Fixed Term Employment Rules Under IR Code: Employer Guidelines for Legal Compliance

Introduction – Fixed Term Employment Rules

The introduction of Fixed Term Employment Rules under IR Code (FTE) provisions under India’s reformed labour framework, the Industrial Relations Code, 2020, has fundamentally transformed how businesses engage talent for limited-duration roles. By replacing informal or loosely structured short-term hiring practices with a formal, legally recognized framework, the reform has brought greater clarity and compliance to the workforce landscape. While widely welcomed by employers and industry bodies, the shift has also led to a degree of confusion regarding implementation and compliance nuances.

Rise in the Use of Fixed-Term Employment in India

Over the last decade, Indian companies, especially in IT, logistics, e-commerce, hospitality, and manufacturing, have leaned more on project-based and seasonal employment models. Rather than absorbing employees permanently or relying solely on contractors, employers began hiring workers on defined short-term contracts.

These arrangements allowed businesses to:

Manage costs more efficiently by aligning staff numbers with real-time operational needs.
Access skilled professionals for fixed-duration assignments (e.g., UI/UX developers, field sales reps, or digital campaign managers).
Avoid long-term benefit liabilities in cases where continuous employment was never the intent.

However, in the absence of clear legal treatment, many of these contracts sat in a grey area, leading to disputes, inconsistent benefit structures, and at times, exploitation.

Formalisation under the Industrial Relations Code, 2020

To address such concerns, the Industrial Relations Code formally recognised Fixed Term Employment, granting such workers parity in wages, hours, allowances, and other benefits with their permanent counterparts, so long as the term of employment and duties were clearly defined.

While this sounds fair in principle, employers now find themselves juggling the expectations of flexibility with the added pressure of Employer compliance under the IR Code.

Applicability Across Sectors and Business Models

The Code does not restrict Fixed Term Employment Rules to specific sectors. Whether a small design agency, mid-sized SaaS company, or a global manufacturer, if hiring is done for a fixed term (say, 6 months or 1 year), then these rules apply.

In startups, this has impacted how companies structure probation or pilot-phase roles.
In factories, it’s relevant for seasonal surges.
In retail chains, hiring for festive seasons must now factor in full parity on wages and statutory benefits.

Compliance Gaps Still Persist

Despite the legal clarity, many companies remain unaware of what the IR Code mandates in practice. Some still rely on outdated formats, while others misuse the fixed term label to sidestep statutory liabilities, putting themselves at risk of labour violations, inspector visits, and employee disputes.

This guide will decode all aspects of Fixed Term Employment Rules, explain employer obligations, and help HR/legal teams avoid costly mistakes.

Legal Meaning of Fixed Term Employment Rules

Under the framework of the Industrial Relations Code, 2020, an individual engaged as a fixed-term employee is one who is appointed directly by the employer for a clearly defined duration. This engagement is documented contractually and must not involve any intermediary or labour contractor. The legislature intended to recognise and legitimise this employment model, which, until the codification, existed in practice but remained legally ambiguous.

The provision dealing with fixed-term employment, outlined in Section 2(o), seeks to differentiate this class of worker from those engaged permanently or through staffing arrangements. In practice, a fixed-term employee may be appointed for three months, one year, or any other period depending on the organisational need, with both the commencement and conclusion of the term stated expressly in the contract.

This structure has been particularly relevant across sectors that experience cyclical project loads, such as technology, logistics, education, and even parts of the manufacturing and apparel industries. While previously such engagements were prone to challenge, especially in the context of alleged disguised permanency, the Code now offers a clear legal route to formalise such hires with legitimacy and protection.

Employee Entitlements and Workplace Parity

A common misassumption historically associated with fixed-term contracts was that of second-class employment; workers on such contracts were often excluded from statutory protections and equal treatment. That is no longer legally permissible.

