India Reduces Gratuity Eligibility Period from Five Years to One Year in Major Labour Law Reform

New Labour Rules Reduce Gratuity Eligibility to One Year

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New Delhi:

The Union government has implemented significant changes to India's labour laws, reducing the minimum service requirement for fixed-term employees to receive gratuity from five years to just one year.

This important modification is part of a comprehensive overhaul announced on Friday, November 21, which consolidates 29 existing labour laws into four streamlined labour codes.

The relaxation of gratuity eligibility requirements stands as one of the most notable changes in the reform, potentially benefiting a vast and diverse workforce. Previously, under the Payment of Gratuity Act, fixed-term employees could only qualify for gratuity benefits after completing five years of continuous employment.

Under the newly implemented codes, this requirement has been substantially reduced, enabling fixed-term employees (FTEs) to access gratuity benefits after just one year of service.

The reform aims to establish equity between fixed-term and regular employees. The updated provisions ensure that FTEs receive the same salary structure, leave entitlements, medical benefits, and social security coverage as their permanent counterparts.

According to a government statement, this alignment "promotes direct hiring and reduces excessive contractualisation."

Fixed-term employees, who are hired for predetermined periods or specific projects, will now enjoy treatment more closely resembling that of permanent staff. The reforms also extend coverage to informal workers, gig workers, platform workers, migrant laborers, and women employees.

Gratuity serves as a lump-sum financial payment that employers provide to workers as recognition for extended service. Traditionally, employees received this benefit upon resignation, retirement, or other forms of separation after fulfilling the mandatory five-year service period.

With the revised regulations, fixed-term staff no longer face such a lengthy waiting period. The government anticipates that this shorter eligibility timeframe will enhance employees' financial stability, particularly during transitions between jobs.

India's previous labour regulations originated from pre-Independence and early post-Independence eras, when economic conditions differed vastly from today's environment.

While many countries have modernized and consolidated their labour laws over the decades, India continued operating under a fragmented system of sometimes outdated legislation distributed across 29 Central Acts. This created compliance challenges for employers and uncertainty for workers.

The introduction of the four Labour Codes replaces these older structures with a more coherent and unified system. The reform intends to support both employees and businesses, fostering a workforce that is more secure, productive, and aligned with global standards.