HR Advisory · Workforce Strategy
Fixed-Term and Contract Labour Under the New Codes: What Changed
Two quiet provisions reshape how you use flexible labour: fixed-term staff now get full parity and gratuity after one year, and you can no longer use contractors for your 'core activities.' Both close doors employers leaned on.
The headline labour-code changes — the wage rule, gig social security — get the attention. But two quieter provisions reshape how Indian employers use flexible labour, and both close doors that companies have long relied on. If your workforce strategy depends on fixed-term contracts or outsourced labour, these are the changes to understand.
Change one: fixed-term employees get full parity
Fixed-term employment is now formalised under the Industrial Relations Code — and with formalisation comes parity. Fixed-term employees must receive the same wages and benefits as permanent employees doing comparable work: the same provident fund, ESI, medical insurance and leave. The change that surprises employers most: fixed-term employees are entitled to gratuity after one year of service, not the traditional five.
The old appeal of fixed-term contracts was partly that they were cheaper — fewer benefits, no gratuity exposure. That arbitrage is gone. A fixed-term hire now costs you broadly what a permanent one does, benefit for benefit. Use fixed-term contracts for genuine fixed-term needs, not as a cost-saving device — because the saving no longer exists.
Change two: no contractors for core activities
The OSH Code introduces a general prohibition on deploying contract labour for the core activities of an establishment. The logic is to stop companies outsourcing their actual business to contractors to dodge employment obligations. There are defined exceptions — broadly, where the core activity is ordinarily done through a contractor in normal functioning, where it does not require full-time workers for the major part of the day, or in similar specified circumstances — but the default position has flipped. Core work is presumed to be employee work.
This forces a question many companies have avoided: what are your core activities, really? The cleaning and the canteen are clearly non-core. But the function you have quietly run on contractors for years because it was cheaper — if that is core to what your business does, the new default says it should be staffed by employees.
What employers should do
- Map your fixed-term population and reprice it. Confirm parity on wages and all benefits, and recognise the one-year gratuity liability. Budget for it.
- Define your core activities honestly. Write down what is genuinely core versus genuinely ancillary. This is the test the law applies.
- Audit contract labour against core activities. Where contractors are doing core work outside the exceptions, plan the transition to direct employment.
- Review contractor arrangements for the exceptions. Where you rely on an exception, make sure the arrangement genuinely fits it — not a label stretched to cover a cost decision.
- Update documentation. Appointment letters in the prescribed form are required, including for the categories you may have documented loosely before.
The strategic read
Both changes push in the same direction: the cost and compliance gap between "flexible" and "permanent" labour has narrowed sharply. The old playbook — use fixed-term and contract labour to lower cost and reduce obligations — no longer works as it did. That is not necessarily bad news. It simplifies workforce strategy: you choose fixed-term or contract labour because the work is genuinely temporary or genuinely ancillary, not because it is a loophole. Decisions made for real operational reasons hold up; decisions made to exploit a gap that has now closed will surface as liability. This is part of the broader workforce mapping every employer now owes.
Frequently asked questions
Do fixed-term employees get the same benefits as permanent staff?
Yes. Under the Industrial Relations Code, fixed-term employees must receive the same wages and benefits as comparable permanent employees — including PF, ESI, medical insurance and leave — and are entitled to gratuity after one year of service rather than five.
Can companies use contract labour for core activities?
Generally no. The OSH Code prohibits deploying contract labour for an establishment's core activities, with defined exceptions such as where the activity is ordinarily contracted in normal functioning or does not require full-time workers for most of the day. The default presumes core work is employee work.
What does the fixed-term gratuity change cost employers?
It removes the old cost advantage of fixed-term contracts. With gratuity due after one year and full benefit parity, a fixed-term hire now costs broadly the same as a permanent one, so fixed-term contracts should be used for genuinely temporary needs rather than cost saving.
How should employers respond to the core-activity rule?
Define core versus ancillary activities honestly, audit where contractors perform core work outside the exceptions, plan transitions to direct employment where needed, and ensure any reliance on an exception genuinely fits rather than stretching a label.
Rebuilding workforce strategy for the new rules
Palo Santo helps employers reprice fixed-term labour, define core activities defensibly, and restructure contract arrangements to comply without losing genuine flexibility.
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