The Code mandates parity in core employment terms between fixed-term and permanent employees when the nature of work performed is similar. This includes:

Equal pay for equal work, wages, allowances, and benefits must mirror those of regular employees.
Fixed-term employees are entitled to earned leave, holidays, and working hours on the same terms as others in equivalent roles.
They become eligible for gratuity if they have completed one year of uninterrupted service, even if the contract is not renewed thereafter.
Employers are not obligated to provide retrenchment compensation on expiry of the fixed term unless there is a premature termination without valid cause.
Employers are barred from issuing repetitive short-term contracts simply to avoid obligations associated with regular employment.

It’s worth noting that where the work performed differs in nature or function, the Code does not mandate uniformity of benefits. However, in all other cases, employers must ensure non-discriminatory treatment, both in letter and in spirit.

Understanding Documentation Responsibilities Under Fixed Term Employment Rules

Structure and Clauses That Matter

In practice, a fixed-term employment contract is far more than a formality or administrative convenience. In the event of a dispute, whether before a labour tribunal or during an inspection by labour authorities, the contract is often the first document scrutinised. Its contents serve as a key indicator of the employer’s intent, approach to compliance, and adherence to statutory obligations.

That’s why businesses must make sure the contract doesn’t miss these key elements:

The actual start and end date of the employment. Vague phrasing like “six months from date of joining” can confuse later. A clear date range is safer.
The description of the work. Not just the job title like “marketing assistant,” but what the person is expected to do. Courts often compare this with permanent employees’ duties, so clarity matters.
The benefits to be offered. The law says a fixed-term employee should get the same benefits as others in similar roles, so PF, ESI, earned leave, and even gratuity (if eligible). If any of such benefits would not apply, then they need to be spelled out in writing, and not assumed.
The exit terms. Can the company end the contract early? If yes, then what’s the notice period or payout? If not clarified, it may be presumed that no early termination is allowed, something that has gone against employers in the past.

A frequently observed issue is the repeated use of rolling or short-term contract renewals without any break in service. This practice may be perceived by labour authorities as an attempt to avoid the conferment of full-time employment status. Such patterns can attract scrutiny and may lead to retrospective claims, including back-pay for statutory entitlements.

Internal Compliance with Standing Orders

Now, even if the contracts are properly drafted, there’s another layer of standing orders. Standing Orders are mandated by the Industrial Employment (Standing Orders) Act, 1946.

If the employer already has certified standing orders, it must include fixed-term roles as a category. Otherwise, the Model Standing Orders would apply by default.

Here’s where things can go wrong:

Sometimes, different departments in the same company use different contract templates for similar roles. It creates inconsistencies. If there’s ever a complaint, those mismatches can make the company’s position weaker.
Often HR team updates templates, but fails to update standing orders, or doesn’t communicate with operations or finance. That leads to policy gaps.
Labour inspectors, especially in larger cities, routinely ask to see the contracts and standing orders together. If they don’t match or if the documentation looks patched together, it raises flags.

Also, the IR Code asks employers to maintain certain records for at least three years. That includes employment contracts, PF/ESI records, and attendance registers. These must be ready during any inspection or audit. Delays or missing paperwork can attract penalties.

Common Pitfalls and Legal Risks for Employers

Misuse of Fixed Term Contracts

Many businesses, especially those scaling fast, are tempted to use fixed-term employment as a tool for operational flexibility. However, that itself isn’t the problem; the problem begins when fixed-term appointments are used repeatedly to mask what is essentially a permanent role. This misuse is not only scrutinized under court decisions but also risks attracting direct inspection under the IR Code.

The law doesn’t bar multiple fixed-term renewals, but the pattern is what matters. If an employee is re-hired through back-to-back fixed-term contracts over the years, without a break in service or change in role, it raises a strong presumption that the employer is trying to avoid offering permanency benefits.

Here’s what employers often overlook:

If the work performed is identical to that of permanent employees, courts may hold the fixed-term designation to be a facade.
If termination before the contract expiry is without cause, it can lead to compensation obligations or even reinstatement orders.

