The Old Rule vs The New Rule
For decades, the Payment of Gratuity Act 1972 required an employee to complete 5 continuous years of service before becoming eligible for gratuity. This effectively excluded the majority of fixed-term, project-based, and short-duration contract workers from this important retirement benefit.
The Social Security Code 2020 introduced a landmark change: Fixed-Term Employees (FTEs) are entitled to pro-rata gratuity upon completion of their contract term — even if they have served for only one year. This aligns with the IRC 2020's recognition of FTE as a legitimate employment category.
Who Is a Fixed-Term Employee Under the IRC 2020?
The Industrial Relations Code 2020 defines a Fixed-Term Employee as a worker whose employment is governed by a written contract specifying:
- A fixed period of employment
- Specific conditions of work (hours, wages, leave)
- Clear start and end date of the contract
- The worker is employed directly by the employer — not through a contractor
Workers engaged through contractors or third-party staffing agencies do not qualify as FTEs under the IRC 2020. Only direct employment on a fixed-term basis triggers the new gratuity rules.
How to Calculate Gratuity for Short-Term FTE
The formula for gratuity remains unchanged: Last drawn Basic + DA × 15/26 × Years of Service. For Fixed-Term Employees, "years of service" is calculated on a pro-rata basis — unlike permanent employees where only completed years are counted.
Gratuity = (Last Drawn Basic + DA) × 15/26 × (Total days served ÷ 365)
Example Calculation: 18-Month FTE Contract
Employee Details
Cost Impact for Industries Heavily Using Fixed-Term Employment
| Industry | Typical FTE Usage | Gratuity Impact |
|---|---|---|
| Manufacturing | High (seasonal production) | High — provision needed per contract |
| IT / Software Services | Medium (project-based) | Medium — varies with contract length |
| Retail | High (festive/seasonal staffing) | High — large volume of short contracts |
| Construction | Very High | Moderate — most via contractors (not FTE) |
| Healthcare | Low–Medium | Low — most staff on regular employment |
Is Fixed-Term Employment Still Worth It?
Despite the increased gratuity cost, FTE remains advantageous for employers because:
- No retrenchment compensation: FTE contracts expire naturally — no retrenchment notice or compensation is required on non-renewal
- No unfair dismissal claims: Expiry of a contract term is not a "dismissal" under the IRC 2020
- Flexibility: Employers can scale workforce up/down without Industrial Disputes Act restrictions
- Reduced standing order complexity: FTE provisions are self-contained in the contract itself
The gratuity cost is a known, calculable liability that can be provisioned monthly from the date of joining. This is far preferable to the uncertainty of retrenchment disputes.
Employer Action Points
- Audit existing FTE workforce: Identify all current fixed-term employees who have served one year or more. Calculate gratuity liability.
- Update FTE contract templates: Include a clear clause acknowledging pro-rata gratuity entitlement after 1 year of service under SS Code 2020.
- Create gratuity provision: Instruct finance/payroll to create a monthly gratuity provision for each FTE employee from month 1 of employment.
- Inform payroll and HR teams: Brief all relevant staff on the 1-year rule. Wrong information at exit can cause disputes.
- Review group gratuity insurance: If you have a group gratuity scheme, inform the insurer about FTE headcount for accurate premium calculation.
This rule applies immediately upon notification of the Social Security Code 2020 in your state. Check whether your state has already notified the SS Code. If yes, all current FTE employees who have completed one year of service are already entitled to pro-rata gratuity on contract expiry. Non-payment is a violation triggering penalties under the Act.