Gratuity After 1 Year: Fixed-Term Employees Get Major Boost Under New Labour Laws

Fixed-term employees across sectors will now be eligible for gratuity after just one year of service, marking a major shift in India’s labour framework as the Union government officially rolled out the newly consolidated four labour codes, replacing 29 existing laws.

According to the Union Labour Ministry, the overhaul is designed to ensure better wages, expanded social security, and stronger health-related protections for workers—particularly those in India’s growing fixed-term, informal, and gig workforce.

What Is a Fixed-Term Employee?

A fixed-term employee works under a written employment contract that:

• Specifies a set end date, or

• Ends automatically upon completion of a particular project or assignment

This model is widely used in manufacturing, IT services, logistics, construction, media, and export-oriented sectors.

A Major Shift: From 5 Years to 1 Year Eligibility

Under the earlier Payment of Gratuity Act, all employees—including fixed-term workers—became eligible for gratuity only after completing five years of continuous service.

The new labour codes make a fundamental change:

Fixed-term employees will now qualify for gratuity after completing just one year of service.

The ministry clarified that the reform aims to place fixed-term workers on a more equal footing with permanent employees, granting them:

• Comparable salary structures

• Leave entitlements

• Medical benefits

• Social security coverage

The government expects this shift to reduce overreliance on informal contract staffing and promote more transparent, direct hiring practices.

What Is Gratuity?

Gratuity is a lump-sum payment made by an employer as a token of appreciation for an employee’s long-term service. Traditionally paid at:

• Retirement

• Resignation

• Superannuation

it is meant to provide a financial cushion during transitions.

The revised framework ensures fixed-term employees are no longer excluded from this benefit due to short-duration contracts.

Where Does the Gratuity Act Apply?

The Payment of Gratuity Act covers:

• Factories

• Mines

• Oil fields

• Ports

• Railways

• Shops and commercial establishments meeting specific criteria

Earlier speculation suggested the eligibility period might drop to three years, but the final decision marks a more dramatic change—bringing the qualifying period down to one year for fixed-term employees.

How to Calculate Gratuity

Gratuity is calculated using the formula:

Gratuity = Last Drawn Salary × (15/26) × Years of Service

• Last drawn salary includes Basic Pay + Dearness Allowance.

Example:
If an employee worked for five years and had a last drawn basic-plus-DA salary of ₹50,000:

50,000 × (15/26) × 5
= ₹1,44,230

The new rules make it easier for fixed-term workers to access this financial benefit much earlier in their careers.

Why This Matters

The reform is expected to:

• Strengthen job security for fixed-term workers

• Improve workforce stability for employers

• Encourage formal hiring over informal contracting

• Expand financial protection for millions of workers

The policy forms a key part of the government’s agenda to modernise India’s labour ecosystem and widen the social security net.