Consequences of Improper Termination

A fixed-term employee is entitled to all statutory rights, including early termination compensation, unless the contract specifically excludes it with a clause that still complies with prevailing laws.

Employers sometimes assume that because the contract has a fixed expiry, termination before that date can be done at will. That’s not correct.

Below are the common consequences faced by employers who fail to comply with the obligations under the IR Code.

Legal Risk	Consequence
Premature termination without clause	Legal notice; potential claim for full wages till expiry
No parity in benefits	Violation under labour codes; PF/ESI/Bonus liability
Non-disclosure of contract terms	May be treated as disguised employment; audit triggers
Lack of termination process	Legal scrutiny; possible reinstatement with back wages
Absence of proper documentation	Inspector objections; penalties under Section 86 of the IR Code

Additionally, the interpretation of these rules is evolving through recent case law, and courts are increasingly reading them in favour of the employee if ambiguity exists. Employers must proactively assess whether their HR, legal, and payroll teams are aligned with such rights, especially in sectors that involve recurring project-based staffing.

Fixed Term vs Contractual Employment: Legal Differences

Legal Status and Implications

It’s common for employers, especially in the mid and small enterprises, to confuse fixed-term employment with outsourced or “contractual” hiring. But the law draws a very clear distinction.

A fixed-term employee is hired directly by the company under a formal employment contract, enjoys a direct employer-employee relationship, and is entitled to all benefits on par with permanent employees. In contrast, a “contractual” employee typically works through a vendor or agency under a principal-contractor relationship.

The implications of this distinction are significant:

The liability rests squarely with the employer in fixed-term setups.
In vendor contracts, liability can pass through to the vendor, unless the principal is found to have exercised direct control.
Benefits like PF, ESI, Bonus, and Gratuity apply differently depending on classification.

Payroll, PF/ESI, Bonus, and Gratuity Rules

From a payroll compliance perspective, the compliance under the IR Code mandates equal benefits for fixed-term workers. The PF Act and ESI Act do not distinguish between fixed and permanent employees. Here’s a comparative summary to highlight the implications:

Feature	Fixed Term Employee	Contractual Worker (Third-party)
Legal Status	Direct employee	As per contractor’s terms
Applicability of PF/ESI	Yes (mandatory)	Yes (via vendor), principal liable if not
Bonus Eligibility	Yes, if employed >30 days	Yes, subject to contractor compliance
Gratuity Entitlement	Usually not, unless continuity is proven	As per the contractor’s terms
Leave and Holiday Provisions	At par with permanent employees	An indirect worker through a vendor

The confusion between these models has led to several disputes, particularly when businesses hire fixed-term employees but treat them like contractors in payroll, often excluding them from full benefits.

Hence, understanding the legal differences between fixed-term and contractual engagement is not just a compliance matter; it impacts the payroll processing, benefits administration, and legal risk exposure directly to the businesses.

Drafting Fixed Term Contracts: Legal Checklist for Employers

When an employer opts to engage someone under a fixed-term employment contract, the contract must reflect both legal intent and statutory care. The employer should clearly define the terms in a way that respects labour law principles and avoids blurring the line between fixed and permanent employment.

This section outlines what an employer must carefully include in a fixed-term contract and what internal approvals or HR steps should accompany such engagement.

Foundational Clauses for Fixed Term Employment

The IR Code does allow fixed-term contracts, but they must be carefully structured to prevent misinterpretation or perceived abuse. Certain clauses form the core of such contracts, including:

Tenure/Duration: Always define a clear start and end date. Do not keep the dates flexible unless the flexibility is governed by defined project-based triggers.
Early Exit Rights: A contract that does not give either party a clean exit route, with or without notice, and may lead to claims of unreasonable restraint. Include notice period provisions with clear compensation terms, even for early exits.
Employee Benefits: The law expects that a fixed-term employee receives the same benefits as a permanent one doing similar work. This includes access to PF, gratuity, paid leaves, and bonus entitlements.
No Automatic Renewal: Automatic rollovers without any formal renewal can weaken the employer’s position. Each renewal should be documented with a new agreement or at least an official extension letter.
Equality Clause: Include a clause confirming that the employee is entitled to parity in pay and benefits with permanent staff holding similar roles. This entitlement is non-negotiable under the terms of the obligations fixed by the Code.

