Fixed-term employment

Topic: Employment, Unemployment and Informalisation · NCERT: Beyond NCERT

Meaning

Fixed-term employment (FTE) means an employer hires a worker directly on a written contract for a fixed period (for example, 2 years). The worker gets the same wages, working hours and benefits as a permanent worker doing the same work. When the contract ends, this does not count as retrenchment.

It matters because it tries to balance two needs. Firms get labour market flexibility, so they can hire for a project without taking on a permanent worker. Workers still get equal pay and gratuity.

Explanation

How it works

• Written contract with a fixed end date. The start date, end date and terms are written down.
• Parity with permanent workers. Parity means being equal. The fixed-term worker must get the same:
• wages;
• hours of work;

• benefits as a permanent worker doing the same work.

• Gratuity after one year. Gratuity is a lump sum an employer pays a worker for years of service.

• A fixed-term worker becomes eligible after one year of continuous service. The amount is in proportion to the time served. The earlier requirement was five years [3].

• End of term is not retrenchment.

• Retrenchment means the employer ends a worker's service for any reason other than punishment, retirement or ill-health. It needs notice and compensation.
• A fixed-term contract simply ends on its date. So no retrenchment compensation is due.

Why firms and workers use it

• For the firm:
• It can hire for a project or a busy season.
• It does not have to carry a permanent worker after the work is done.

• It does not have to go through the retrenchment process when the term ends.

• For the worker:

• They get a direct job with the employer, with a written contract.
• They get equal pay with permanent staff, not lower pay.
• They earn gratuity in proportion to service, even on a short contract.

Worked example (gratuity eligibility)

• A factory hires Meena on a 2-year fixed-term contract.
• Old rule (5 years): her contract ends before 5 years, so she gets no gratuity.
• New rule (1 year) [3]: she crosses 1 year of continuous service, so she qualifies. She gets gratuity in proportion to her 2 years of service.
• When the 2 years end, her job ends. This is not retrenchment, so she gets no retrenchment compensation. She still gets her gratuity.

In India

• Law: fixed-term employment is part of the Industrial Relations (IR) Code, 2020. This code replaced the Industrial Disputes Act 1947, the Trade Unions Act 1926 and the Industrial Employment (Standing Orders) Act 1946.
• Commencement: all four labour codes came into force on 21 November 2025 [1]. Together they merged 29 central labour laws [1].
• Gratuity rule: eligibility after 1 year instead of 5 years [3].
• Constitutional basis: labour is on the Concurrent List (List III, Seventh Schedule).
• So both Parliament and state legislatures make labour laws.

• The code works fully on the ground only after states notify their own rules.

• Related parts of the IR Code:

• Standing orders (a firm's written service rules) must cover the classification of workers, such as permanent and temporary. They apply to firms with 300 workers (up from 100) [4].

• Firms with 300 or more workers need prior government permission for lay-off, retrenchment or closure. The earlier limit was 100 [4]. FTE adds to this flexibility, because the end of a term needs no such permission.

• Formalisation link: the codes require every employee to get an appointment letter [3]. A written fixed-term contract fits this push to put jobs on paper.

Don't confuse with

• Contract labour: contract workers are hired through a contractor. The OSH Code covers them, and its rules apply only where 50 or more contract workers are engaged (earlier 20). A fixed-term worker is hired directly by the employer, with pay equal to permanent staff.
• Retrenchment: this is the employer ending service early for reasons other than punishment, retirement or ill-health, and it needs notice and compensation. When a fixed-term contract ends on its date, that is not retrenchment.
• Lay-off: here the employer temporarily cannot give work (for example, because of a power shortage or a machine breakdown), and the worker stays on the rolls. In FTE the job ends when the term ends.
• Casual or informal work: there is no written contract and there are weak legal protections. FTE has a written contract, equal pay and gratuity.

Prelims Hooks

• Fixed-term employment is part of the Industrial Relations Code, 2020, not the Code on Wages, 2019.
• Fixed-term employees are eligible for gratuity after 1 year of continuous service, in proportion to service. The earlier requirement was 5 years [3].
• The end of a fixed-term contract is not retrenchment, so no retrenchment compensation is due.
• Fixed-term workers get wages, hours and benefits on par with permanent workers doing the same work. Trap: the statement "fixed-term workers may be paid less than permanent workers" is wrong.
• All four labour codes came into force on 21 November 2025 [1]. Labour is a Concurrent List subject, so states must frame their own rules.
• The IR Code's threshold for prior permission before lay-off, retrenchment or closure is 300 workers (up from 100) [4].

Mains Points

• Flexibility vs security (GS-III):
• For: Chapter V-B of the old Industrial Disputes Act made firms afraid to grow past 100 workers. This left India with too many small firms (the "missing middle"). FTE and the 300-worker limit may help firms grow and hire more people for labour-intensive manufacturing. FTE may also reduce the use of contract labour, since firms can now hire directly for short periods.

• Against: firms may keep renewing fixed-term contracts instead of making workers permanent. This weakens job security. Short-term workers also find it harder to join unions and bargain.

• Formalisation of work:

• Written contracts, equal pay, gratuity after 1 year [3] and appointment letters [3] bring short-term jobs into the formal net.

• The real test is state-level rules and enforcement. Labour is a Concurrent subject, so rollout depends on each state.

• Social dialogue (GS-II):

• Trade unions say there was little tripartite consultation before the IR Code was passed in September 2020. Tripartite consultation means government, employers and unions deciding together.
• The Indian Labour Conference did not meet beforehand. This weakens trust in reforms like FTE, even though the ILO welcomed the codes [2].

Related concepts

• Labour laws
• Tripartism
• Floor wage
• Fair wage
• Living wage
• Need-based minimum wage
• Lay-off
• Retrenchment
• Hire and fire
• Standing orders

Read more

• Labour laws and the four labour codes