Gratuity for Fixed-Term Employees: A Statutory Analysis

I. Introduction

Historically, India had a fragmented labour law framework, comprising more than 29 central labour laws governing wages, industrial relations, social security and work safety and health. To streamline all these, legislative reforms in the year 2019-2020, effective from November 2025, consolidated the legislations to form four integrated labour codes, namely, the Code on Wages 2019, Code on Industrial Relations 2020, Code on Social Security 2020 and Code on Occupational Safety, Health and Working Conditions 2020. These codes aim to justify labour rules, reduce compliance costs, and offer a more standardised and modernised framework for labour governance. However, ambiguities in the interpretation of definitions and regulatory frameworks across the four Codes impede their application and raise concerns about legislative drafting and coherence.

Among the ambiguities that still remain under the Code on Social Security 2020 is the granting of gratuity to fixed-term employees (“FTEs”). Although the Code aims to provide FTEs with the protection of gratuity, the statutory language fails to address key loopholes, especially the qualifying service requirement and the calculation of gratuity. This blog discusses such ambiguities and opines that the interpretive uncertainty is brought about by a lack of uniformity in definitions across labour codes, a lack of clear specification of qualifying service conditions and the imprecise application of the word “pro rata”. It concludes by emphasising the need for legislative clarification and harmonisation across the labour codes to consistently apply the provisions on gratuity for FTEs.

II. The Legal Background

Traditionally, gratuity in India has been regulated under the Payment of Gratuity Act 1972, a social welfare legislation that conceptualised the concept of gratuity as deferred wages to an employee upon the termination of a long and continuous service. The Act applies to establishments that employ ten or more people and requires that gratuity be paid on retirement, resignation, superannuation, or even on death and disablement, but only after a period of five years of continuous service (except in cases of death or disability). Gratuity is calculated by a strict statutory formula: (Last drawn wages x 15 x years of service completed)/26. The computation of "completed years of service," which rounds up service longer than six months to a full year and ignores service shorter than six months, is the fundamental feature of this framework. This demonstrates a clear legislative goal to ensure uniformity and predictability in calculating gratuities without resorting to fractional computations.

But when it comes to FTEs, the Code on Social Security 2020 makes substantial deviations from the traditional model. Inspired by the Industrial Relations Code 2020, the new framework aims to promote formal employment while maintaining a balance between permanent and fixed-term workers. In a dramatic shift in policy, FTEs will now be eligible for gratuity upon contract expiration, regardless of the five-year qualification period. The fact that FTEs are frequently employed for shorter periods and would not otherwise be eligible for gratuity benefits has been practically acknowledged through this amendment.

Nevertheless, while the motive behind this is progressive, the Code fails to elaborate on how the term of service of such employees is to be computed. The lack of clarity on whether to compute gratuity on a pro-rata or completed-year basis creates interpretive ambiguity and thus gives rise to the possibility of legal and drafting ambiguities within the evolving gratuity framework.

III. The First Drafting Problem: Absence of a Qualifying Period in the Code

The first significant drafting issue in the Code on Social Security 2020 is that it does not specify a clearly defined qualifying period for gratuity in the case of FTEs. Although the Code is innovative in that the liability to pay gratuity arises after the termination of a fixed-term contract, it fails to specify a minimum period of service required to trigger this entitlement. Such omission creates uncertainty about whether gratuity is payable on all fixed-term contracts, regardless of length, or only on contracts exceeding a certain threshold, such as one year.

The origin of this possible one-year benchmark is usually found in the definition of FTE under the Industrial Relations Code 2020. However, two major interpretive issues arise from this definition. First, it is cross-code borrowing, where the definition given in the Industrial Relations Code is not directly adopted by the Code on Social Security. Second, it leads to a larger question of statutory interpretation of whether definitions in one labour code can be read into another automatically, where no legislative intention is explicitly intended. Doctrinally, despite the objective of labour law consolidation, every Code remains a distinct and self-contained statute. Therefore, the importation of definitions across codes that are not supported by text implicitly creates an interpretation deviance and legal ambiguity.

