What Happened
- 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.
Static Topic Bridges
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.
- 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.
Connection to this news: 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.
- 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.
Connection to this news: 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."
- 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.
Connection to this news: 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.
Key Facts & Data
- 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).