Gratuity New Rule: Under the ‘Fixed-Term’ framework, employees appointed on a contract for a specific duration will be placed directly on the company’s payroll. This means they will receive the same salary, leave entitlements, and allowances as permanent employees.

Gratuity New Rule: A major change has been introduced to gratuity regulations under the new Labor Code. Under these provisions, Fixed-Term Employees (FTEs) will no longer have to wait five years to become eligible for gratuity. Due to these regulatory changes, they will now be entitled to receive gratuity after completing just one year of continuous service.

What Constitutes a ‘Fixed Term’?

Previously, when a company hired an employee on a contract basis, that employee did not receive the same benefits as permanent or regular staff members. Now, under the ‘Fixed-Term’ framework, employees appointed via a written contract for a specific duration—such as one or two years—will be placed directly on the company’s payroll. Consequently, their salary, leave entitlements, and allowances will mirror those of permanent employees.

According to the existing law (the Payment of Gratuity Act, 1972), an employee typically becomes eligible for gratuity only after completing five years of service. However, under the FTE framework, if your contract with the company spans, for instance, one year and three months, you will now receive gratuity calculated for the full 15 months. This comes as welcome news, particularly for individuals engaged in project-based work.

In summary, a minimum of one year of service is mandatory for Fixed-Term Employees (FTEs) to qualify for gratuity. Employees working for less than one year will not be eligible to receive gratuity. Once the one-year mark is reached, the company will calculate and pay gratuity for every additional month or day worked; for instance, if you have worked for one year and five months, you will receive gratuity calculated for 17 months.

Why Were the Rules Changed?

These changes to the rules have been implemented with a focus on individuals working on short-term projects or under fixed-term contracts (typically 1 or 2 years), ensuring that they, too, can receive gratuity as a reward for their work without having to endure a long waiting period of five years.

Increase in Basic Salary

According to the new labor code, gratuity calculations will be salary-based, wherein the salary component must constitute at least 50 percent of an employee’s total CTC (Cost-to-Company). As per the regulations, allowances included in your CTC—such as HRA (House Rent Allowance) or Travel Allowance—cannot exceed 50 percent. If the total allowances exceed this 50 percent threshold, the excess amount will be added to your basic salary. This will result in an increase in the basic salary, thereby boosting the amounts received as gratuity and PF (Provident Fund) contributions.

Expedited Full & Final Settlement (F&F)

Currently, companies typically take anywhere from 30 to 60 days to process a Full and Final Settlement (F&F). Under the new regulations, following an employee’s resignation, termination, or the expiration of their contract, the company is required to disburse the gratuity and all outstanding salary dues within two working days (48 hours).