Labour Codes: #29 Fixed-Term Employment V. Consultants Under the Labour Codes

1. STATUTORY DEFINITION

The Code on Social Security, 2020 (“SS Code”) expressly defines “fixed term employment (FTE)” under Section 2(34) as:

“engagement of an employee on the basis of a written contract of employment for a fixed period; provided that a fixed term employee shall be eligible for all benefits available to a permanent employee proportionately according to the period of service rendered by him and the period of service shall not be less than such period as may be notified by the appropriate Government.”

This definition formally recognises fixed-term contracts as a regulated form of employment within the statutory framework.

2. POSITION UNDER EARLIER LAWS

Prior to the Codes, India lacked a unified statutory definition of fixed-term employment. Although employers engaged FTEs in practice, its recognition was scattered:

a) The Industrial Employment (Standing Orders) Central Rules, 1946 allowed “fixed term” through a 2018 amendment.

b) The Payment of Gratuity Act, 1972 (now repealed by Section 164 of SS Code) required five years of continuous service for gratuity, with no special dispensation for FTEs.

c) Different social-security statutes (EPF, ESI, Maternity Benefit Act) treated coverage differently.

Thus, before 2020, the treatment of FTEs was uneven, leading to inconsistent entitlements and compliance uncertainty.

3. RATIONALE FOR INTRODUCING A UNIFIED DEFINITION

The Statement of Objects and Reasons to SS Code emphasises the need to “remove multiplicity of definitions” and ensure “widening the scope of benefits to the fixed term employees” as a “big step towards equity.”

Key objectives include:

a) Ensuring parity of benefits between FTEs and permanent employees.

b) Allowing employers elasticity in workforce planning without diluting worker protection.

c) Preventing misuse of fixed-term engagements to bypass statutory benefits.

4. SOCIAL-SECURITY ENTITLEMENTS FOR FTES

SS Code ensures statutory parity by extending the following:

(a) Gratuity

Section 4 of the Statement of Objects and Reasons clarifies that gratuity shall be payable to fixed-term employees on a pro-rata basis even when five years of continuous service is not completed.

(b) Continuous Service Framework (Section 54)

The definition of “continuous service” (Section 54) applies uniformly to all employees, including FTEs. It accounts for interruptions due to leave, sickness, accident, strike, lock-out, etc.

(c) Access to Other Benefits

Section 2(34) itself mandates that FTEs receive all benefits available to permanent employees proportionately, wherever qualifying periods are notified.

This includes EPF, ESI, maternity benefits, and other entitlements, subject to coverage thresholds.

5. CONSULTANTS VS. FIXED-TERM EMPLOYEES — THE DISTINGUISHING LINE

While fixed-term employees operate under a contract of employment, consultants render services through a contract for service.

Key Differentiators

1. Control & Supervision

a) FTEs are integrated into the employer’s organisational hierarchy—subject to working hours, reporting structures, HR policies.

b) Consultants retain operational autonomy and deliver outcomes, not controlled processes.

2. Economic Dependency

a) FTEs draw wages and fall squarely within SS Code’s expanded definition of “employee” under Section 2(26) (not extracted in the uploaded snippet but applicable under the Code).

b) Consultants operate as independent business entities.

3. Social-Security Coverage

a) FTEs are mandatorily covered under EPF/ESI if applicable; they accrue gratuity on a pro-rata basis.

b) Consultants do not receive statutory benefits unless expressly contracted.

4. Continuity of Engagement

a) FTEs have a fixed but defined tenure that mirrors employment stability.

b) Consultants may work simultaneously for multiple clients.

The distinction is significantly relevant because Section 2(34) creates a formal statutory category for FTEs, leaving consultants outside the employer–employee relationship.

6. IMPACT ON CONSULTANT MISCLASSIFICATION RISKS

Granting consultant-like personnel fixed hours, exclusive engagement, organisational control, or long-tenure arrangements increases the likelihood of being reclassified as FTEs or even permanent employees.

Once misclassified, the employer becomes liable for:

1. Retrospective EPF/ESI contributions,

2. Gratuity (pro-rata under SS Code),

3. Statutory leave and maternity benefits,

4. Potential industrial disputes and claims of unfair labour practice.

The statutory clarity under Section 2(34) heightens scrutiny, as authorities will examine substance over form, assessing whether the relationship constitutes employment irrespective of contractual labels.

7. KEY IMPACTS ON BUSINESSES

The unified definition of fixed-term employment under the labour codes places greater responsibility on employers to structure engagements transparently.

1. While offering flexibility in workforce planning, the SS Code simultaneously expands benefits and compliance obligations to FTEs.

2. Businesses must therefore redesign engagement models, reassess consultant contracts to mitigate misclassification risk, and ensure that FTEs receive proportionate statutory entitlements.

3. A careful alignment of contract architecture, HR practice, and statutory compliance is now indispensable.

4. Fixed-term employment must not be used as a mechanism to:

a) Circumvent permanent employment benefits,

b) Rotate individuals on serial short-term contracts to avoid continuity, or

c) Mask de facto permanent roles.

5. Given the explicit Parliamentary intention to extend benefits equitably to FTEs, any manipulative structuring can attract compliance action, investigation, and adverse findings in disputes.