Until recently, gratuity was almost a non-issue in conversations about contract labour, because the five-year continuous-service requirement meant very few contract workers ever qualified. That has changed, and factories using contract manpower need to understand what actually shifted.
What Changed
Under the Payment of Gratuity Act, 1972, an employee traditionally became eligible for gratuity only after five years of continuous service, calculated as last-drawn wages × 15/26 × completed years of service. Under the Code on Social Security, which forms part of the new Labour Codes, fixed-term and contract employees now become eligible for gratuity after just one year of continuous service, paid on a pro-rata basis for the actual tenure worked. This is a meaningful shift for any factory running contract labour on rolling or multi-year assignments, not the occasional short-term surge.
What This Means in Practice
- Gratuity liability doesn't disappear because a worker is on contractThe one-year threshold for fixed-term and contract workers means gratuity provisioning needs to be part of the cost conversation much earlier than most factories are used to.
- The wage base for calculation has also widenedUnder the unified wage definition, if allowances exceed 50% of total remuneration, the excess is added back into the wage figure used for the gratuity calculation, which can increase the payable amount even where the headline CTC hasn't changed.
- Death and disability waive the service requirement entirelyIf a worker dies or is disabled during employment, gratuity becomes payable regardless of how long they've worked, this has always been true and remains unchanged.
- The 10-employee threshold for applicability is unchangedThe Act applies to any establishment employing 10 or more people on any day in the preceding 12 months, which covers the vast majority of factories using contract manpower at any scale.
Five years used to be the number every HR team kept in their head for gratuity. For contract and fixed-term workers, that number is now one.
Whose Responsibility Is It
Gratuity liability for contract workers generally sits with the entity that is the legal employer of record, typically the manpower supplier or labour contractor, not the principal employer directly. That said, if a contractor defaults, the question of residual liability follows the same principal-employer exposure that applies to PF and ESIC, so it's worth confirming in writing how your supplier provisions for this rather than assuming it's fully off your plate.
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How This Interacts With Resignation and Termination
Gratuity eligibility is about continuous service, not about how the employment ends. A worker who resigns after crossing the qualifying period (one year for fixed-term and contract workers, five years for the traditional category) is entitled to gratuity exactly the same as one who is let go, provided the separation isn't for proven misconduct involving moral turpitude, which is one of the narrow exceptions the Act allows for forfeiture. Employers sometimes assume gratuity is only payable on termination initiated by the company, which isn't correct and can turn into a dispute at the worst possible time, when a departing worker and an employer are already not on the best terms.
"Continuous service" itself has a specific meaning worth knowing. A worker doesn't lose their qualifying period because of a short authorised leave, a layoff, or a strike that isn't their fault. What resets the clock is a genuine break in employment, not a pause within it. For contract workers rotated between assignments by the same manpower supplier without a real gap, this generally counts as continuous, which is one more reason UAN-style continuity (discussed in our piece on PF transfer) matters as much for gratuity tracking as it does for provident fund.
What We Track for Every Placement
For contract workers we place, we track continuous service duration against the one-year threshold from day one, not as a lookup done only when someone asks. That means when a worker crosses the mark, gratuity provisioning is already reflected in how the placement is costed, rather than being a surprise liability discovered at separation. Clients don't have to run this calculation themselves; it's part of what a manpower supplier handling full compliance actually means in practice, not just wage payment and PF/ESIC filing.
It's also worth noting that gratuity is exempt from attachment or forfeiture in most circumstances, meaning it generally can't be withheld to offset dues a worker owes the company, except in the narrow misconduct-related cases the Act specifically allows. Employers who try to net gratuity against unrelated deductions are on shaky legal ground, and this is another area where getting independent, current advice before acting is worth far more than guessing.
If you're unsure whether a specific worker or group has crossed the qualifying threshold, that's a straightforward question to put to your manpower supplier, and a clear, dated answer, not a vague reassurance, is what a properly run compliance process should be able to produce on request.