Snapshot of Mandatory Clauses

Key Clause Area	What Must Be Included
Duration of Employment	Clear start and end dates. Avoid vague language like “project basis.”
Termination Clause	Right to terminate before expiry, with/without notice and consequences
Statutory Benefits	Confirm entitlement to PF, ESI, leaves, gratuity, etc.
Renewal Structure	State that renewal, if any, will require mutual written agreement
Equality Clause	Confirm same benefits/pay as permanent employees

Internal Process & Documentation Considerations

Having a well-defined employment contract is just half the job. Internal procedures also matter, especially when compliance under the IR Code is on the line.

Senior Approval and Role of the Legal Team

Get the concept of fixed-term hiring formally approved at the management level. In large companies, this may require HR policy revisions or board approvals. Keep these resolutions on file.
Let the in-house legal team or an external counsel review the language of the contracts and policies, not just for compliance with the Code, but also for practical enforceability. Ensure clauses like renewal, notice, and termination reflect judicial interpretations.

Payroll and Benefits Alignment

Inform the payroll department to ensure that the fixed-term employees receive the same treatment as their permanent counterparts when it comes to deduction and disbursement of statutory dues.
In addition, it helps to document internal monthly checks to see:
- Are such employees being paid on time?
- Was there any mid-way exit, and how was it recorded?
- Were any contracts silently renewed beyond 2 terms?

Employee Communication & Documentation

Give the employee a reasonable opportunity to read the contract before signing.
Get a written acknowledgment that they understand it’s a fixed tenure role, and that expiry without renewal does not amount to termination.

Acceptable Contexts for Fixed Term Hiring

There are some broad categories where the use of fixed-term employment is accepted and fairly common, even among well-run organisations:

Temporary project work (e.g., a 5-month digital rollout or survey exercise);
Seasonal staffing in delivery, logistics, e-commerce fulfilment, etc. (especially during year-end or festival periods);
Maternity or medical leave cover, or deputation replacements;
Client-based contracts that are limited in time (for BPOs or service vendors);
Training or graduate rotation programs of a known duration;
Pilot operations (say, testing a new location, process, or tool, over 2–3 months).

But even in such categories, the employers need to be very careful. The contract must mention that the role is fixed term, specify the end date, and assure equal pay and benefits (including PF, ESIC, bonus, etc.) as applicable to regular staff.

Where It Backfires: Common Legal and Compliance Pitfalls

This is a common area where employers falter, often at a cost that far exceeds any perceived savings from such temporary hiring.

Here’s what NOT to do while hiring fixed-term employees:

Replacing regular, ongoing roles with fixed-term contracts. If the work is ongoing, such as the administration department, accounting, and sales operations, then such roles are not meant to be fixed-term.
Extending fixed-term contracts repeatedly with no break to the same individual. It is viewed as a circumvention tactic and often leads to tribunals declaring the employee permanent.
Paying lower salaries or skipping gratuity/bonus just because it is a short-term hire. The Code mandates parity on all counts, pay, hours, leave, and benefits.
Using a fixed term purely to avoid notice periods or HR compliance reflects bad faith and usually results in adverse rulings during disputes or inspections.
Ignoring consultation with employee unions (especially in PSUs or highly unionised sectors). This can lead to work stoppages or legal proceedings under industrial law.

Legal Oversight and Penalties for Misuse of Fixed Term Employment Rules

Fixed-term employment can seem like an administratively efficient solution—particularly for businesses managing project-based work or navigating economic uncertainty. However, the flexibility granted under the Industrial Relations Code, 2020, comes with a corresponding layer of regulatory oversight. Misuse of this model, whether intentional or inadvertent, can lead to serious consequences, including legal penalties, reputational damage, and disruption to workforce stability.

