New Labour Codes Overview: Transforming Gratuity Landscape

India’s landmark labour reforms through four comprehensive Labour Codes represent the most significant overhaul of employment legislation in decades. These codes consolidate 29 central labour laws into a unified framework, with the Code on Social Security, 2020 specifically addressing gratuity provisions. The implementation brings sweeping changes that affect millions of workers across all sectors.

The new framework aims to formalize India’s workforce, extend social security benefits to previously excluded categories of workers, and simplify compliance for employers. The gratuity provisions under the Social Security Code have been carefully designed to balance worker welfare with business sustainability.

Revolutionary Changes in Gratuity Framework

The most groundbreaking modification is the introduction of differential eligibility criteria based on employment type. While permanent employees continue with the traditional 5-year threshold, fixed-term and contract workers now qualify after just 1 year of continuous service. This change recognizes the evolving nature of employment relationships in modern India.

Updated Eligibility Criteria: Who Qualifies?

The Payment of Gratuity Act, 1972, originally applied only to establishments with 10 or more employees. The new Social Security Code maintains this threshold while dramatically expanding coverage through revised eligibility periods and employee categories.

Continuous Service Definition

Understanding “continuous service” is crucial for gratuity eligibility. An employee is deemed to have completed continuous service if they have worked for at least 240 days (190 days for establishments working underground or in seasonal operations) in a given year. Days of layoff, strikes, lock-outs, and authorized leave are included in service calculations.

Comprehensive Eligibility Matrix

Exemption Scenarios

The 5-year minimum service requirement is waived in specific circumstances:

• Death During Service: Gratuity paid to legal heirs regardless of service duration
• Permanent Disability: Immediate eligibility upon disability rendering employee unfit for current role
• Superannuation: Retirement at prescribed age
• Voluntary Retirement: After completing minimum 5 years (permanent) or 1 year (fixed-term)

Gratuity for Contract Workers: Breaking New Ground

One of the most progressive aspects of the new Labour Codes is the explicit inclusion of contract and fixed-term workers in gratuity coverage. This addresses a long-standing gap in social security protection for India’s vast contingent workforce.

Key Provisions for Contract Workers

Contract workers engaged through contractors or staffing agencies are now entitled to gratuity benefits after completing just 1 year (240 working days) of continuous service with the principal employer. This marks a significant departure from previous practice where such workers were often excluded from gratuity benefits.

Fixed-Term Employment: Enhanced Flexibility

Fixed-term employment has gained prominence as businesses seek operational flexibility. Under the new codes, fixed-term employees enjoy parity with permanent workers in all statutory benefits, including gratuity. Key aspects include:

• Gratuity calculated proportionately based on completed service period
• Payment due upon contract expiration, even if not renewed
• Multiple contracts with same employer aggregated for calculation
• No discrimination in wage structure compared to permanent staff

Compliance Obligations

Employers engaging contract or fixed-term workers must:

• Maintain detailed service records showing continuous service periods
• Make gratuity provisions in financial planning
• Issue appointment letters clearly stating fixed-term nature and gratuity entitlement
• Process gratuity payments within 30 days of eligibility/separation

Salary Structure Revisions: Impact on Gratuity Calculation

The Code on Wages, 2019 has fundamentally reshaped how employers structure compensation packages. These changes directly impact gratuity calculations by redefining what constitutes “wages” for statutory benefit purposes.

The 50% Basic Salary Rule

Under the new wage code, basic salary and dearness allowance must constitute at least 50% of the total Cost to Company (CTC). Previously, many employers structured packages with low basic pay (20-30% of CTC) and higher allowances to reduce statutory contribution obligations. This practice is no longer permissible.

Expanded Definition of Wages

The new codes use an inclusive definition of wages that captures:

• Basic Salary: Fixed compensation excluding allowances
• Dearness Allowance: Cost of living adjustment linked to inflation
• Retaining Allowance: Paid to maintain employment relationship

Excluded Components: Bonus, overtime, commission, travel allowance, house rent allowance, and other reimbursements remain outside wage calculations for gratuity purposes.

Financial Impact Analysis

Gratuity Calculation Formula & Payment Limits

Despite numerous reforms, the fundamental gratuity calculation formula remains unchanged, ensuring consistency and predictability for both employers and employees.

Standard Calculation Formula

Gratuity = (Last Drawn Monthly Basic Salary + DA) × 15 × Completed Years of Service ÷ Divisor

Understanding the Divisor

The divisor varies based on the type of establishment:

• 26 days: For factories, mines, oilfields, plantations, ports, railway companies, and manufacturing units where work is continuous for 6 days per week
• 30 days: For all other establishments including IT companies, retail, hospitality, education, and service sectors operating 5-day weeks

Fractional Year Calculation

Service periods are calculated in years and months. Any period exceeding 6 months in the final year is rounded up to a full year. For example:

• 7 years 4 months = 7 years for calculation
• 7 years 8 months = 8 years for calculation
• 10 years 6 months = 11 years for calculation

Maximum Gratuity Ceiling

The current maximum gratuity payable is capped at ₹20,00,000 (Twenty Lakhs), regardless of the calculated amount. This ceiling has remained unchanged since 2010, though periodic revisions are under consideration by the government.

Step-by-Step Calculation Example

Interactive Gratuity Calculator

Industry-Specific Gratuity Guidelines

While the Payment of Gratuity Act provides a uniform framework, implementation varies across industries based on working patterns, salary structures, and sector-specific regulations.

Information Technology & Software Services

The IT sector employs millions across India, with high attrition rates and diverse employment models. Key considerations:

• Divisor: 30 days (5-day work week standard)
• Fixed-Term Contracts: Common for project-based roles; 1-year eligibility applies
• Work-from-Home: Remote work doesn’t affect continuous service calculation
• Stock Options: RSUs/ESOPs excluded from gratuity wage base

Manufacturing & Factories

Manufacturing establishments have specific provisions due to continuous operations:

• Divisor: 26 days (6-day continuous operations)
• Shift Workers: All shifts qualify; night shift allowances excluded from calculation
• Production Incentives: Performance bonuses not included in gratuity base
• Seasonal Shutdowns: Authorized shutdowns counted as continuous service

Healthcare & Hospitals

Medical professionals and support staff have unique employment patterns:

• Duty Hours: Extended shifts and on-call duties all count toward 240-day requirement
• Residential Doctors: Accommodation value not included in gratuity calculation
• Contractual Staff: Nurses, technicians on fixed-term contracts eligible after 1 year

Construction & Infrastructure

Project-based employment presents unique challenges:

• Project Transfers: Movement between projects with same employer maintains continuity
• Site Allowances: Remote location allowances excluded from gratuity base
• Seasonal Work: 190-day eligibility threshold for seasonal operations

Retail & Hospitality

High employee turnover sectors with part-time workforce:

• Part-Time Staff: Pro-rata gratuity based on actual working hours
• Tips & Service Charges: Customer tips excluded; only basic+DA considered
• Multiple Outlets: Transfers across branches maintain service continuity

Real-World Case Studies