Fixed term employment under the Labour Codes: an HR guide

Fixed term employment (FTE) is direct employment on a written contract for a fixed period, recognised for all sectors under the Industrial Relations Code, 2020 since 21 November 2025. A fixed-term employee must get the same hours, wages, allowances and benefits as a permanent employee doing the same or similar work, statutory benefits in proportion to service, and gratuity after one year. When the contract simply expires, no notice or retrenchment compensation is payable.

This guide covers what parity means in payroll, how gratuity works for fixed-term staff, how to draft and renew the contract, and when FTE is the wrong tool. For the wider context, see our summary of the four labour codes, and for how fixed-term hiring compares with outsourced staffing, see our contract labour checklist.

What is fixed term employment under the IR Code?

The IR Code defines fixed term employment as the engagement of an employee on the basis of a written contract of employment for a fixed period. Three conditions come attached:

• Hours of work, wages, allowances and other benefits must not be less than those of a permanent worker doing the same or similar work.
• The employee is eligible for all statutory benefits available to a permanent worker, proportionately to the period of service, even if the period is shorter than the usual qualifying period.
• The employee is eligible for gratuity after one year of service under the contract.

Before the Codes, fixed-term employment was permitted by notification under the central model standing orders, first for apparel manufacturing and from 2018 for all sectors in the central sphere, with state practice varying. The IR Code put it in the statute itself.

Two features make FTE different from older "temporary" or "casual" hiring. It is written, with a defined end date, and it carries parity. A fixed-term employee is your employee, on your rolls, covered by your PF, ESI and payroll in exactly the same way as anyone else.

What rights does a fixed-term employee have?

Entitlement	Permanent employee	Fixed-term employee
Wages and allowances	As per grade	Not less than a permanent worker in the same or similar role
Working hours	As per policy and law	Same
PF and ESI	From joining, if eligible	Same, on the same wage base
Statutory bonus	After 30 days worked in the year, if within the eligibility limit	Same, in proportion to days worked
Annual leave	As per policy and the OSH Code	Same accrual rule, pro rata to service
Maternity benefit	As per the Code on Social Security	Same, subject to the qualifying conditions
Gratuity	After 5 years of continuous service	After 1 year of service under the contract
Notice on separation	As per contract and standing orders	Not required when the contract expires
Retrenchment compensation	If retrenched	Not payable on expiry of the term

Parity is about the role, not the person. If a permanent machine operator in grade W3 earns ₹24,000 a month with a ₹1,500 shift allowance, a fixed-term operator doing the same work must get at least that. Benefits that are not statutory, such as medical insurance or meal subsidy, are a grey area: "other benefits" in the definition is wide, and the safer course is to extend the same benefits pro rata.

Do fixed-term employees get gratuity?

Yes. Under the Code on Social Security, a fixed-term employee becomes eligible for gratuity after one year of service, instead of the five years that applies to others. The formula is the familiar one: 15 days' wages for each completed year of service, on last drawn wages as defined under the Codes, using the 26-day divisor for monthly-paid staff, with the ₹20 lakh ceiling.

Worked example: gratuity on a two-year contract

An engineer is hired on a two-year fixed-term contract for a plant commissioning project. Basic plus DA is ₹32,000 a month, and other components keep wages within the 50% test, so wages for gratuity are ₹32,000.

1. Daily wage for gratuity: ₹32,000 ÷ 26 = ₹1,230.77.
2. Fifteen days' wages: ₹1,230.77 × 15 = ₹18,461.54.
3. For two completed years: ₹18,461.54 × 2 = ₹36,923.

Gratuity payable on expiry is ₹36,923. Before the Codes, the same engineer would have received nothing. If allowances are high and the 50% add-back applies, the wage base is higher; our guide to the 50% wage rule shows the calculation, and the gratuity calculator gives a quick check.

How the Code treats a fixed-term employee who serves, say, 1 year and 9 months (whether the extra months count as a further year, as part-years above six months do for others, or are paid pro rata) is a point to confirm against the rules and guidance that apply to you. Decide one basis and apply it consistently.

Is notice or retrenchment compensation payable when the contract ends?

Not when the contract expires on its terms. The IR Code's definition of retrenchment excludes termination of a worker's service as a result of completion of the tenure of fixed term employment, and the non-renewal of a contract on its expiry. So on the agreed end date:

• No notice period is owed by either side, though a written reminder 30 days ahead is good practice.
• No retrenchment compensation is due.
• No reskilling fund contribution arises, because there is no retrenchment.
• Earned wages, leave encashment if the policy allows it, pro-rata bonus and gratuity (after one year) are all payable, within two working days under the Code on Wages.

Early termination is different. If the employer ends the contract before the end date for reasons other than misconduct, the terms of the contract govern, and depending on the facts it may be treated as retrenchment. Write an early-termination clause with a notice period or pay in lieu, and take advice before ending a contract early for business reasons. For the exit itself, our full and final settlement guide covers the components.