Statutory Oversight: Who Regulates What?

In India, the concept of a single regulator does not exist. The enforcement landscape is layered and varies slightly across states. Broadly, however, three authorities are directly involved in scrutinising such fixed-term arrangements.

Firstly, the Labour Commissioner acts as the principal regulatory authority for all employment classification issues, especially around contract and fixed-term hiring. They are usually the first to receive complaints or reports of violations.

Secondly, the Inspector-cum-Facilitator under the IR Code is empowered to initiate suo moto inspections. They may ask for employment registers, contract samples, or benefit disbursement records. In particular, if a fixed-term employee has been denied parity in wages or statutory benefits, or if the job is essentially permanent, this triggers immediate concern.

Lastly, the State Governments can issue their own set of detailed rules governing documentation, contract formats, registers, timelines for renewal, etc. So, compliance is not just with the Code, it is with both Central and applicable State laws.

Penalties and Legal Consequences

There is no standard fine across all violations; the law prescribes different penalty ranges based on the nature and frequency of non-compliance.

Some examples include:

If an employer pays lower wages to fixed-term employees compared to permanent employees performing the same role, then as per Section 89(1), a fine up to ₹50,000 for the first offence and imprisonment up to 1 year, or fine up to ₹1,00,000, or both for a repeated offence within 3 years.
If an employer denies gratuity or earned leave to a fixed-term employee whose contract satisfies minimum service conditions, then a fine up to ₹50,000 (first offence) and Imprisonment up to 1 year, or fine up to ₹1,00,000, or both for repeated offence can be levied on him.
If an employer continuously renews short-term fixed contracts to avoid granting permanent status, despite the employee doing continuous work, then a fine up to ₹2,00,000 and imprisonment up to 6 months, or fine up to ₹5,00,000, or both for repeated offence can be levied.

How Employers Can Ensure IR Code Compliance for Fixed Term Contracts

While the IR Code has still not been in effect to date, in recent months, there has been increased scrutiny around how employers will engage individuals under fixed-term contracts. Many HR teams are currently relying on formats that don’t align with the compliance structure introduced under the Code. This section outlines how internal HR or compliance departments should be approaching fixed-term employment rules and ensuring adherence to compliance under the IR Code, without overlooking practical challenges that typically arise in field-level execution.

The HR or compliance teams need to set up an internal SOP for these situations. And that SOP, though flexible across sectors, must ensure three core stages are covered:

First, the documentation stage. The HR Teams should confirm that the job is legally permitted for fixed-term engagement. Some employers continue to use a generic format, but under the IR Code, contracts must mention parity in benefits with permanent staff, such as PF, ESI, and bonus.
Then comes the point of execution. This is where administrative failures often creep in. Contracts should be signed before onboarding, not during the actual employment. State governments like Karnataka have also made it mandatory to report fixed-term employees via online portals. A surprising number of companies either skip this step or do it retroactively, which weakens the documentation trail.
Lastly, the exit process needs to be formally documented, even if the contract is expiring naturally. That means providing a relieving letter, ensuring final dues are calculated, including pro-rata bonus (if applicable), and storing these records digitally for an audit trail. HR should also consider a periodic audit of such files, especially if fixed-term contracts are being used frequently across different teams.

Now, about the paperwork itself, offer letters for fixed-term employment should include such clauses:

The contract start and end dates must be clear and not left open-ended.
There must be an explicit mention of parity in wages and benefits. That includes paid leave, overtime rules, and statutory entitlements.
Employers should declare upfront that there is no automatic renewal; fresh consent is needed to extend the term.
A line stating that the contract is governed by Section 2(o) of the IR Code, 2020, should be included for legal clarity.

Also, the employers need to realise that registers and employee logs should reflect fixed-term status correctly. In states like Maharashtra, there’s a requirement to record contract duration and parity declarations. If left out, it can be treated as suppression of employment terms, especially if challenged later by the worker.

