Fixed-term employment in India is a form of direct employment under a written contract for a predetermined period, with statutory parity in wages, hours, allowances and benefits compared to permanent employees performing the same or similar work.

Under the Industrial Relations Code, 2020 and Code on Social Security, 2020 (in force from 21 November 2025, with central rules notified in 2026), fixed-term employees (FTEs) receive clearer rights, including pro-rata gratuity after one year of service. This guide explains the rules, benefits, gratuity calculation, differences from permanent and contract labour arrangements, and practical compliance points for 2026.

Understanding Fixed-Term Employment under the Labour Codes

Fixed-term employment requires a written contract specifying the start and end dates. The employee is engaged directly by the establishment (not through a contractor). The Codes mandate that hours of work, wages, allowances and other benefits cannot be less favourable than those given to permanent workers doing the same or similar work. Statutory benefits are available on a proportionate basis even when the engagement period is shorter than normal qualifying periods.

The four Labour Codes consolidated 29 central laws and took effect together on 21 November 2025. Central rules followed in 2026, while state-level rules continue to roll out. This framework aims to give employers workforce flexibility while protecting FTEs through parity and social-security coverage.

Key data points:

• Fixed-term employees qualify for gratuity after one year of continuous service on a pro-rata basis, unlike the general five-year threshold for permanent employees.
• Expiry or non-renewal of a fixed-term contract is explicitly excluded from the definition of retrenchment.
• The Code on Wages 50% wage rule affects the base used for calculating provident fund, gratuity and other statutory payments.

Core Rules for Fixed-Term Employment

A valid fixed-term arrangement rests on a written contract that clearly states the fixed period, nature of work, wages, benefits and other terms. Appointment letters under the applicable rules typically require disclosure of the type of employment (regular, fixed-term or other).

Employers must maintain wage and benefit parity with permanent employees performing comparable work. This covers basic pay and allowances structure, working hours, leave entitlements (proportionate where relevant), and applicable social-security schemes. Blanket exclusion of FTEs from PF, ESI or other benefits solely because of fixed-term status is not compliant.

Best for whom: Project-based roles, seasonal peaks, maternity or temporary cover, and time-bound expansion where long-term permanency is not required.

Clear recommendation: Document the business rationale for the fixed term, ensure the contract is signed before joining, and align the salary structure with the 50% wage definition under the Code on Wages so that statutory calculations remain accurate.

Benefits Available to Fixed-Term Employees

FTEs are entitled to the same or proportionate statutory benefits available to permanent employees doing similar work. These commonly include:

• Wages and allowances at parity levels
• Provident Fund (PF) and Employees’ State Insurance (ESI) subject to wage ceilings and establishment coverage
• Leave benefits on a proportionate basis
• Maternity benefit where eligibility conditions are met
• Statutory bonus where applicable
• Other welfare and safety provisions under the Occupational Safety, Health and Working Conditions Code

Social-security coverage applies according to the relevant thresholds and schemes; duration of the contract alone does not automatically exclude an eligible employee.

Decision Table: Benefit Parity Snapshot

Benefit Area	Fixed-Term Employee Treatment	Permanent Employee	Notes for 2026 Compliance
Wages & Allowances	Not less than permanent for same/similar work	Full entitlement	Parity mandatory
PF / ESI	Subject to thresholds; from eligibility date	Subject to thresholds	No blanket FTE exclusion
Leave	Proportionate where rules allow	Full as per rules	Accrue and track carefully
Maternity Benefit	Eligible if conditions met	Eligible if conditions met	Service period rules apply
Gratuity	Pro-rata after 1 year continuous service	Generally after 5 years	Major distinction
Retrenchment Compensation	Not payable on natural expiry/non-renewal	Applicable if retrenchment criteria met	Expiry ≠ retrenchment

Best for whom: Organisations that need flexibility without creating disguised permanent relationships or underpaying for comparable work.

Recommendation: Build parity checks into offer letters and payroll systems so that differences are limited to the fixed duration itself.

Gratuity Rules for Fixed-Term Employees in 2026

One of the most significant changes is gratuity eligibility. Under the Code on Social Security, 2020, fixed-term employees become entitled to gratuity on a pro-rata basis after completing one year of continuous service. The five-year continuous-service requirement that applies to most permanent employees does not apply in the same way to FTEs on expiry of the fixed term.

Calculation approach (standard formula applied pro-rata):

Gratuity ≈ (Last drawn wages × 15 × Number of years of service) / 26

“Wages” follows the Code on Wages definition (with the 50% rule influencing the composition of the wage base). Part of a year exceeding six months is typically counted as a full year in the conventional formula; pro-rata treatment applies for FTEs. Payment is generally required within the prescribed timelines after it becomes due.

Example illustration: An FTE completing 18 months at last-drawn qualifying wages of ₹30,000 would receive gratuity calculated on 1.5 years using the 15/26 formula. Exact figures depend on the precise wage components and continuous-service determination.