One attempt to address this gap is seen in Draft Rule 34 of the Code on Social Security (Central) Rules, which introduces a one-year service qualification to the gratuity eligibility of FTEs. This, however, raises a vital administrative law issue: whether subordinate legislation can impose a substantive eligibility condition that is not present in the parent statute. Principles of delegated legislation, and especially the doctrine of ultra vires imply that rules cannot have the effect of delegitimizing or extending the scope of the enabling Act. If the situation arises, courts are likely to consider whether the rule simply clarifies legislative intent or unlawfully creates a new condition. If the latter is applied, the one-year rule's weakness will be revealed, making it vulnerable to legal challenge and increasing the ambiguity of the gratuity system.

IV. The Second Drafting Problem: The 'Pro Rata' Gratuity Puzzle

The concept of "pro rata" in relation to gratuity for FTEs has been introduced in the Code on Social Security 2020. This is the second major ambiguity in the Code on Social Security 2020. The Code has not addressed the reconciliation of the new term with the existing mathematical formula for calculating gratuity while attempting to cover gratuity for temporary employees. It is widely known that gratuity is determined in relation to the number of years of completed service. A period of service exceeding 6 months is rounded up to 1 year, while a period of service of less than 6 months is not taken into account. Fractional years of service are not considered under the binary system, which is designed to ensure predictability. However, there is a conceptual flaw in the rounding rule when "pro rata" logic is applied. For example, when an employee has worked for 1.5 years, it is considered 1 year of completed service. However, when "pro rata" logic is applied, the gratuity is payable based on the actual tenure of 1.25 years. It is to be noted that the term "pro rata" can be interpreted in three ways, none of which is directly mentioned in the text:

1. Tenure-Based: The term "pro rata" has been used to refer to the contract period, not to the number of years.

2. Qualifying Service: It has been used to refer to a shortened qualifying term, not to the calculation formula.

3. Drafting Oversight: The term "pro rata" has been added in Section 53 of the Code on Social Security 2020 to refer to "fairness" without altering the formula.

However, "pro rata" is now just a decorative term within the existing gratuity system.

V. Policy and Practice Implications

In everyday circumstances, obscure qualifying periods and calculation techniques have a significant impact, leading to significant compliance uncertainties and irregular payroll procedures for businesses. There is a lack of clarity on whether a 10-month contract is eligible for gratuity and how gratuity will be calculated for a 14-month tenure.

For employees, there is a potential for litigation on entitlements to gratuity pay in the current drafting process. Rather than offering a social safety net, employees in short-term employment contracts will be left in a state of ambiguity and will have to rely on judicial determinations to claim entitlements. Similarly, regulators will face difficulties in enforcing uniform standards due to internal contradictions in the parent legislation. As the Codes become effective, we will see an uptick in labour law cases as the judiciary will have to do the “heavy lifting” in interpreting these Codes.

V. Conclusion

Although the 2019-2020 legislative changes to labour laws are an immense step towards the simplification of India’s complex labour laws, the implementation phase has also revealed that consolidation doesn’t necessarily imply clarity. The FTE gratuity issue has demonstrated two main errors in the drafting of the legislation: the absence of clarity regarding the qualifying service and the mathematical inaccuracy of the ‘pro rata’ and ‘completed years’ terminology.

Beyond secondary regulations that might be considered ultra-broad, the legislature must directly amend the parent statute to address these difficulties. In order for there to be true harmonization, it is imperative to:

• Synchronize the definition of FTEs across all four codes,

• Explicitly define the minimum service threshold for FTE gratuity

• Reconcile fractional service periods with the traditional gratuity formula.

Precision in legislative drafting is not merely a technical requirement; it is a fundamental determinant of whether labour protections transition from paper theory into effective practice.

About the Author

Gunjan Sharma and Muskan Jain are fourth-year law students at the Rajiv Gandhi National University of Law, Punjab.

Editors

Tanay Hindocha, Senior Editor