Govt scraps 5-year gratuity rule for fixed-term workers, now payable just after 1 year: Details here

 

India’s labour landscape is set for one of its biggest resets in decades, with the Union government on Friday announcing that fixed-term employees will now qualify for gratuity after just one year of service, a substantial shift from the long-standing five-year requirement. The change is part of a sweeping overhaul that merges 29 labour laws into four consolidated labour codes aimed at expanding social security and modernising workplace protections.

According to the Labour Ministry, the restructuring is designed to ensure better wages, wider social protection and stronger health-related safeguards for workers across sectors.

A fixed-term employee is hired on a contract with a clearly defined end date or tied to a specific project. These workers, along with gig workers, platform workers, migrant labourers and women employees, fall within the scope of the reforms.

Five-year limit scrapped for FTEs

Under the earlier Payment of Gratuity Act provisions, employees became eligible for gratuity only after completing five years of continuous service. The new codes abolish that requirement for Fixed Term Employees (FTEs) by reducing the qualifying period to one year.

The ministry said the move is meant to “bring fixed-term workers at par with permanent employees,” ensuring that contract-based workers receive the same salary structure, leave entitlements, medical benefits and social security coverage.

Officials expect the change to discourage excessive reliance on contract staffing and push companies toward more transparent direct hiring.

What gratuity means and why this change matters

Gratuity is a lump-sum financial benefit paid by an employer as a gesture of appreciation for long service. Traditionally handed out when an employee resigned, retired or otherwise separated from an organisation after five years, it now becomes accessible far earlier for FTEs.

The Payment of Gratuity Act extends to factories, mines, ports, railways, oilfields and several other establishments. While earlier discussions pointed to a possible reduction of the eligibility period to three years, the government’s decision to cut it to one year marks one of the most significant relaxations to date.

For many employees on short contracts, the move is expected to offer a stronger financial safety net and help smooth job transitions.