Best for whom: Both employers (for accurate provisioning) and FTEs who previously often missed gratuity because contracts ended before five years.

Clear recommendation: Accrue gratuity liability from the start of any contract that may reach or exceed one year. Track continuous service carefully, especially across renewals, and include gratuity in full-and-final settlement on expiry.

Contract Expiry, Renewal and Termination

When a fixed-term contract reaches its natural end date and is not renewed, employment ceases automatically. This is not treated as retrenchment under the Industrial Relations Code. Consequently, the employer is generally not required to pay notice pay or retrenchment compensation solely because of expiry or non-renewal.

Early termination before the fixed end date may attract different consequences depending on the contract terms and whether it meets the definition of retrenchment or other separation events. Full-and-final settlement (including any earned wages, leave encashment and eligible gratuity) should follow the applicable timelines—reports note accelerated settlement requirements (for example, within two working days in certain separation cases under the new framework).

Renewal is permissible. However, repeated short renewals of what is essentially ongoing work can attract scrutiny. Courts and authorities may examine the substance of the arrangement. Clear documentation of the renewed fixed period and continued parity remain essential.

Recommendation: Issue timely communication before expiry, process F&F promptly, and avoid using successive micro-contracts to circumvent permanency or benefit obligations.

Fixed-Term Employment vs Other Arrangements

Fixed-term vs Permanent Employee

Permanent employment has no predetermined end date and carries stronger continuity protections (retrenchment procedures, notice, compensation thresholds). Gratuity for permanent employees generally requires five years of continuous service. FTEs trade long-term security for a defined tenure while receiving wage/benefit parity and the one-year gratuity pathway.

Fixed-term vs Contract Labour

Fixed-term employment is direct employment on the principal employer’s rolls. Contract labour is engaged through a third-party contractor. Under the Occupational Safety, Health and Working Conditions Code, engagement of contract labour in core activities is restricted (with limited exceptions). FTEs face no such core-activity bar and receive direct statutory parity and the one-year gratuity rule.

Fixed-term vs Independent Contractor

An independent contractor is not an employee. FTEs are employees with corresponding rights, deductions, social-security coverage and protective obligations on the employer.

Decision Table: Choosing the Right Engagement Model

Factor	Fixed-Term Employment	Permanent Employment	Contract Labour
Direct employment	Yes	Yes	No (via contractor)
Defined end date	Yes	No	Depends on contractor arrangement
Wage/benefit parity	Mandatory with permanent peers	Full	Different regime; principal liability risks
Gratuity	Pro-rata after 1 year	Generally after 5 years	Usually via contractor
Core activities	Permitted	Permitted	Restricted
Expiry = retrenchment?	No	N/A	Different rules
Best suited for	Projects, peaks, cover roles	Core ongoing roles	Non-core, specialised or fluctuating support

Best for whom: Use FTE when you need direct control, parity compliance and a clean end date; reserve permanent roles for ongoing core work; use contract labour only where legally permitted and for genuine non-core needs.

Practical Compliance Checklist for 2026

• Issue a clear written fixed-term contract and compliant appointment letter.
• Ensure wage structure respects the 50% rule and parity with comparable permanent roles.
• Enrol eligible FTEs in PF, ESI and other applicable schemes without delay.
• Accrue and track pro-rata leave and gratuity (especially once the one-year mark approaches).
• Process full-and-final settlement promptly on expiry, including any due gratuity.
• Maintain records of continuous service, renewals and business justification.
• Review state-specific rules, as labour is a concurrent subject.

SalaryBox supports growing organisations with tools that help manage attendance, payroll components, statutory calculations and settlements more consistently—useful when handling mixed permanent and fixed-term workforces under the evolving Labour Codes.

Final Recommendations

1. Treat fixed-term employment as a legitimate, regulated option rather than a way to avoid benefits.
2. Prioritise written contracts, parity and accurate wage definition from day one.
3. Provision for one-year gratuity and include it in F&F processes.
4. Distinguish clearly between FTE, permanent and contract-labour arrangements to avoid misclassification risks.
5. Stay updated on central and state rules through 2026, as implementation details continue to settle.

Fixed-term employment under the Labour Codes offers employers flexibility with a defined exit while giving employees meaningful parity and earlier gratuity access. Clear documentation, consistent application of benefits and timely settlements keep both sides compliant and reduce disputes.

Frequently Asked Questions

What is fixed-term employment in India?

Fixed-term employment is the engagement of a person as an employee on the basis of a written contract for a fixed or predetermined period. The employee is hired directly by the establishment (principal employer) rather than through a contractor. Under the Industrial Relations Code, 2020 and Code on Social Security, 2020, the arrangement must provide hours of work, wages, allowances and other benefits that are not less than those of a permanent employee doing the same or similar work. Statutory benefits are available proportionately according to the period served. The contract must clearly state the tenure. This model is recognised across sectors and is distinct from permanent employment (no fixed end date) and contract labour (engagement via a third-party contractor). Proper documentation and parity are essential for compliance in 2026.

