The Labour Laws are set to undergo a major overhaul, as the Union Labour Ministry announces new Gratuity reforms in a historic move.
In a major labour reform move, the Union Government has revamped India’s labour framework, bringing significant relief to fixed-term employees across industries. Under the new labour codes, fixed-term workers will now become eligible for gratuity after completing just one year of service, a sharp departure from the earlier requirement of five years of continuous employment.
The Labour Ministry stated that this restructuring aims to offer better wages, wider social security coverage and stronger health and safety protections for workers, spanning both formal and informal sectors. With 29 labour laws now consolidated into four simplified labour codes—
- Code on Wages
- Social Security Code
- Occupational Safety Code, and
- Industrial Relations Code
Who Qualifies as a Fixed-Term Employee?
A fixed-term employee is someone hired under a contract that clearly defines a specific end date or concludes once a particular project or task is completed. These reforms extend benefits to not only traditional employees but also gig workers, platform workers, migrant labourers, and women employees, helping bridge long-standing gaps in India’s diverse workforce.
1-Year Gratuity Rule: A Game Changer
Previously, the Payment of Gratuity Act mandated a minimum of five years of service before any employee could claim gratuity. The new labour codes waive this requirement for Fixed-Term Employees (FTEs), enabling them to receive gratuity after just 12 months of service.
The Labour Ministry emphasised that the intent is to bring FTEs on par with their permanent counterparts in terms of employment benefits. As per the updated rules:
- FTEs will receive the same salary structure as permanent staff.
- They will also enjoy similar leave benefits, medical facilities, and social security protections.
- The new policy is expected to reduce the growing reliance on long-term contract staffing and nudge companies toward more transparent, direct hiring practices.
What Exactly Is Gratuity?
Gratuity is a lump-sum financial benefit that an employer pays an employee as a mark of gratitude for their service. Traditionally awarded upon retirement, resignation or job separation, gratuity provides a financial cushion during employment transitions. By reducing the eligibility period to one year for fixed-term workers, the government aims to offer greater security and stability, especially for employees engaged in short-duration roles.
The Payment of Gratuity Act applies to a broad range of establishments such as factories, mines, railways, ports and oil fields. Although earlier discussions hinted at reducing the eligibility requirement to three years, the final decision to lower it to one year marks a far more progressive shift.
How to Calculate Your Gratuity
The gratuity amount is calculated using a standard formula:
Gratuity = Last Drawn Salary × (15 ÷ 26) × Years of Service, where Last drawn salary includes
Basic Pay + Dearness Allowance.
Example:
If an employee completes eight years of service with a last drawn Basic + DA of INR 40,000:
40,000 × (15 ÷ 26) × 8 = INR 1,84,615/-
The revised gratuity rule is expected to empower millions of fixed-term employees by giving them faster access to financial benefits. At the same time, employers may benefit from improved morale, reduced attrition, and a more committed workforce. As India moves toward a more flexible yet secure labour ecosystem, the updated codes mark a significant step in modernizing worker welfare in the country.
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