New Labour Code mandates gratuity after 1 year; definition of wages widened

Labour Reforms on Gratuity

The government on Friday notified new gratuity rules under the Payment of Gratuity Act, 1972 a move that could widen retirement benefits for fixed-term employees and alter how “wages” are defined for calculation.

The labour reforms announced by the government aim to bring more clarity and fairness to gratuity payments across sectors. Here are the key changes:

Fixed-term employees now become eligible for gratuity after just one year of continuous service. Currently, employees are paid gratuity if they have completed five years of continuous service at the time of leaving the company.

"The new labour codes extend gratuity to fixed-term employees irrespective of the duration of their service a significant departure from the five years requirement. Organisations relying heavily on short term contractual or project-based staff will have to make earlier and more frequent gratuity payouts," said Rashmi Pradeep, Partner (head - southern region), Cyril Amarchand Mangaldas.

The definition of “wages” has been expanded to include additional components notably, gratuity itself will now count for the purposes of computing wages under the Act.

“'Wages' now include basic pay, dearness allowance, and retaining allowance; 50% of the total remuneration (or such percentage as may be notified) shall be added back to compute wages, ensuring consistency in calculating gratuity, pension, and social security benefits,” stated the press release.

For employees on fixed-term contracts, the previous requirement of five years often meant losing out on gratuity if their tenure ended earlier. With the one-year benchmark, more contract and fixed-term staff qualify for this long-term benefit. Meanwhile, the broader wage definition means gratuity payouts may also be calculated on a higher base, benefiting employees by increasing the quantum.

Organisations will need to update payroll and human-resources policies to capture the expanded definition of wages. Fixed-term employment models may yield added cost for employers given the shorter eligibility window for gratuity.

If you are a fixed-term employee, check whether your contract now makes you eligible for gratuity sooner. For employers and HR teams, review your employment classification, contract terms, and payroll calculations. Given the expanded wage definition, it may be time to revisit gratuity liability modelling.

Employers must now provide a free annual health check-up to all workers above 40 years, and ensure timely payment of wages to promote financial stability and reduce workplace stress. ESIC coverage has been expanded pan-India  voluntary for establishments with fewer than 10 employees, but mandatory even if a single worker is engaged in hazardous activities.

For the first time, ‘gig workers’, ‘platform workers’ and ‘aggregators’ have been formally defined, with aggregators required to contribute 1-2% of their annual turnover (capped at 5% of payouts) to social-security funds. Social protection will extend to all categories of workers, supported by an Aadhaar-linked Universal Account Number that makes benefits portable across states and accessible to migrant labour.

The Government has announced that the four Labour Codes -the Code on Wages, 2019, the Industrial Relations Code, 2020, the Code on Social Security, 2020 and the Occupational Safety, Health and Working Conditions Code, 2020 are being made effective from 21st November 2025, rationalising 29 existing labour laws.