Fixed Term Employment Under the Labour Codes

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Fixed Term Employment

Background

Fixed term employment was formally introduced in March 2018 by amending the Central Rules under the Industrial Employment (Standing Orders) Act, 1946. This allowed all types of industries to engage fixed term workmen. Our earlier blog has studied the introduction of the amendment to the Central Rules under the introduced fixed term employment.

The new labour codes have extended this to all types of establishments. Generally speaking, fixed term employment is a mode of work wherein an establishment hires an employee for a specific period of time. This period is stipulated in the contract of employment and may be renewed after expiry depending on the requirements of a particular role.

The utility of such a work arrangement stems from its flexibility if viewed from an employer perspective. It also benefits industries that are engaged in short-term projects that require skilled workmen. This is especially seen in industries that experience seasonal variations in demand of a particular good or service. If seen from an employee’s perspective, it is an option for individuals seeking work experience along with short-term earning ability. This helps workers seeking requisite experience for permanent jobs as well.

A major concern amongst fixed term employees, however, was the fact that they often received the short end of the stick when it came to conditions of work, statutory benefits and termination of employment. They were not entitled to the same benefits and protections that permanent employees received.

The labour codes have taken big steps to correct the above and ensure fixed term employees receive adequate protection. The subsequent section shall examine the substantive provisions under the Codes relating to fixed term employment to provide readers with an overview of the legal framework pertaining to the same.

Definition of Fixed Term Employment

The term fixed term employment is defined only under the Code on Social Security and Industrial Relations Code. There are two nuances that distinguish these definitions from one another. Under the Code on Social Security, the definition uses the term employee and does not contain clause-(c) found in the Industrial Relations Code. The IR Code on the other hand uses the term worker and contains the aforementioned clause which provides that a fixed term worker shall be eligible for gratuity if he renders service under the contract for a period of one year.

However, both the definitions make it clear that a fixed term employee’s working hours, wages, allowances and other benefits shall not be less than that of a permanent employee doing the same work or work of a similar nature. They also clearly stipulate that fixed term employees shall be eligible for all benefits available to a permanent employee under any law for the time being in force. This is subject to the caveat that the benefits shall be paid in proportion to the period of service rendered. It is not necessary for the period of service to extend to the required qualifying period of employment.

The implications of the above-mentioned definitional nuances will become clear in the subsequent section that examines the substantive provisions relating to fixed term employment.

Provisions Relating to Fixed Term Employment

The biggest change brought in may be found under Section-53(1)(d) of the Code on Social Security. It provides that gratuity shall be payable on termination of contract period under fixed term employment. The second proviso under the above states that the five years continuous service requirement shall not be necessary in cases of expiration of fixed term employment. The third proviso to Section-53(2) stipulates that in the case of fixed term employee’s gratuity shall be paid on a pro rata basis.

It is here the definitional nuance discussed above becomes relevant. Fixed term employment defined under Section-2(o) of the IR Code contains a clause stating that fixed term workers become eligible for gratuity if they render service under their contract for a period of one year.

This might prompt one to conclude that the one-year requirement is applicable only to workers and not to employees. However, the proviso to Rule-35(a) of the draft Code on Social Security (Central) Rules, 2020 provides us with clarity on the same. It clearly states that an employee on fixed term employment shall be eligible for gratuity if he renders service under the contract for a period of one year. Therefore, the difference in definition does not create any distinction between workers and employees. Both, the Code on Social Security and the Industrial Relations Code provide for similar legal regulations.

There is, however, ambiguity surrounding the period of service a fixed term employee would have to complete to become eligible. The provisos under the Code on Social Security and its rules do away with the five-year requirement and impose a one-year contract of service requirement, respectively. Confusion arises due to the pro rata basis proviso under Section-53(2) which indicates the possibility for a shorter period to be eligible for gratuity as a fixed term employee.

There also questions surrounding gratuity payments in cases where contracts are renewed. These can have differing consequences based on the operation of renewal clauses, extension clauses and clauses that create a new contract de novo. Depending on the operation of the clauses the eligibility and quantum of gratuity payable may differ.

Which interpretation of the provisos do you think is correct?

Should fixed term employees be entitled to gratuity after completion of one year?

Do the provisions provide for payment of gratuity for shorter periods of service?

Drop your thoughts in the comments below.

