engagement.

Employers should therefore avoid using fixed-term contracts as a substitute for properly documenting contractor arrangements. Equally, they should not assume that a fixed-term designation eliminates statutory obligations towards a directly employed worker. A periodic review of workforce classification can help identify cases where appointment letters, contractor agreements and actual working arrangements do not align.

5. Contract expiry, renewal and early termination

The IR Code excludes specified cases of termination from the definition of retrenchment, including termination resulting from expiry or non-renewal of a contract and completion of the tenure of fixed-term employment, as set out in the statutory definition.

This does not mean that every termination described as an expiry is automatically lawful. Employers must examine the written contract, the actual circumstances and any other applicable statutory requirements. Expiry of the agreed term should be distinguished from early termination, which may raise separate contractual and legal questions.

Repeated renewals are not automatically unlawful, nor does the law impose a universal requirement that every fixed-term appointment must be linked to a specific project. However, employers should ensure that the arrangement is properly documented, consistent with the actual employment relationship and compliant with applicable law.

Before approving a renewal or deciding not to renew, employers should:

• Review the existing contract and any previous extensions.
• Confirm the continuing business requirement and the proposed duration.
• Check whether the employee’s role, remuneration or benefits will change.
• Reassess statutory parity and benefit obligations.
• Identify any gratuity or other payments that may become due.
• Confirm the appropriate separation process if the employment will end.
• Obtain legal review where the contract terms or circumstances create uncertainty.

A consistent approval process helps employers avoid treating renewals and separations as purely administrative decisions without reviewing their legal and financial implications.

6. A practical governance model for HR, legal and payroll teams

Fixed-term employment compliance requires coordination across departments. HR may maintain the contract and employment records, payroll may calculate wages and benefits, finance may assess the associated liabilities, and legal teams may review the contract terms and applicable requirements.

A practical governance model should assign responsibility for each stage of the employment lifecycle:

Employers should periodically test whether the documented process is operating in practice. A contract may contain appropriate terms, for example, but the intended controls will not be effective if payroll does not track service periods or if benefit calculations use outdated wage components.

Conclusion

Fixed-term employment remains a recognised means of engaging employees for a defined period under India’s Labour Codes, but it requires careful administration. Employers must distinguish direct fixed-term employees from contract labour, provide the treatment required by law, assess gratuity eligibility and calculations correctly, and handle contract renewals and expiry through a documented process.

The most effective approach is to integrate fixed-term employment into the organisation’s regular HR, payroll and legal compliance framework. A structured checklist, accurate service records and timely review of statutory benefits can help employers manage workforce flexibility while meeting their obligations under the applicable law.

1. https://www.labour.gov.in/static/uploads/2026/03/a4ccf4c6d97c4f1f36a6d83f8c64213d.pdf?v=20260620082854 ↩︎

Last Updated on 26 October, 2026