Fixed-Term Employment Under The New Labour Codes: Implications For Contract Labour And Gratuity

Following the enactment of the four new labour codes – the Industrial Relations Code, 2020 (IRC); Code on Social Security Act, 2020 (CSS); Occupational Safety, Health and Working Conditions Code, 2020; and Code on Wages, 2019 – India’s labour laws, long characterised by a fragmented framework of Central and State legislation, have undergone significant structural consolidation and reform.

These labour law enactments will provide both increased flexibility in the Indian labour market and the ability for employers and employees to create formal employment relationships, thereby providing full statutory benefits to employees. In this context, one of the most significant changes involves the statutory recognition of Fixed-Term Employees (FTEs), along with the relaxation of the eligibility criteria for gratuities under the CSS as well as the expansion of the definition of ’employer’ within the IRC framework to include contractors. These changes inevitably raise significant questions regarding the legal characterisation and entitlements of contract labour under the new framework. The author delves into the question of whether contract labour can be treated as fixed-term employees for the purpose of gratuity. 

As per the statutory framework governing FTE and gratuity under the new labour codes, contract labour does not automatically fall within the ambit of FTE, and eligibility for gratuity on the shorter timeline associated with fixed-term employment arises only where the engagement satisfies the statutory requirement of a written fixed-term contract of employment. This article considers the implications of restructuring employment arrangements and the allocation of gratuity liability between contractor and principal employer. 

FTE was first introduced in the apparel manufacturing sector under the Industrial Employment (Standing Orders) Act, 1946, and was subsequently expanded across sectors. Under that framework, an FTE workman was engaged on the basis of a contract of employment for a fixed period; his hours of work, wages, allowances and other benefits could not be less than those of a permanent workman; and he was eligible for statutory benefits proportionate to his period of service. 

Under the current framework, the CSS defines an ‘employee’ to include a contractor, and defines ‘fixed term employment’ as engagement on the basis of a written contract of employment for a fixed period, while requiring parity in wages, allowances and other benefits with a permanent employee doing the same work or work of a similar nature and proportionate access to statutory benefits. Section 53 of the CSS provides for gratuity on termination of employment, expressly covers termination of the contract period under fixed-term employment, waives the five-year condition where employment ends on the expiration of fixed-term employment, and provides for gratuity on a pro rata basis in the case of an employee employed on fixed-term employment. 

On a joint reading of the fixed-term employment definition, the contractor-inclusive definition of employer, and Section 53 of the CSS, a contract labour engaged by the contractor may fall within the gratuity framework for FTE only if he is engaged under a written fixed-term contract of employment. The existence of a written fixed-term employment agreement is necessary. 

Concerns of misuse

While this heralds a major step ahead in strengthening labour welfare, the new framework itself still calls for caution. The present code architecture does not expressly carry forth the previous safeguard that could otherwise block the conversion of permanent workers into fixed-term employees. The absence of such express protections opens avenues for abuse of FTE arrangements as a means of undermining employment security and escaping the usual obligations owed to permanent workers.

Also, the mere inclusion of contractors within the definition of ‘employer’ does not, in and of itself, transform every arrangement of contract labour into FTE. Labourers who are engaged on an informal and undocumented basis may still fail to qualify as fixed-term employees and, consequently, may be unable to avail the corresponding gratuity position attached to FTE. It is only where contractors restructure engagement practices to incorporate written contracts for fixed periods that such labour may qualify as FTE of the contractor under the statutory framework. In practical terms, principal employers may still face gratuity exposure in contractor-heavy arrangements and would therefore be well advised to treat this as a live compliance risk. 

Practical recommendations

From a practical standpoint, employers and contractors should carefully review their engagement models in light of the evolving framework governing fixed-term employment, contract labour and gratuity. The terms of engagement should be clearly documented through written contracts, since the existence of a written fixed-term contract is central if a person is to be characterised as FTEs and thereby access the one-year gratuity position now associated with fixed-term employment in post-notification explanations of the new framework. Contractors intending to engage workers on a fixed-term basis should therefore adopt standardised contractual documentation that expressly specifies the duration of employment and the applicable statutory benefits. 

Principal employers should periodically audit contractor workforce arrangements to assess potential gratuity exposure and to ensure that statutory obligations are being appropriately discharged by contractors. At the same time, organisations should also be aware of the potential risks involved in converting permanent jobs into short-term positions, particularly given that there is no anti-conversion clause within the current system; these types of conversions will likely be challenged through legal and industrial relations means.

There is no doubt that the new labour system implementation will achieve important objectives, however, the extent to which these benefits are achieved will be a result of the appropriate application of labour law, monitoring of compliance, and adherence to appropriate contractual processes across all sectors. This proactive approach can help organisations balance workforce flexibility with compliance obligations while advancing the labour welfare objectives underlying the new labour codes.  

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.