Fixed Term Employment Under New Labour Codes 2025 — Complete HR Guide

Introduction

Fixed Term Employment (FTE) has long existed in India’s industrial landscape as a grey area — workers engaged for defined periods, often denied the benefits that permanent employees enjoyed, and frequently used as a mechanism to circumvent statutory obligations. The new Labour Codes, effective 21st November 2025, change this fundamentally.

Under the Industrial Relations Code, 2020 and the Code on Social Security, 2020, Fixed Term Employees are now explicitly defined, their rights are codified, and — most significantly — they receive full parity with permanent employees across wages, leave, social security, and gratuity entitlements.

What is Fixed Term Employment Under the Labour Codes?

The Industrial Relations Code, 2020 defines Fixed Term Employment as the engagement of a worker on the basis of a written contract of employment for a fixed period. Key elements:

• Written contract mandatory — oral FTE arrangements have no legal standing
• Fixed period — defined start and end date
• No automatic renewal — contract terminates unless explicitly renewed
• Appointment letter mandatory — under OSH Code, stating designation, wages, period, and entitlements

Equal Treatment — The Core Principle

The most impactful provision: parity with permanent employees. The IR Code mandates that a Fixed Term Employee is entitled to the same benefits as a permanent worker in the same establishment:

• Wages — same as permanent employees for the same or similar work
• Working hours — 8 hours/day, 48 hours/week
• Leave — same entitlements (earned leave after 180 days)
• Social security — EPF, ESI, maternity benefit from day one
• Allowances — no differential treatment
• Working conditions — same safety and welfare standards

Gratuity After One Year — The Game Changer

The most significant change for FTE workers: gratuity is payable after just one year of continuous service (vs five years for permanent employees).

Under the Code on Social Security, 2020:

A Fixed Term Employee shall be entitled to gratuity upon cessation of employment after completion of one year of continuous service.

Calculation:

• Gratuity = (Wages × 15 × Years of Service) / 26
• “Wages” = new unified wages definition under Code on Wages

Example:

• FTE engaged for 18 months at wages of ₹20,000/month
• Gratuity = (₹20,000 × 15 × 1.5) / 26 = ₹17,307

Payable at end of contract period — employer cannot avoid gratuity by not renewing after one year.

→ Use our Gratuity Calculator to calculate FTE gratuity payouts.

Implications for Employers — Cost Planning

Before Labour Codes:

• FTE for 2 years → no gratuity (below 5-year threshold)
• Cost: wages + EPF + ESI only

After Labour Codes:

• FTE for 2 years → gratuity payable on cessation
• Cost: wages + EPF + ESI + gratuity provisioning

For 100 FTEs at average wages ₹18,000/month on 12-18 month contracts, annual gratuity liability runs into lakhs. Total FTE employment cost must be recalculated immediately.

EPF and ESI for Fixed Term Employees

EPF:

• FTEs with wages below ₹15,000/month must be enrolled in EPF from day one
• No minimum engagement period — a 3-month FTE is eligible immediately
• UAN issued — portable across subsequent employers

ESI:

• FTEs with wages below ₹21,000/month in establishments with 10+ employees must be covered
• Medical benefits under ESI available from day one of contribution

Maternity Benefit:

• Female FTEs entitled to 26-week paid maternity leave if worked 80 days in preceding 12 months
• Applies even if FTE contract period overlaps with maternity leave

Re-skilling Fund

For permanent workers who are retrenched (not for FTEs whose contracts expire naturally):

• Employer must contribute 15 days’ wages per retrenched worker to the Re-skilling Fund
• Separate from retrenchment compensation
• Applies if FTE is terminated mid-contract without valid cause

Appointment Letter — Mandatory

The OSH Code mandates appointment letters for every FTE, clearly stating:

• Designation / nature of work
• Wages payable
• Period of engagement (start and end date)
• Social security entitlements
• Leave entitlement
• Terms of termination

FTE vs Contract Labour — Key Distinctions

The prohibition on contract labour in core activities is critical — FTEs have no such restriction.

Standing Orders and FTEs

Standing Orders now mandatory for establishments with 300+ workers (raised from 100). Must cover:

• Classification of workers including FTEs
• Conditions of service
• Termination including expiry of FTE contracts
• Disciplinary procedures

HR Action Checklist

Immediate:

1. Review all existing FTE contracts — ensure written, with appointment letters
2. Enroll FTEs in EPF and ESI from day one
3. Begin gratuity provisioning for all FTEs approaching one year
4. Update payroll structure — ensure FTE wages meet 50% Basic+DA threshold
5. Audit FTE deployment — no FTE in core activities if contract labour restrictions apply
6. Issue standing orders if workforce (including FTEs) is 300+

Short-term: 7. Train HR team on FTE vs contract labour distinction 8. Update offer letter and contract templates 9. Include FTEs in actuarial gratuity valuation 10. Set up UAN registration workflow for FTE joiners

Frequently Asked Questions

What is Fixed Term Employment under the Labour Codes? A direct employment arrangement for a defined period under a written contract. FTEs are entitled to the same benefits as permanent employees, including gratuity after one year of service.

Is gratuity payable to Fixed Term Employees after one year? Yes. Under the Code on Social Security, 2020, an FTE is entitled to gratuity on cessation after completing one year of continuous service.

Are FTEs entitled to EPF and ESI? Yes — from the first day of engagement, same terms as permanent employees.

Can an FTE be engaged in core activity? Yes — this restriction applies only to contract labour (engaged through a contractor), not to FTEs directly employed.

Is an appointment letter mandatory for FTEs? Yes. Under the OSH Code, every employer must issue an appointment letter to every employee including FTEs.

What happens at natural contract expiry — is it retrenchment? No. Non-renewal at contract end is not retrenchment. Retrenchment compensation and Re-skilling Fund apply only if FTE is terminated mid-contract without valid cause.

Can an FTE join a trade union? Yes. FTEs have the same rights as permanent employees, and their membership counts in union recognition proceedings.

Conclusion

Fixed Term Employment under the new Labour Codes represents a fundamental rebalancing of India’s employment landscape. Equal pay, equal benefits, equal social security, and one-year gratuity eligibility collectively ensure that fixed-term workers receive genuine protections.

For employers, FTE is no longer a lower-cost alternative to permanent employment — the full cost now includes gratuity from year one, EPF and ESI from day one, and equal wages by design.

Related resources:

• Industrial Relations Code — Full Pillar Guide
• Gratuity Calculator under Code on Social Security, 2020
• Code on Social Security — Full Pillar Guide
• Compliance Calendar — IR Code Obligations