FAQs on Fixed Term Employment Rules Under the IR Code, 2020

1. Can fixed-term employees claim gratuity?

Yes, they can, if certain conditions are met. Under Section 35 of the IR Code, a fixed-term employee shall be eligible for gratuity if he renders service under the contract for one year. Earlier, gratuity was mostly tied to five years of service. However, the law makes an exception. So, even a 1-year tenure, if continuous and without a break, makes the employee eligible. That said, employers should make sure their payroll and compliance teams are aware of this nuance, as overlooking it can lead to penalties at the time of exit settlement or during a labour inspection.

2. What is the notice period for fixed-term workers?

The law does not prescribe any mandatory notice period for termination of a fixed-term contract. Since such contracts automatically lapse on the agreed end date, there’s no question of notice at the time of natural expiry. However, if the employer wants to terminate the worker before the end of the agreed term, or the employee wants to leave their job, it is advisable to either insert a 30-day notice clause or offer salary instead of notice. This is not just a best practice but often necessary to avoid allegations of unfair dismissal. Also, if the organisation follows standing orders, they may contain additional rules that need to be followed even for fixed-term employment exits.

3. Can an employer renew fixed-term contracts indefinitely?

Legally, nothing stops an employer from renewing fixed-term contracts. But if such renewals happen frequently, say, back-to-back 6-month contracts for the same role with no break or change in scope, then the authorities may view it as an attempt to bypass permanent employment obligations. In labour disputes, such cases often get flagged as instances of “disguised permanency.” Employers must, therefore, be cautious. If a position is recurring, essential, and long-term in nature, repeated fixed-term renewals might backfire. They can attract scrutiny under the IR Code compliance or inspections, or even from trade unions.

4. Do standing orders apply to fixed-term employment?

Yes, they do. Standing orders, whether model or certified, apply to fixed-term employees just as much as permanent staff. That means all provisions such as attendance, conduct, leave, disciplinary procedures, termination processes, etc., must be extended to fixed-term workers as well. Not extending standing order provisions to such staff can result in non-compliance, especially during inspections or when a dispute is raised. HR teams should ensure onboarding procedures, discipline handling, and exit formats are all aligned to standing order norms.

5. Is ESIC applicable for fixed-term workers?

Yes. Eligibility under the Employees’ State Insurance (ESIC) scheme is not dependent on the employment type, but on the basis of wages. If a fixed-term employee earns below the prescribed wage ceiling (currently ₹21,000/month), the employer must register the employee for ESIC from Day 1. This obligation does not vary based on the short-term or long-term nature of employment. Also, if ESIC registration is missed and an incident occurs, say, a medical emergency or accident, the employer may be penalised by the authorities.

Conclusion – Fixed Term Employment Rules

Navigating the framework for fixed-term employment under the IR Code, 2020, may seem straightforward on paper, but in actual workplace practice, it needs a far more cautious and structured approach, especially for employers who are scaling fast or operating in sectors where short-duration roles are common. While the Code offers flexibility to engage workers on time-bound contracts without necessarily absorbing them into the permanent workforce, this flexibility comes with specific compliance responsibilities, particularly relating to gratuity, standing orders, and social security.

Many organisations mistakenly believe that fixed-term employees occupy a regulatory grey area with fewer compliance requirements. In reality, the Industrial Relations Code, 2020, has significantly elevated the standards, placing fixed-term workers on nearly equal footing with permanent employees in several key areas. Overlooking these obligations, whether in payroll planning, contract drafting, or exit processes, can invite regulatory scrutiny or trigger disputes from dissatisfied employees after their contracts.

Ultimately, employers should view fixed-term contracts not as a loophole, but as a regulated engagement format that must be implemented with the same seriousness as any other employment arrangement. Getting your HR documentation, appointment letters, exit workflows, and internal policies aligned with the fixed-term rules under the Code is no longer optional; it’s part of demonstrating responsible compliance.

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