New Labour Codes: Gratuity After One Year Only for Fixed-Term Employees — What It Means

One of the most discussed features of the new labour codes is the provision that allows employees to receive gratuity after just one year of service. It appears to be a sweeping reform, but the rule comes with a crucial limitation: only fixed-term employees qualify.

Permanent employees remain under the five-year minimum service requirement, making this benefit exclusive to India’s rapidly expanding fixed-term workforce.

Who Is a Fixed-Term Employee?

A fixed-term employee works under a written contract that specifies a clear tenure. Once the duration expires, the employment ends automatically without any formal termination process.

This model is common in industries where work demand fluctuates, such as:

• Manufacturing

• Textiles and apparel

• Construction

• IT and IT services

• Media and audio-visual production

• Logistics and warehousing

• Hospitality

• Export-oriented sectors

The new labour codes mandate that fixed-term workers must receive wages, hours of work, leave, and social-security benefits equivalent to permanent employees, making the category more structured and formal.

What Is Gratuity?

Gratuity is a lump-sum financial benefit paid by an employer to an employee as a reward for long-term service. Historically, workers needed five continuous years of employment to qualify.

In industries reliant on short-term contracts, many fixed-term staff members never reached this benchmark, even while contributing full-time work.

What Has Changed Under the New Labour Codes?

The new framework introduces a one-year gratuity eligibility rule for fixed-term employees. Any employee completing one year of continuous service — even if their contract ends afterward — becomes eligible.

However:

• Permanent employees still require five years.

• The one-year rule is not universal and applies only to fixed-term hires.

The rationale is to prevent exploitation of short-duration workers who perform at par with permanent staff but previously lacked access to long-term financial benefits.

Who Stands to Gain the Most?

Sectors relying heavily on short-term and project-based staffing are expected to feel the strongest impact, including:

• Export-driven manufacturing

• Apparel and textiles

• Construction

• Media production and digital content

• IT-enabled services

• Hospitality and events

These workers previously had no realistic path to gratuity due to the five-year rule.

Under the new codes, a worker with a 12-month or 18-month contract can now earn gratuity at the end of their term — a substantial shift towards financial security and fairness.

The change aligns with the broader goal of the labour codes: modernising outdated laws, expanding social security, and bringing more workers into the formal safety net.