New labour codes to drive wider adoption of fixed-term employment: Report
India's four new Labour Codes — enacted between 2019 and 2020 and brought into force on November 21, 2025 — are expected to significantly expand the adoption of fixed-term employment (FTE) contracts across industries.
Companies surveyed anticipate a surge in fixed-term hiring under the new framework because the Codes extend statutory protections (minimum wages, ESI, PF contributions, gratuity) to fixed-term employees, making FTE legally cleaner and more attractive than informal contract labour.
Under the Social Security Code, the minimum qualifying period for gratuity for fixed-term workers has been reduced from five years to one year, removing a major barrier that had previously pushed companies toward informal, unrecorded contract hiring.
The Code on Wages mandates that basic pay constitute a minimum of 50% of gross wages — a structural change that increases PF contributions, gratuity liability, and leave encashment calculations.
Final implementation rules under the four Codes are expected to be notified by April 1, 2026, after which full compliance will be mandatory.
India's Four Labour Codes — Overview
India's labour law framework — previously fragmented across 29 central labour laws dating back to the colonial era — has been consolidated into four comprehensive Codes enacted between 2019 and 2020. These are among the most significant labour law reforms since Independence.
Key Details
- Code on Wages, 2019: Consolidates Minimum Wages Act, Payment of Wages Act, Payment of Bonus Act, and Equal Remuneration Act. Key change: Universal minimum wage (floor wage) applicable to all employees; basic wage floor at 50% of gross wages; uniform pay-day rules.
- Industrial Relations Code, 2020: Consolidates Trade Unions Act, Industrial Employment (Standing Orders) Act, and Industrial Disputes Act. Key change: Threshold for prior government permission for retrenchment/closure raised from 100 to 300 workers; codifies fixed-term employment for the first time.
- Code on Occupational Safety, Health and Working Conditions (OSH), 2020: Consolidates 13 laws. Key change: Single licence for multi-state establishments; digital records; safety standards extended to all sectors including gig workers.
- Social Security Code, 2020: Consolidates EPF, ESI, Maternity Benefit, Gratuity laws. Key change: Extends social security to gig workers, platform workers, and fixed-term employees; gratuity qualifying period for FTE reduced to 1 year.
Fixed-term employment formalisation is directly enabled by the IR Code (codifying FTE) and the Social Security Code (reducing barriers to extending benefits to FTEs).
Fixed-Term Employment — Concept and Implications
Fixed-term employment refers to employment contracts with a defined end date, as opposed to permanent employment. The Industrial Relations Code, 2020 formally introduces fixed-term employment as a category in Indian labour law for the first time, with statutory rights equal to permanent workers.
Key Details
- FTE benefits under the new Codes: Equal wages, equal working hours, equal statutory benefits (PF, ESI, gratuity), access to dispute resolution — all equal to permanent employees doing similar work.
- Gratuity: Reduced qualifying period from 5 years to 1 year for FTE under the Social Security Code.
- No severance advantage: Employers cannot use FTE to avoid retrenchment compensation — the Code on Wages and Social Security Code create cost parity.
- Formalisation effect: Because FTE now carries the same compliance obligations as permanent employment, companies have an incentive to formally record these workers rather than use informal unregistered contract labour.
- Gig economy recognition: For the first time, gig workers and platform workers are defined under the Social Security Code and are eligible for welfare benefits — a landmark step in India's labour jurisprudence.
The report's finding that companies anticipate higher FTE adoption reflects the strategic use of a now legally well-defined category — previously companies used informal contracts to avoid the ambiguity; formalisation reduces legal risk.
Code on Wages — 50% Basic Pay Rule and Its Impact
The Code on Wages, 2019 introduces a universal definition of "wages" that mandates basic pay constitute at least 50% of total compensation. This has significant downstream effects on PF contributions, gratuity calculations, and ESI deductions — all of which are calculated as percentages of "basic wages."
Key Details
- Current practice (pre-Code): Many companies structured CTC to minimise basic pay (sometimes as low as 20-30% of gross wages) — inflating allowances to reduce PF/gratuity liability.
- New requirement: Basic pay ≥ 50% of gross wages.
- Effect: PF employer contribution (12% of basic wages) and employee contribution (12% of basic wages) will both increase — raising formal employment costs but also increasing retirement security for workers.
- Gratuity formula: 15 days of last drawn wages per year of service — higher basic wages mean higher gratuity payouts.
- SME readiness gap: Many smaller enterprises have not yet restructured their payroll — creating a compliance challenge once final rules are notified.
The "readiness gap" mentioned in the report is directly traceable to the wage restructuring requirement — companies that delay adjustment will face penalties once compliance becomes mandatory.
- Four Labour Codes consolidate 29 central labour laws.
- Codes enacted: Code on Wages (2019), Industrial Relations Code (2020), OSH Code (2020), Social Security Code (2020).
- Codes came into force: November 21, 2025.
- Final implementation rules expected: April 1, 2026.
- Gratuity qualifying period for FTE: Reduced from 5 years to 1 year (Social Security Code).
- Code on Wages: Mandates basic pay ≥ 50% of gross wages.
- Retrenchment threshold: Raised from 100 to 300 workers (IR Code) for prior government permission.
- Gig and platform workers: First time covered under Indian social security law (Social Security Code, 2020).