New Gratuity Rules For Fixed-Term Employees: What It Means For You

Unlike freelancers or pure gig workers, an FTE usually has normal employee features like fixed working hours and working under an employer's supervision, and he/she is on the company’s rolls, just for a limited period. For example, an infrastructure-building firm hires a civil engineer for a 12-month project with a clear end date or hires a substitute to cover maternity leave for nine months for an employee. This also includes seasonal hiring, like an extra biller during year-end closing.

The FTEs get broadly similar benefits to permanent employees while they are on the rolls, but their contract automatically ends at the agreed date or completion of the task.

One-Year Gratuity Rule Changes Eligibility 

“So, as per new labor laws, FTEs will now become eligible for gratuity after just 1 year of continuous service, instead of the old five-year requirement that still applies to regular permanent employees. This one-year rule is only for FTEs and similar fixed-term/contract workers. The permanent employees still generally need five continuous years (except in case of death or disability),” says Krishna.

The one-year gratuity eligibility under the new 2026 rules is not limited only to "on-roll" employees; it can also extend to many outsourced and vendor-hired (contract) workers, depending on who is treated as their “employer” under the law.

Vendor Employees May Also Come Under Gratuity Rules 

The key factor is who is legally responsible for gratuity, not whether the payroll comes from the company’s own payroll department or from a vendor. Under the Payment of Gratuity Act, 1972, an “employee” includes any person (other than an apprentice) employed for wages in or in connection with the work of an establishment, whether the contract is with the principal employer or a contractor.

“So, if a contract/outsourced worker is engaged for a principal employer (for example, security, housekeeping, or IT support supplied by a vendor), they can still be eligible for gratuity if they complete the required service period while working continuously for that principal,” says Krishna.

The question arises—who pays the gratuity? The principal or the vendor? The contractor/vendor is usually the first-level employer and must pay gratuity as per the Act. If the contractor fails to pay or goes bankrupt, the principal employer may be held liable for wages and gratuity, especially if the work is integral to the establishment.

“The caution I would give employees is this: don’t just look at where you sit or whose manager gives you daily work. Look at your appointment letter, salary slip, Provident Fund (PF) employer name, Employee’s State Insurance (ESI) records, Human Resource (HR) policies, leave approval, reporting control, and who can terminate your employment. These documents often reveal who the actual employer is,” says Sujith Salunkhe, a Securities and Exchange Board of India (Sebi)-registered investment advisor (RIA) and founder and chief investment advisor of MoneyDhan, a financial planning firm.

New Wage Definition Can Increase Retirement Benefits 

For companies, the governance lesson is equally clear. If a person is truly a vendor employee, the vendor must comply. But if the company uses vendor paperwork only to avoid labour benefits while controlling the worker like its own employee, that structure can be challenged. Under the new labour-code environment, substance will matter more than labels.

If the worker is employed by a contractor, vendor, or staffing agency, then the company where the person is deployed is usually the principal employer, not the direct employer.

The Labor Ministry’s FAQ specifically clarifies that in the case of contract labor, gratuity liability is to be borne by the contractor as the employer, and gratuity is payable after five years of continuous service under Section 53.

“Earlier, many companies structured salaries like this: low basic salary, low Dearness Allowance (DA), and high allowances. On paper, the employee’s CTC looked attractive, but retirement benefits were calculated on a much smaller wage base. The new labour-code framework tries to reduce that manipulation,” says Salunkhe.

Under the Code on Wages, wages broadly include basic pay, dearness allowance, and retaining allowance, while items like Housing Rent Allowance (HRA), bonus, overtime, commission, and some other allowances are excluded.

The labour ministry has explained that if allowances and contributions exceed 50 per cent of total payment, the excess amount will be added to wages.

Salunkhe gives an example.

Suppose an employee has a Rs 12 lakh annual cost to company (CTC), but only Rs 3 lakh was shown as basic pay earlier. Gratuity and PF would be calculated on a much smaller base. Under the new wage definition, the company may not be able to keep such a heavily allowance-driven structure.

FAQs

1. Who qualifies as a fixed-term employee under the new labour codes?

A fixed-term employee is hired for a specific duration or project under a contract with a clear end date. Unlike freelancers, they are usually on the company’s rolls and receive employee benefits.

2. Can fixed-term employees now receive gratuity after just one year?

Yes. Under the new labour code framework, fixed-term employees can become eligible for gratuity after one year of continuous service instead of the earlier five-year rule applicable to permanent employees.

3. Are outsourced or vendor-hired workers also covered under gratuity rules?

In many cases, yes. Eligibility depends on who is legally treated as the employer under the law, and continuous service with the principal employer may also matter.