Fixed-term vs permanent vs contract labour vs probation

Feature	Fixed-term	Permanent on probation	Contract labour	Apprentice
Whose rolls	Yours	Yours	The contractor's	Yours, under the Apprentices Act
End date	Fixed in the contract	None, subject to confirmation	As per contractor agreement	End of training period
Wage parity	With permanent workers	As per grade	Minimum wages; parity rules under state law and the OSH Code where they apply	Stipend, not wages
Gratuity	After 1 year	After 5 years	Contractor's liability	Not applicable
Main compliance risk	Sham renewals, unequal pay	Indefinite probation	Principal employer liability	Using apprentices as regular labour

Apprentices are a separate regime; see apprentice hiring under the Apprentices Act.

How to draft a fixed-term employment contract

A fixed-term contract should be short, specific and clearly different from a standard appointment letter. Include:

1. The fixed period, with exact start and end dates, and the project or reason for the fixed term.
2. Role, grade and the comparator, so parity can be shown: the permanent grade whose pay and benefits apply.
3. Wages and benefits, either itemised or by reference to the same pay structure as permanent staff.
4. Statutory benefits, stating PF, ESI, bonus, leave and gratuity eligibility.
5. Expiry, stating that employment ends automatically on the end date without notice or compensation, unless renewed in writing.
6. Early termination by either side, with notice or pay in lieu, and termination for misconduct under the standing orders or disciplinary policy.
7. Renewal, stating that any renewal will be in writing, before expiry, and that there is no expectation of renewal or of permanent employment.
8. Policies, incorporating the employee handbook and POSH policy.

Keep the signed contract and every renewal letter in the employee's document file. An undocumented extension, where the employee simply keeps working after the end date, is the most common way a fixed-term arrangement turns into an argument that employment has become indefinite.

Can a fixed-term contract be renewed?

The IR Code does not set a maximum term or a cap on the number of renewals. That is not a licence to roll contracts forever. Repeated renewals for a role that is perennial in nature invite the argument that the arrangement is a sham designed to deny permanent status, and courts look at substance over labels.

A workable internal rule:

• Renew only where the reason for the fixed term still exists, and record that reason.
• Set an internal cap, such as a total of three years, after which the role is reviewed for a permanent position.
• Issue the renewal letter before the current term ends, never after.
• Do not create artificial breaks of a day or a week between contracts to defeat continuity; they are easy to see and weaken your position.

Converting existing permanent employees into fixed-term employees is a red flag. The 2018 central model standing orders amendment expressly barred converting permanent posts into fixed-term ones, and any such move would also be a change in conditions of service needing notice under the IR Code. Take advice before considering it.

When is fixed term employment the wrong tool?

• For a perennial, core role that will exist indefinitely. Hire permanently with probation.
• To avoid gratuity or notice. Gratuity now arrives after one year, and sham contracts get unpicked.
• To pay less than permanent staff for the same work. Parity makes this unlawful.
• To test a new hire. That is what probation is for.
• For very short, task-based work with no supervision or integration. A genuine independent contractor engagement may fit, but read our guide to gig workers and social security on misclassification first.

FTE fits genuinely time-bound needs: a plant commissioning, a system migration, a seasonal peak, maternity cover, a funded project.

Payroll and HR treatment

• Employment type recorded as fixed-term on the employee record, with the contract end date as a tracked field.
• Same pay structure as the permanent comparator grade.
• Gratuity accrual from day one in the provision, with eligibility at one year.
• Leave accrual pro rata, and a clear rule on unused leave at expiry.
• Alerts 60 and 30 days before the end date, so the manager decides renewal or exit in time.
• Exit processed through the normal F&F, marked as contract expiry rather than resignation or termination.

Common mistakes

• Paying fixed-term staff a lower rate or a smaller benefit set than permanent staff in the same role.
• Applying the five-year gratuity rule to fixed-term employees.
• Letting employees work past the end date with no renewal letter.
• Rolling contracts for years in a perennial role.
• Paying "retrenchment compensation" on expiry because payroll could not tell expiry from termination.
• Leaving the F&F until the next payroll cycle.

FAQs

Is a fixed-term employee entitled to gratuity? Yes, after one year of service under the contract, under the Code on Social Security, 2020, using the same 15-day formula and ₹20 lakh ceiling as other employees.

Is notice required to end a fixed-term contract? Not when it ends on the agreed expiry date. Early termination is governed by the contract and may need notice or pay in lieu.

What is the maximum period of a fixed-term contract? The IR Code does not fix one. Set an internal cap and review long-running roles for permanent positions.

Do fixed-term employees get PF and ESI? Yes, on the same basis as permanent employees: PF on wages up to the applicable ceiling of ₹25,000 a month from 17 September 2026, and ESI where gross wages are within ₹21,000.

Can a fixed-term employee be made permanent? Yes, by a new appointment or a written conversion. Service under the fixed-term contract should be counted in line with your policy and the law.

Is fixed term employment the same as contract labour? No. A fixed-term employee is on your rolls. Contract labour is engaged through a contractor, with the principal employer carrying secondary liability.

How NeevHR helps

NeevHR employee records hold employment types and grades on an effective-dated timeline, so a fixed-term hire sits on the same pay structure as the permanent grade. Contracts and renewal letters live in documents with expiry tracking, and the full and final settlement worksheet computes gratuity, leave encashment and pro-rata bonus at expiry. You can see the fixed-term workflow in a demo.

This article provides general information for educational purposes. Statutory rules, thresholds, rates and filing requirements may change; verify with the relevant authority or a qualified professional. Last reviewed: 27 Oct 2026.