Fixed-Term Employment Contract Rules Under India's New Labour Code

By Varun M

This covers fixed-term employment (FTE) under India's new labour codes. For employers: it's a genuine, direct hiring option — not a loophole. It comes with a parity obligation, a real gratuity trigger, and one trap that catches employers who treat it as easy-exit staffing.

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Model wages and statutory obligations for any hire, fixed-term or permanent.

The short answer

A fixed-term employee must get the same wages, hours, and statutory benefits as a permanent employee doing similar work, proportionate to their service. Letting a contract run its full natural term and end is not retrenchment. Ending it early, before the agreed date, can be — see the warning below before you use FTE for flexibility.

What fixed-term employment actually is

FTE is a direct employment relationship between you and the employee, for a specified period, formalised in writing — it's not the same as engaging staff through a third-party contractor or staffing agency (which falls under separate contract-labour rules). The employee is on your rolls, on your payroll, for the duration of the contract.

The parity obligation

This is the core rule: hours of work, wages, allowances, and other benefits for a fixed-term employee must not be less than those of a permanent employee doing the same work or work of a similar nature — and the employee is entitled to all statutory benefits available to a permanent worker, proportionate to their period of service. Practically, this means you can't use FTE status alone to justify a lower wage or fewer benefits than you'd offer a permanent employee in the equivalent role.

Gratuity, on a much shorter timeline

A fixed-term employee becomes eligible for gratuity after just 1 year of continuous service, against 5 years for a permanent employee — a real, near-term liability if you use FTE contracts of a year or longer. See gratuity liability for fixed-term employees for how to budget for this across a fixed-term workforce.

The trap: natural expiry vs. early termination

Letting a fixed-term contract run to its agreed end date, and simply not renewing it, is explicitly excluded from the definition of "retrenchment" — no notice pay and no retrenchment compensation are owed for that alone (gratuity may still be owed if the 1-year threshold above is met).

But ending the contract before its agreed end date is a different matter entirely. Early termination can be treated as retrenchment — triggering notice and retrenchment-compensation obligations similar to a permanent employee's, once the employee has completed a qualifying period of service — and can separately expose you to a breach-of-contract claim for wages over the remaining, un-worked term. If you're using fixed-term contracts specifically for staffing flexibility, this is the detail that removes most of that flexibility: you generally can't exit early the way you might assume, without cost.

What this means in practice

Let contracts run their full term wherever possible. If a role's need may end sooner, set the contract's initial term to match your actual expected need, rather than a longer default term you might want to exit early.
If early termination is genuinely necessary (poor performance, business downturn), follow notice and compensation obligations as if it were a standard retrenchment, and document the reasons carefully.
Non-renewal at the natural end date remains the clean, low-obligation option — but decide and communicate that non-renewal before the contract's end date, not as a surprise on the last day.
This is a genuinely contested, still-developing area of interpretation under the new codes — get counsel involved before terminating any fixed-term contract early, not after.

Renewing a fixed-term contract

Renewing rather than letting a contract lapse is common, but be deliberate about it: repeated back-to-back renewals of the same role can invite scrutiny over whether the position is genuinely fixed-term at all, versus a permanent role structured to avoid permanent-employee protections. There's no fixed number of renewals that's automatically safe or unsafe under the new codes — treat this as a compliance-counsel question for your specific pattern of hiring.

FAQ

A direct employment relationship between employer and employee for a specified period, formalised in writing — distinct from engaging staff via a third-party contractor or staffing agency, which is governed by separate contract-labour rules.

Hours of work, wages, allowances, and other benefits for a fixed-term employee must not be less than those of a permanent employee doing the same or similar work, and the employee is entitled to all statutory benefits available to a permanent worker, proportionate to their service.

No — the contract simply ending at its agreed date, without renewal, is explicitly excluded from the definition of retrenchment. No notice pay or retrenchment compensation is owed for that alone (though gratuity may still be owed if the employee completed 1 year or more).

This is the trap: ending a fixed-term contract before its agreed end date can be treated as retrenchment, triggering notice and compensation obligations similar to a permanent employee's, and can separately expose you to a breach-of-contract claim for wages over the remaining term. Don't assume fixed-term contracts can be exited early without cost.

There's no fixed safe number of renewals under the new codes, but repeated back-to-back renewals of the same role can invite scrutiny over whether the position is genuinely fixed-term or a permanent role structured to avoid permanent-employee protections. Treat this as a compliance-counsel question for your specific hiring pattern.

Last verified: 14 Aug 2026

Sources: Industrial Relations Code, 2020 (fixed-term employment definition, parity obligation, retrenchment exclusion for natural contract expiry); Code on Social Security, 2020 (gratuity eligibility).

This is general information, not legal advice, and the early-termination-as-retrenchment area is still developing in interpretation. Confirm any specific termination decision with legal or HR compliance counsel before acting.