The Flexibility Imperative
Indian industry has long sought workforce flexibility to respond to market conditions, project requirements, and seasonal demands. The traditional binary of permanent employment versus contract labour left gaps. Permanent employment created long-term obligations regardless of business needs. Contract labour through third parties introduced intermediaries and legal complexities.
Fixed term employment, now formally recognised under the Industrial Relations Code, 2020, offers a middle path. Employers can hire workers for defined periods without engaging labour contractors, while workers receive protections comparable to permanent employees for the duration of their engagement.
The Legal Framework
The Industrial Relations Code defines a fixed term employee as a worker engaged for a fixed period specified in writing. The contract must state the term of employment clearly. Oral agreements or ambiguous arrangements do not qualify as fixed term employment.
Critically, fixed term employees are entitled to the same working conditions, wages, and statutory benefits as permanent workers performing similar work. This equality principle distinguishes lawful fixed term employment from exploitative arrangements designed to avoid statutory obligations.
Equality of Treatment
The equality requirement is comprehensive. Fixed term employees must receive the same basic pay, dearness allowance, and other cash benefits as permanent workers in similar roles. They must have the same working hours, leave entitlements, and welfare facilities.
Statutory benefits including provident fund, ESI, bonus, and gratuity apply fully. For gratuity, the typical five-year service requirement is modified: fixed term employees completing one year are entitled to gratuity proportionate to their service period.
This proportionate gratuity provision is significant. It means even short-term fixed term employees accumulate gratuity entitlement. Budget accordingly when calculating the cost of fixed term engagement.
When to Use Fixed Term Employment
Fixed term employment is appropriate for genuinely time-bound needs. Project-based work with a defined completion date suits fixed term engagement. Seasonal operations with predictable peak periods can use fixed term workers for the season. Temporary replacements for permanent workers on leave can be engaged on fixed term.
What fixed term employment should not become is a device to avoid permanent employment indefinitely. Engaging the same worker on successive fixed term contracts for years, performing work that is permanent in nature, may be challenged as a colourable device to defeat statutory protections.
Genuine Need Assessment
Before offering fixed term employment, assess whether the work is genuinely temporary. If you know at the outset that the work will continue indefinitely, fixed term engagement is inappropriate. If a project's completion date is uncertain but the work will clearly end, fixed term engagement is appropriate.
Document your business reasons for fixed term engagement. In the event of challenge, this documentation supports the legitimacy of your decision. "We always do it this way" is not a defence. Specific, genuine business reasons for the fixed term are.
Contract Essentials
The fixed term contract must specify the duration unambiguously. "For the duration of the project" without specifying an end date creates uncertainty. "Until 31 December 2025" or "For 12 months from the date of joining" provides clarity.
Include all terms and conditions in writing. Wages, allowances, working hours, leave entitlements, notice periods, and termination conditions should be explicitly stated. Ambiguity favours the employee in interpretation disputes.
Renewal and Extension
Fixed term contracts may be renewed or extended. Each renewal should be documented in writing with a new end date. Multiple renewals are not prohibited, but patterns suggesting permanent work disguised as fixed term attract scrutiny.
Consider offering permanent employment to fixed term workers who have been renewed multiple times and whose work is clearly ongoing. This demonstrates good faith and may avoid challenges to the fixed term classification.
Termination Provisions
Fixed term contracts terminate automatically on the expiry of the specified term. No termination notice or procedure is required for term-end expiry. The contract simply ends as agreed.
However, termination before the fixed term's expiry requires cause. Unlike permanent employees who may be retrenched with compensation, fixed term employees cannot be terminated early without disciplinary grounds or mutual agreement. This is the trade-off for flexibility: you gain certainty about term-end departure but lose flexibility for early termination.
Disciplinary Termination
Early termination for misconduct or poor performance must follow due process. Provide written charges, opportunity to respond, fair inquiry, and reasoned decision. Summary termination without process exposes the employer to claims for the remaining contract period.
Document performance issues as they arise. If termination becomes necessary, your documentation supports the action. Without documentation, the employee's denial of performance issues becomes difficult to rebut.
Conversion to Permanent
The Code does not mandate conversion of fixed term employees to permanent status. Unlike some jurisdictions where long fixed term engagement triggers automatic permanency, Indian law leaves this to employer discretion.
That said, practical and reputational considerations may favour conversion. Workers who have served well on fixed term and whose work is continuing make good candidates for permanent positions. Conversion recognises their contribution and provides workforce stability.
Practical Implementation
Develop template fixed term contracts reviewed by counsel. Ensure templates comply with applicable standing orders and establishment-specific requirements. Train HR personnel on proper use of fixed term engagement.
Maintain clear records of all fixed term employees, including contract terms, renewals, and statutory benefit payments. Track contract expiry dates to avoid inadvertent continuation beyond term, which might support a claim of permanent employment.
Review your workforce composition periodically. If fixed term workers form a large proportion performing ongoing work, reconsider your employment model. The flexibility of fixed term employment depends on its use for genuinely temporary needs, not as a general workforce strategy.
