A 14-month fixed-term engineer exits on Friday. Finance asks for FNF by Monday under the two-working-day wage rule. HR still uses the old rule of thumb: “gratuity only after five years.” The Code on Social Security disagrees for fixed-term employees. The settlement is wrong before the bank file is even opened.
What changed for fixed-term gratuity
Under the Code on Social Security, 2020, fixed-term employees engaged directly by the employer become eligible for gratuity on a pro-rata basis after one year of continuous service. That is the operational shock for companies that treated every FTE as “no gratuity ever” because five years felt unreachable on a project contract.
Permanent employees still sit in the familiar five-year frame for ordinary exits. Death and disablement have long had special treatment. The new mistake is mixing contractor labour, rolling “FTE” labels and permanent headcount into one Excel column called “gratuity eligible = N”.
How to calculate without inventing a formula
- Use last-drawn wages under the Code definition (basic + DA + retaining allowance, with the 50% add-back where required).
- Apply the standard 15 days’ wages per completed year (or the number the Central Government notifies), on a pro-rata basis for FTEs.
- Do not split service into “pre-Code” and “post-Code” wage regimes for the exit calculation - MoLE clarifications treat last-drawn Code wages as the base for the whole service period.
- Stage gratuity as a separate FNF line - it is not wages under Section 17(2)’s two-working-day clock. See full and final in two working days.
Who is in, who is out
| Engagement | Wrong habit | Code-ready habit |
|---|---|---|
| Direct fixed-term employee | Skip gratuity until year 5 | Pro-rata after 1 year continuous service |
| Contract labour via contractor | Principal employer auto-pays FTE rule | Usually contractor liability; different clock |
| Permanent employee | Ignore new wage definition | Five-year frame + Code wage base |
Gratuity risk now sits in your employment-type master, not in a founder’s memory of the old Act. If FTEs are tagged wrong, every exit after month thirteen is a underpayment waiting for a claim.
The way forward
Tag every person as permanent, fixed-term or contractor-sourced. Put FTE end dates and gratuity eligibility on the same record that drives exit & offboarding. Rebuild salary components with the 50% wage rule before you trust a last-drawn figure. Pair this with fixed-term employment under the IR Code.
Practical operations guidance, not legal advice. Confirm eligibility, forfeiture and state rules with a qualified labour lawyer.
Stage gratuity before last working day
Keep FTE flags, wage base and FNF on one tenant - not three spreadsheets.