Disclaimer: This blog is meant for informational purposes and discussion only. It contains only general information about legal matters. The information provided is not legal advice and should not be acted upon without seeking proper legal advice from a practicing attorney.
Simpliance makes no representations or warranties in relation to the information on this article.

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Animay Singh
Simpliance COE

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14 thoughts on “Fixed Term Employment Under the Labour Codes”

  1. Its semantics….nothing more. I meant the codes spending too much time on specifying conditions, not your post :-). Be it gratuity or anything similar. At the end of five year or one year the code seems to be saying period for gratuity is payable is 1 year or 5 year ( as in period for which services are rendered). In principle and in simplistic term its the money earned by employee or worker. If its the money earned, how period of employment relevant ? be it one day, one week, one month or one year (of course one can fall back upon administrative expenses or clerical charges but we should not be expecting social part of wages to have same efficiency as incentives…:-)). I ve seen manager making blunders (both HR and Line) on this in the past…let us say a person resigns or is asked to leave..in either case neither manager nor HR is concerned about if period of service will turn out to be 4 yrs 5 months or 4 yrs 6 months & 1 day ( now it may not be relevant but hope drift & point is clear) . And employees don’t have time to discern nuances. Guess that answers the question with right perspective while higlighting kind of HR talent & mangers surviving in Indian market including those in USA MNCs ( but thats past). 🙂

    1. Absolutely agree with you on that sir, failing to disburse and incorrect calculation of gratuity is a huge problem. Legal regime should be simple to ensure implementation is simple

  2. Let me add, specifi case I’ve highlighted would have translated into a loss of INR 10 lacs for employee…simply because HR & manger were ignorant or apathetic

  3. I have one query. FTE are to be paid gratuity prorata on expiry of the contract as per the new code on social security. suppose a person is employed on contract for 3 years. but he leaves on the 2nd year on his own. ie he breaches the contract that he should work for 3 years. is he eligible for gratuity. How can an employer pay gratuity for those who breach contract and leave on his own? can anybody clarify?

    Jebadurai, cbe.

    1. Hi,
      The provision states that the gratuity shall be payable on termination of fixed term employment thus, if the employee terminates the contract with a prior notice then he/she will still be eligible for Gratuity if he has rendered service under the contract for a period of one year irrespective of whether he has completed the tenure of contract.

  4. The very nature of payment implies that it is given out side the earned wages and a gratis. Such payments are always attached to compliance of qualifying conditions. Once it is not wages , expecting that to be paid on prorata basis is irrational. This is in the nature of loyalty bonus, which shall be a reward for working for a reasonably longer period. The new law by allowing shorter qualifying period for gratuity, is actually, hinting that with the fixed term ending, the right of employment ceases. i feel that the amendment is balanced and well thought over.

  5. Hi,

    Another query on Fixed Term Contract employee’s tax liability. Does the FTC employee come under the regular Section 192 or do they come under 194J.

    Any opinions, suggestions, will be highly grateful.

    1. Hi Rajiv,

      As per the Industrial Relations Code, 2020 – there is no cap on the number of times private firms can renew fixed-term contracts in India neither is there any cap on extending the FTE period. Hence companies are at liberty as per the new regime to extend the FTE period a number of times. This is done primarily to boost categories of employment such as seasonal employment.

    1. Hi Arjun,

      In terms of Section 2 (o) (b) of the Industrial Relations Code, 2020 – a fixed term employee shall be eligible for all statutory benefits available to a permanent worker proportionately according to the period of service rendered by him even if his period of employment does not extend to the qualifying period of employment required in the statute.

      Therefore, yes he is eligible for Bonus as long as he fulfils the statutory requirements. Incentives can be based on the internal policies of the company.

  6. when an permanent employee is to wait for 5 years to become entitled for gratuity, employee appointed on Fixed Term employment is entitled for gratuity on pro rata basis on expiry of the fixed term. pl. note the term on expiry of the fixed term. If this being so, how can an employee appointed on Fixed term of 3 years leaves on his own accord or abandon the employment on his own without any information in the second year, be entitled for gratuity for 2 years. He has breached our term of contract of service. Can anybody clarify .- Jebadurai.R, coimbatore

    1. Hi R. Jebadurai,

      As per Section 2 (o) (c) of the Industrial Relations Code, a fixed term worker shall be eligible for gratuity if he has rendered service for a period of 1 year under the contract.

      Hence to answer your question, as per the new Code, in your situation gratuity will still be payable since the fixed term worker in your case, has rendered the minimum service requirements of 1 year under the contract.

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