Fixed-Term Employee Policies: What Indian Companies Must Document Under the New Labour Codes

India’s four new Labour Codes have been a long time coming. Years of consolidation, endless drafts, state-level rules still trickling in. Somewhere in the middle of all that, fixed-term employment quietly became one of the most consequential provisions for companies that hire project-based, seasonal, or contract staff.

If you hire even one person on a fixed-term basis and your documentation is not in order, you are sitting on a compliance gap. This post breaks down exactly what needs to be documented, why it matters, and where companies typically go wrong. For the broader picture of what the new Codes change, see our overview: How India’s new Labour Codes are forcing companies to rewrite their HR policies.

What Fixed-Term Employment Actually Means Under the New Codes

Before we get into documentation, let us get the definition right, because a lot of companies are still mixing up fixed-term employees with contract labour or consultants.

Under the Industrial Relations Code, 2020, a fixed-term employee is hired directly by the employer for a specific duration. There is no middleman, no staffing agency in the chain. The contract is time-bound but the employment relationship is direct.

This distinction has big consequences. Fixed-term employees are entitled to the same working conditions and benefits as permanent employees doing comparable work, including statutory benefits on a pro-rata basis. If someone works with you for six months on a fixed-term basis, they are entitled to leave, ESI, PF, and gratuity proportional to their tenure. The old workaround of cycling people through short contracts to avoid gratuity? That no longer works the way it once did.

The Six Documents Your Fixed-Term Policy Framework Must Cover

The Appointment Letter (With the Right Clauses)

This is the foundation. An appointment letter for a fixed-term employee must clearly state the start date, the end date or the event that triggers the end of employment (such as project completion), and a statement that the position is fixed-term in nature.

What most companies miss: the letter must also specify whether there is a notice period for early termination, what happens to statutory benefits if the engagement ends early, and the reason for the fixed-term nature of the role. That last point is increasingly scrutinised. If a company puts someone on back-to-back fixed-term contracts for three years doing the same core job, a labour court will look very closely at whether this was genuine fixed-term employment or an attempt to avoid permanency.

The HR Policy on Fixed-Term Employment

A standalone appointment letter is not enough. You need a formal HR policy that governs how fixed-term employment works within your organisation. This policy should cover:

• Eligibility criteria: which roles can be offered on a fixed-term basis and under what business circumstances
• Maximum duration and renewal caps: how many times a contract can be renewed and the maximum cumulative period before permanency is considered
• Pro-rata benefit entitlements: leave accrual, gratuity, bonus eligibility
• Transition process: how the company handles end-of-contract, whether extensions are offered and how they are communicated
• Rehiring rules: the minimum gap before a previously fixed-term employee can be rehired in the same capacity

This policy should sit in your main HR policy library, not buried in an email thread from the legal team.

Gratuity Computation Record

This one trips up even well-run HR teams. Under the Code on Social Security, 2020, fixed-term employees who have completed their tenure are entitled to gratuity proportionate to their service, regardless of whether they have completed the traditional five-year threshold. The five-year rule simply does not apply to fixed-term employees.

That means your documentation must include a gratuity computation record for every fixed-term employee at the time their contract ends. This record should show the basic pay on which the computation is based, the number of days/months worked, and the amount payable. It should be signed off by HR and finance, and a copy should be provided to the employee. For the underlying gratuity rules, see our gratuity rules guide.

Leave Accrual and Encashment Policy (Fixed-Term Specific)

Because fixed-term employees earn leave on a pro-rata basis, your leave policy needs to explicitly address what happens to accrued but unused leave at the end of the contract. Do you pay it out? Do you allow the employee to take it in the notice period? Silence on this point is where disputes begin.

Your policy should also clarify whether fixed-term employees are eligible for casual leave, sick leave, and maternity/paternity leave under the same terms as permanent staff. Under the new codes, they should be, but many policies have not been updated to reflect this.

The Non-Renewal Communication Template

When a fixed-term contract ends and is not being renewed, you are not technically terminating the employee. The contract simply expires. But this distinction only holds up if you handled it correctly throughout.

A non-renewal communication template ensures that the employee receives written notice of non-renewal before the end date (the exact timeframe depends on your state rules, but 30 days is a safe standard), the communication confirms their final working day, lists the dues payable (gratuity, leave encashment, final salary), and provides a timeline for settlement. Without this, you risk the non-renewal being construed as a retrenchment, which triggers entirely different obligations.

The Audit Trail of Renewals and Conversions

If you have fixed-term employees who have been on back-to-back contracts, you need to document the business rationale for each renewal. This is not just good practice. It is your primary defence if the relationship is ever challenged.

The audit trail should include the original contract, each renewal letter with the stated reason for renewal (be specific, not just “based on business requirements”), any offers of permanent employment that were made and declined, and performance records.

For companies that move fixed-term employees to permanent roles, the conversion letter must clearly reference the original fixed-term period and acknowledge that it counts toward total service for purposes like gratuity and seniority.

The State Rules Problem

Here is something a lot of policy guides gloss over. While the four Labour Codes are central legislation, they become operational only when states notify their own rules under each Code. As of 2025, different states are at different stages. Some have notified rules under all four codes. Others have notified rules under only one or two.

This means your fixed-term employee policy cannot be a single national document if you operate across states. It needs to account for state-specific variations, particularly in working hours, wage definitions, and notice period requirements.

For companies with multi-state operations, enterprise-grade policy management that can handle jurisdiction-specific versions of the same policy is not optional. It is how you avoid having your HR team maintain six different Word documents and hope nobody uses the wrong one.

Where Documentation Actually Breaks Down

In our experience working with HR teams across industries, the documentation failure almost never happens at the policy-writing stage. It happens at the execution stage.

The appointment letter is drafted correctly. The policy exists. But when a fixed-term contract ends, no one pulls the gratuity computation. The non-renewal letter goes out three days before the end date instead of thirty. The renewal is signed but not uploaded to the HRMS. The employee’s leave balance is cleared from the system before the encashment is processed.

This is why real-time compliance tracking tied to contract end dates matters. When a fixed-term contract is nearing its end, your system should trigger the documentation checklist, not rely on an HR team member remembering.

Communicating These Policies to Fixed-Term Employees

Documentation that lives only in your internal systems has limited compliance value. Fixed-term employees need to know their rights, and proof that they were informed is as important as the policy itself.

Under the Industrial Relations Code, every worker must receive a letter of appointment. But beyond the letter, employees should be able to access and acknowledge the core policies that affect them: leave entitlement, gratuity eligibility, grievance procedures.

This is where targeted policy distribution by employment type becomes relevant. Your permanent employees do not need to receive your fixed-term employment policy as a primary document. Your fixed-term employees do, and the delivery should be tracked and acknowledged.

For employees who have questions about their contract terms, entitlements, or end-of-contract process, self-service employee interaction tools reduce the burden on HR and give employees direct access to the information they need, in plain language, when they need it.

A Quick Documentation Checklist

Before any fixed-term employee starts, you should have:

• Appointment letter with fixed-term clauses signed and filed
• HR policy on fixed-term employment acknowledged by the employee
• Leave accrual method and encashment terms communicated

Before any fixed-term contract ends, you should have:

• Non-renewal or renewal communication issued with adequate notice
• Gratuity computation completed and approved
• Final leave balance confirmed and encashment processed
• Full-and-final settlement documented and signed

Before any fixed-term employee is renewed, you should have:

• Business rationale for renewal documented
• Updated contract with new dates signed by both parties
• Audit trail of all prior contracts in one accessible location

Frequently Asked Questions