What are the rules for fixed-term employment under the Labour Codes?

The key rules require a written contract specifying the fixed period, direct employment by the principal employer, and parity in wages, working hours, allowances and benefits with permanent employees performing the same or similar work. Fixed-term employees are entitled to statutory benefits on a proportionate basis even if their tenure is shorter than normal qualifying periods. Gratuity becomes payable on a pro-rata basis after one year of continuous service. Expiry or non-renewal of the contract is not treated as retrenchment, so notice pay and retrenchment compensation are generally not required solely on natural expiry. Appointment letters and wage definitions must align with the Codes (including the 50% wage rule). State rules may add procedural details. Employers must avoid using successive short contracts to evade permanency or benefit obligations.

Do fixed-term employees get the same benefits as permanent employees?

Yes, in the sense of parity and proportionality. Fixed-term employees are entitled to wages, hours, allowances and other benefits that are not less favourable than those of permanent employees doing the same or similar work. Statutory benefits such as PF, ESI, leave, bonus and maternity benefit (where eligibility criteria are met) apply on a proportionate basis according to the period of service, even if the qualifying period for permanent employees is longer. The major structured difference is gratuity (one-year pro-rata threshold for FTEs versus the general five-year rule for most permanent employees) and the absence of retrenchment compensation on natural contract expiry. Employers cannot lawfully create a lower benefit tier solely because the engagement is fixed-term.

Is gratuity payable to fixed-term employees?

Yes. Under the Code on Social Security, 2020, fixed-term employees are entitled to gratuity on a pro-rata basis. The traditional five-year continuous-service requirement that applies to most permanent employees is modified for FTEs so that gratuity becomes payable after one year of continuous service when the fixed-term employment ends. Payment follows the standard formula of fifteen days’ wages for every completed year of service (or part thereof as applicable), calculated on the last-drawn wages as defined under the Codes. Gratuity should be included in the full-and-final settlement on expiry or other qualifying termination.

How long must a fixed-term employee work to qualify for gratuity?

A fixed-term employee generally qualifies for pro-rata gratuity after completing one year of continuous service under the contract. Service of less than one year does not attract gratuity under the special FTE rule (except in cases such as death or disablement, where the five-year rule is also waived for other categories). Once the one-year threshold is met, gratuity is calculated proportionately for the period served using the applicable formula. Continuous service determination is important, particularly if contracts are renewed.

Are fixed-term employees eligible for PF and ESI?

Yes, subject to the normal eligibility conditions, wage ceilings and establishment coverage under the respective schemes. Fixed-term status alone does not exclude an employee from Provident Fund or Employees’ State Insurance. Where the employee and establishment meet the thresholds, contributions and coverage apply from the relevant eligibility date, often from the beginning of employment. Proportionate treatment and timely enrolment are required; blanket exclusion of FTEs is not compliant.

What happens when a fixed-term employment contract expires?

Employment ends automatically on the expiry date stated in the written contract if it is not renewed. This cessation is not treated as retrenchment under the Industrial Relations Code. Therefore, the employer is generally not required to pay notice pay or retrenchment compensation solely because of natural expiry. The employee remains entitled to earned wages, proportionate leave encashment (if applicable), and gratuity if the one-year continuous-service condition is met. Full-and-final settlement should be completed within the timelines prescribed under the Codes.

Can a fixed-term employment contract be renewed?

Yes, a fixed-term contract can be renewed by mutual agreement through a fresh or extended written contract that again specifies a fixed period. Renewal is a common practice for ongoing project or seasonal needs. However, repeated renewals of what is essentially continuous work may be examined for substance over form. Employers should maintain clear documentation, continue parity in wages and benefits, and track continuous service for gratuity and other entitlements. Using successive micro-contracts solely to avoid permanency or statutory benefits carries compliance risk.

What is the difference between fixed-term employment and contract labour?

Fixed-term employment is direct employment by the principal employer under a written contract for a fixed period, with statutory wage and benefit parity and the one-year gratuity rule. Contract labour is engagement of workers through a third-party contractor; the contractor is the immediate employer, although the principal employer carries certain residual liabilities. Under the Occupational Safety, Health and Working Conditions Code, contract labour is generally restricted in core activities of the establishment (with limited exceptions). FTEs face no such core-activity prohibition and receive direct social-security and parity protections.

What is the difference between a fixed-term employee and a permanent employee?

A fixed-term employee is engaged for a predetermined period under a written contract and employment ends automatically on expiry (without retrenchment consequences). A permanent employee has no fixed end date and enjoys stronger continuity protections, including retrenchment procedures, notice and compensation requirements when applicable. Both categories are entitled to wage and benefit parity for comparable work, but gratuity for permanent employees generally requires five years of continuous service, whereas FTEs qualify for pro-rata gratuity after one year. Permanent roles suit ongoing core work; fixed-term roles suit time-bound or project needs.